Bulls, bears, investment firms and big banks—all are part of the stock market, a crucial component of the global economy. But what exactly is the stock market and how does it work?
The earliest forms of the stock market involved entrepreneurs raising money by giving shares in private businesses to friends, family and other investors. Those shares then rose and fell in value as the fortunes of the business did. These direct trades form the basis of what we now know as the primary market, which includes IPOs, follow-on public offerings, private placements and debt offerings. Anything else that occurs to buy or sell these shares is known as the secondary market and takes place in marketplaces like stock exchanges and over-the-counter systems.
While the primary market gives companies their first opportunity to publicly list their shares, the vast majority of the buying and selling of those shares happens in the secondary market every day. The supply and demand for these stocks, along with thousands of others, are what drives the market’s prices up or down.
Today, there are numerous marketplaces where buyers and sellers of stocks can meet to transact, including the NYSE, the Nasdaq and many other exchange-traded markets and over-the-counter systems. Many of these marketplaces are regulated, which ensures that there are plenty of buyers and sellers in the market and helps to prevent fraud or abuse.
The average annual growth rate of the overall market, as measured by major indexes like the Dow Jones Industrial Average or S&P 500, is around 10%, though individual years may see a more dramatic up or down. It’s also important to remember that the stock market is a global marketplace, which means that what happens in one corner of the world can have significant effects on others.