Stocks are financial instruments that represent the holder's ownership of a portion of the assets and earnings of a joint-stock company. They are one of the main forms of marketable securities. A joint-stock company issues stocks as proof of an investor's shareholder status and rights, with investors receiving dividends and bonuses based on their holdings. As part of a company's capital, stocks can be transferred, bought, and sold, serving as a primary long-term credit instrument in the capital market. However, investors cannot demand a return on their initial investment from the company.

When a company needs to raise significant funds for activities such as expanding production or developing new technologies, it can adopt the joint-stock system. This system divides the company's ownership into equal parts, each represented by a share. Investors who purchase these shares become shareholders and own a corresponding proportion of the company. For example, if a company issues 1,000 shares of stock and you purchase 100 shares, you own 10% of the company.

For companies, stocks are a critical financing tool. By issuing shares to the public, companies can raise substantial funds to expand their production, invest in research and development, pursue mergers and acquisitions, and promote growth. For investors, stocks are investment vehicles aimed at generating returns. Investors can earn income through company dividends or by trading stocks in the market, buying low and selling high to capitalize on price differences.

The stock market is an organized financial marketplace where investors can buy and sell company shares and other securities. It enables companies to raise capital and provides investors with opportunities to invest and trade. The stock market comprises two main segments: the issuance market and the trading market.

- Issuance Market (Primary Market): Companies raise funds by issuing shares for the first time through an Initial Public Offering (IPO). Investment banks and other intermediaries assist companies in offering shares to the public, thereby splitting ownership and raising capital.

- Trading Market (Secondary Market): Once issued, stocks are traded in the secondary market, where investors buy and sell shares freely, ensuring liquidity and circulation.

The stock market operates as a complex financial system encompassing key processes such as issuance, trading, clearing and settlement, and regulation.

Participants:

1. Companies: Issue stocks to raise funds for activities like business expansion, research and development, and debt repayment.

2. Investors: Includes individual and institutional investors (e.g., pension funds, mutual funds) who trade stocks for income.

3. Brokers: Provide services and platforms for investors to buy and sell stocks, executing trades on their behalf.

4. Exchanges: Institutions like the New York Stock Exchange (NYSE) and NASDAQ provide structured and regulated environments for trading to ensure order and efficiency.

Stages of Operation:

1. Initial Public Offering (IPO): A company collaborates with an underwriter (often an investment bank) to determine the details of the stock issuance. After marketing the shares to potential investors, the underwriter facilitates the sale, allowing the company to raise operational funds.

2. Trading Stage: Investors analyze stocks, place orders through brokers, and trade based on supply and demand. Stock prices are influenced by factors such as company performance and investor sentiment. Orders may include market orders (trading at the current market price) or limit orders (trading at a specific price).

3. Clearing and Settlement: This process ensures the smooth transfer of funds and securities between buyers and sellers. Specialized clearing agencies oversee these operations to reduce risks and increase efficiency.

4. Supervision Stage: Regulatory agencies, such as the Securities and Exchange Commission (SEC) in the U.S., ensure the market operates fairly and transparently. They protect investors, maintain order, and promote healthy market development.

Functions of the Securities Market

The stock exchange serves as the central hub of the financial market, playing a vital role in modern economies. It connects enterprises and investors, promotes capital flow, and optimizes resource allocation.

1. Market Liquidity: Provides a platform for trading securities, enhancing liquidity. This facilitates the transformation of savings into investments, energizing the real economy.

2. Price Determination: Stock prices reflect asset valuations based on supply and demand, helping investors make informed decisions and enabling company valuations.

3. Resource Allocation: Guides funds toward high-quality enterprises using price signals, fostering industrial upgrades and economic growth.

4. Information Disclosure: Requires companies to regularly disclose financial information, ensuring transparency and enabling informed investment decisions.

5. Regulation and Safety: Enforces strict disclosure rules and trading regulations to maintain fairness, transparency, and investor confidence.

6. Corporate Development: Facilitates company financing and governance improvements, promoting competitiveness and long-term growth.

Stock exchanges can be categorized based on various criteria:

• By Trading Method:

Auction Market: Transactions occur through public bidding, with prices determined by the highest bid and lowest ask (e.g., NYSE).

Brokered Market: Brokers facilitate trades, often for large or illiquid transactions.

Dealer Market: Market makers provide bids and ask for quotes, profiting from the spread (e.g., NASDAQ).

• By Transaction Type:

Stock Exchanges: Focus on stocks and derivatives like options and warrants.

Bond Exchanges: Trade fixed-income securities like government and corporate bonds.

Commodity Exchanges: Trade commodities such as gold, oil, and agricultural products.

Futures and Options Exchanges: Handle futures and options contracts.

• By Organizational Structure:

Member-Based Exchanges: Owned by members, typically brokerage firms or financial institutions.

Joint-Stock Exchanges: Operated by joint-stock companies, allowing public investment in the exchange itself.

• By Region:

Domestic Exchanges: Serve local markets (e.g., Shanghai Stock Exchange, Tokyo Stock Exchange).

International Exchanges: Serve global investors (e.g., NYSE, London Stock Exchange).

• By Technology Level:

Traditional Exchanges: Use open outcry systems for face-to-face trading.

Electronic Exchanges: Rely on digital platforms for efficient, cost-effective trading.

Stock exchanges are indispensable to modern financial systems, playing a critical role in economic stability and growth. As financial markets evolve, stock exchanges will continue enhancing their functions, driving greater value for economies and investors alike.