The Stock Market
The stock market is a financial market where participants can issue and trade stocks (i.e., shares). Stocks represent partial ownership in a company. Therefore, the sale of stocks is also referred to as equity finance. Because the owner of a stock is also partial owner of the company, they are entitled to a proportion of the firm’s profits. However, in the case of bankruptcy, shareholders will get their money back only after all debt (including bonds) is repaid.
Unlike bonds, stocks don’t have a date of maturity, i.e., they generally don’t have to be repaid at a particular time. However, the shareholders still expect to be compensated for investing their money. As mentioned above, they are entitled to a proportion of the firm’s profits, which is called a dividend. Dividends are usually paid once a year. In addition to that, shareholders can also profit from an increase in the company’s stock price. Stocks are traded on organized stock exchanges, like the New York Stock Exchange (i.e., Wall Street) or the London Stock Exchange. The prices at which they trade are defined by supply and demand.
Ultimately, the price of a stock reflects people’s assumption of the company’s future profitability. Because of this, the stock market is often used as an indicator of future economic developments. There are hundreds of stock indices available to monitor the overall price levels in any particular stock market. A stock index is usually calculated as a weighted average of the prices of individual stocks that are considered typical of that specific market. Famous examples of stock indices include the Dow Jones Index, the NIKKEI Index, the DAX, and many more.
In a Nutshell
Financial Markets bring together individuals who want to save money with other individuals or companies who want to raise money. The bond market and the stock market are the two most important types of financial markets. The bond market allows participants to issue and trade bonds, i.e., certificates of indebtedness of the issuer to the holder (debt finance). Whereas the stock market is a financial market where participants can issue and trade stocks, i.e., partial ownership in a company (equity finance).