How Stock Markets Work
Stock markets play a vital economic role, helping large companies raise finance and giving access to an alternative stream of capital alongside loan finance and company revenue. The markets are heavily traded worldwide, with billions in transactions processed every single day across the major global exchanges. But how exactly do stock markets operate on a technical level, and what is it about the markets specifically that attracts the brightest and best from all walks of life to make their fortune?
Stock markets provide the opportunity for traders to make (and lose) fortunes speculating on the price of shares and other securities. Savvy traders can interpret market behaviour and try to anticipate movements in price to ride both positive and negative trends across particular companies and industries, allowing the free-flowing trade of shares in both directions without the need for physical interaction or negotiation of contract terms.
Shares are largely standardised instruments which enable the free transaction from one trader to the next without the need for registration or any further administrative burden. They are the lifeblood of many growing plc’s, and provide strong indicators of economic outlook and prosperity. The markets operate by creating a platform for buyers and sellers of securities to meet and exchange their share assets, which in and of themselves generate an often tax-free ongoing yield in the form of dividend payouts.
Markets trade in real-time throughout the business day, and constantly match orders on both sides of the table to make fluid trading possible. Traders can either buy shares in companies they forecast to perform well, or often sell shares they don’t yet own in the anticipation of buying them back at a lower price point (known as short selling, or ‘going short’).
With the help of a broker, who executes the trades automatically on demand, the trader is able to engage in active speculation throughout the trading day, and indeed across a wider timeframe of months and even years depending on the exact nature of each trade. Brokers will often also offer financing for certain trades, allowing traders to ‘leverage’ the gains (and losses) beyond the limits of their own resources.
For those trades that are unmet by market demand, i.e. those for which there is no corresponding buyer or seller, a designated ‘market maker’ steps in to fill the order, ensuring that shares can be traded freely even where the markets take a largely bearish approach to a particular stock or index.
The major global stock markets operate smoothly throughout the day to allow live trading without the need for exchanging physical share certificates or meeting face to face. In this sense, the markets provide an ideal opportunity for determined individuals and trading organizations alike to invest, with the potential for significant gains for the savvy trader.