TradingKey - Did you know? At the beginning of the pandemic in 2020, the U.S. stock market experienced rare multiple circuit breakers as panic spread throughout the market. However, some investors, armed with a deep understanding of the stock market, seized bottom-buying opportunities and achieved asset growth against the trend. So, what exactly are stocks? How does the stock market operate?

Stocks are financial assets that signify the holder's stake in the assets and profits of a corporation. They represent a primary type 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. 

The stock market is a structured financial venue where investors can trade shares of companies and various other securities. It allows businesses to generate capital while offering investors the chance to invest and trade. The stock market consists of two primary components: the issuance market and the trading market.

The stock market operates as a complex financial system encompassing key processes such as issuance, trading, clearing, 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 affected by elements like a company's performance and investors' feelings. 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.

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.

• Market Liquidity: Provides a platform for trading securities, enhancing liquidity. This facilitates the transformation of savings into investments, energizing the real economy.
• Price Determination: Stock prices reflect asset valuations based on supply and demand, helping investors make informed decisions and enabling company valuations.
• Resource Allocation: Guides funds toward high-quality enterprises using price signals, fostering industrial upgrades and economic growth.
• Information Disclosure: Requires companies to regularly disclose financial information, ensuring transparency and enabling informed investment decisions.
• Regulation and Safety: Enforces strict disclosure rules and trading regulations to maintain fairness, transparency, and investor confidence.
• 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:

• By Transaction Type:

• By Organizational Structure:

• By Region:

• By Technology Level:

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.

Now that you've learned these basics, are you ready to start investing?