A few of our readers have requested we do a blog on how the Stock Market actually works. So if you are tired of not being able to understand the financial markets, let's  get to it.

Let’s break down the word “Stock” first. Stock is a term used to describe the supply of goods available for sale,

So what is a Stock Market?

When we talk about the stock market, we talk about the collection of a lot of markets and exchanges where the trading of equities, issuing and other sorts of securities are going to take place through formal exchanges.This kind of market has become one of the essential components of a free market economy.

In this market, the investors meet just to buy and sell shares. There was a time when a market needed to be a literal place. Now, almost all the stocks’ markets are electronic.

A stock market that can be functional is considered critical to economic development because it gives to the companies the ability to quickly access capital from the public.

What are the purposes of the Stock Market?

It has two principal purposes.

  1. This market provides amounts of capital to other companies which they can later use to expand their business.
  2. The stock market gives to some investors; those investors then purchase stocks to share in the profits of public companies.

Now, let’s get to the critical part…

How does the Stock Market work?

It’s necessary to know that in the stock market you are going to find a two-section split: the primary and the secondary market.

The primary market: This is where you find the new issues, and people sold them through initial public offerings. In this market, all the securities are initially created. That is a version of the stock market that is open, in this one the company’s shares are sold for the very first time.

Secondary market: This is the kind of market where the investors trade their stocks by themselves, but the company that previously sold the stock is not a direct participant in the transaction the investors are making.

In this market, the participants are the individual and institutional investors.

There is a third kind of market which you need to know. This is expert level stock market knowledge that will impress your peers if you casually drop it into conversation. 

OTC market: This is an alternative for the investors to take part of the selling of stock from a decentralised market. Almost all the time the transactions are electronic and telephonic. This market is usually for stocks and stock prices.

So, there is indeed more about this market, but this is just the tip of the iceberg to get started and to understand how the stock market works.