What is a Stock Market?
This article is aimed at people new to the stock market, who hear phrases like NASDAQ and FTSE 100 and wonder what they mean! The idea is to break down the stock market into different groups and concepts to help you gain a clearer understanding of how the stock market works and functions.
A stock market consists of several different entities. First of allý
The Share/Stock Itself
The word share and stock often mean the same thing. However if you were to clearly define the two:
- stock is the capital raised by a company through the issue of shares
- a share is a single unit of stock
Buying a share in a company will allow you to share their profits if the company grows and performs well. Shares are bought and sold in stock exchangesý
Stock Exchanges
Stock exchanges are where ýit all happensý. These are buildings that provide platforms for stock brokers and traders to buy and sell shares. For someone to buy or sell shares in a company at a stock exchange, it must be officially listed there. The NASDAQ for example contains around 3,200 listings.
Stock exchange examples include;
London stock exchange (LSE),
National Association of Securities Dealers Automated Quotations (NASDAQ),
New York stock exchange (NYSE),
Tokyo stock exchange (TSE)
Market Makers
Market makers are companies that quote you the buy (ask) and sell (bid) price of a share. They work inside the stock exchanges and their quotes will often look like this;
GRMN
Bid $30.10 Ask ý30.12
The gap of 2 cents between the bid and the ask is where the market makers obtain their profit.
Brokers
Brokers are the middle men between you and the market makers as individuals can not directly deal with the market makers. To trade shares you must open up a brokerage account with a broker. They normally charge you between US $2-12, UK ý8-13 to buy and sell a block of shares.
Indexes
Indexes measure the performance of a group of stocks and give a strong indication of the direction shares in the market are going. Examples of common indexes include
FTSE 100 (Financial Times Stock Exchange 100)
S&P 500 (Standard & Poorýs 500)
DJ30 (Dow Jones 30)
You might be thinking how you determine what companies make it into the top 30, 100, 500 etc. Take the FTSE 100 for example; the top 100 companies are the 100 most capitalised companies in the UK. This could also mean the 100 companies whose share prices are most likely to influence the direction of the market.
Sectors
Stock markets are also split up into different sectors, this is to help investors and financial analysts work out which sectors are performing well and which ones should be left alone. The 11 most common sectors are;
Basic Materials
Capital Goods
Communications
Consumer Cyclical
Consumer Staples
Energy
Financial
Health Care
Technology
Transportation
Utilities
There are also indexes for each sector to help investors quickly monitor the best performing sectors.
Bull/Bear Market
Lately you might have often heard the phrase ýwere in a bear marketý, bear simply refers to a falling market and bull refers to a rising market. A market will usually get labelled a bull or bear market after it has risen or fallen by 20%.
There is a general overview of the stock market for you, if there are any terms/concepts you donýt understand then you will most likely find them explained on my website listed below.
Matthew Merriman, has experienced winning and losing in the stock market and now works from home and makes a decent living out of it. His website SharesExplained.com covers all the basics (and more) of the stock market and encourages new investors to trade successfully and safely.
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