What Is the Stock Market?

Finance, Home & Family
on April 2, 2012

As the name suggests, the stock market is a public entity where stocks or shares in businesses are traded at an agreed price. According to Investopedia, the stock market (also known as the equity market) “is one of the most vital areas of a market economy.” The New York Stock Exchange (NYSE) is the largest stock exchange in the world, according to the total value of tradable shares held as of January 2012 (known as domestic market capitalization).

How the stock market works. A share is literally a share in the ownership of a business. By buying a share, the owner is entitled to a percentage of the assets and earnings of the company. Companies sell shares as a means of raising money to cover costs or expand the business. The stock market allows companies and individuals to buy and sell shares in a relatively easy manner. A stock exchange provides the capability to buy and sell shares from all the listed companies in one place.

Why buy stocks and shares? Investors buy stocks and shares, as they enjoy the potential benefits of investing in this way. The return on investment from the purchase and sale of stocks and shares can be significantly higher than traditional savings accounts. While selling shares does have risks (because the value can decrease as well as increase), shrewd investors have been able to make a good living from trading in this way, and others have simply found a useful means to supplement the income from pensions and savings.

Bull market. When a group of stocks and shares is increasing in value (or is expected to increase in value), then it is referred to as a bull market. Although the term is used to describe the stock market, it can also apply to anything that is traded. These are markets that are optimistic, full of confidence and where good results are expected to follow. The term applies to the way in which a bull attacks its opponents. The way in which a bull thrusts its horns upwards is used as a metaphor for the way in which the market is moving.

Bear market. A pessimistic market, where the price of shares is decreasing and investors anticipate ongoing losses, is referred to as a bear market. This relates to the way in which a bear attacks its opponent by swiping downwards with its paws. Bear investors are those that attempt to benefit from a fall in prices. Over the long term, most bear investors will have lost money, due to the average annual increase in the value of commodities held in the stock market.