Concept of Stock Market

The concept of Stock Market

The stock market refers to public markets that exist for issuing, buying and selling stocks that trade on a stock exchange or over-the-counter. It is a place where you can buy and sell shares of companies listed there for trading.  Stock exchanges list shares of common equity as well as other security types, e.g. corporate bonds and convertible bonds.

The stock market serves two very important purposes. The first is to provide capital to companies that they can use to fund and expand their businesses. The secondary purpose the stock market serves is to give investors – those who purchase stocks – the opportunity to share in the profits of publicly-traded companies.

Investing in the stock market is among the most common ways investors attempt to grow their money, but it’s also among the riskier investment options available. The securities once issued in the primary market become the part of the secondary market. It provides a place or mechanism for active trading of securities among investors themselves. The stock market is a secondary market, which aids to the liquidity of securities traded there on. When investors have to buy securities in the secondary market, they have to contact the securities brokers for opening the account for the purchase of securities. After the account has been opened, the securities broker conveys the order of investor to the securities dealers who handle the inventory of securities. There are two basic types of stock markets- organized stock exchange and over-the-counter market.

An organized stock exchange is the physical locations where securities are traded under some established rules and regulation through the licensed members of the exchange. It is one of the important secondary markets where the investors buy and sell the securities between themselves. Organized stock exchanges facilitate the trading of securities, which are listed in it. This means the securities, which are not listed, are not traded in organized stock exchange. It provides companies with access to capital in exchange for giving investors a slice of ownership.

This trade is either through formal exchanges or over-the-counter (OTC) marketplaces. Over-the-counter (OTC) market was traditionally concerned with the trading of securities which were not listed in an organized stock exchange. However, today the securities listed in organized stock exchange are also traded in OTC market. OTC market is an informal type of market for securities where no compulsory listing of securities is required. Any security can be traded on OTC market as long as a registered dealer is willing to make a market in the security (willing to buy and sell the security). It is not a central physical place like an organized stock exchange, rather it is the network of brokers and dealers scattered across the country. Buy and sell in an OTC market are conducted through negotiated bidding through a network of the communication line and computer system, which links brokers and dealers in an o\OTC market to their clients. The brokers and dealers in the OTC market can compete with both investment bankers and the organized exchanges because they can operate in both primary as well as secondary market.


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