The stock market, also known as the stock exchange, is either a physical location or a virtual space, where traders buy and sell company stock. The stock market exists to facilitate the exchange of stocks between those who want to sell and those who want to buy. These buyers and sellers meet on the stock market to strike a deal, that is, to decide on a price and execute the transaction.
Primary and Secondary Markets
The stock market is a secondary market which trades in securities that have already been issued, as distinct from a primary market in which the securities are initially created and offered to the public. In the primary market, a company issues shares through an IPO (initial public offering), and the shares are then traded in the secondary market (the stock market) when the shareholders want to sell their stock. An important distinction between the primary market and the secondary market is that in the latter, the issuing company is not involved.
The NYSE (New York Stock Exchange) is the largest and most prestigious stock market in the world. The exchange was formed in 1792 and trades in the largest and most successful companies in the U.S. The NYSE is a physical stock market where transactions are executed on a trading floor. When investors want to buy or sell shares of a company stock, they place the order with their brokerage firms, which are members of the exchange. When an order is placed, the brokerage firm forwards the order to floor brokers who then go to a spot on the floor known as the trading post. A specialist on the trading post then matches buyers and sellers of the same company stock to execute the order.
Stock prices on the trading post are determined through auction. The current price of the stock is determined by "bid" and "ask" prices; a bid price is the highest price offered by a potential buyer, and an ask price is the lowest price a seller will sell at. When a price is agreed upon, a deal is struck and the brokerage firm's client's order is executed by the floor broker at the trading post. The information about the execution of the order flows back to the brokerage firm, who then notifies the client about the execution.
The most popular virtual stock exchange is the Nasdaq. In a virtual market, also known as an OTC (over-the-counter) market, trades are conducted through a network of computers, without any physical locations or floor brokers. Before the technology boom of the '90s, the Nasdaq was considered a market for only second-grade stocks, as all the most prestigious stocks were only traded in the NYSE. Today, some of the biggest tech companies are traded in the Nasdaq, and the market is a serious competitor to the NYSE.
Anyone with Internet access can participate in virtual stock exchanges, such as the Nasdaq. When an investor wants to buy shares, he first opens an account with an online brokerage such as Scottrade, Sharebuilder or E-Trade, and deposits money into the trading account. The online broker, upon receiving the funds, deposits the money into the investor's personal trading account. When the investor places an order to buy shares, he logs into his trading account and specifies the company, number of shares, and price. The online broker then forwards the order to the Nasdaq, which finds a seller for the shares through computer networks. When the trade is executed, the information is sent to a clearing house which registers the shares to the brokerage firm's investor's name.