There is a ton of buzz, romance, fantasy, excitement, and insanity around the concept of investing, trading, or gambling with the stock market. The average person loves to think about returns, compounded growth, how fast a stock can double, and all those other sexy concepts. Very few people really thinking about what the stock market definition is. So before you read any further you probably want to know why you even care about understanding stock market definitions.
If you were like me, you probably thought of the stock market as a wizard behind the curtain. Some magical or all powerful person or machine randomly moved the stock price up or down and people reacted. If too many people bought or sold the computer would adjust. Your job as an investor or trader was to react to the changing price accordingly. In this mindset your stock market definition would be along the lines of:
The stock market is the mover a stock values which you buy to and sell to
In reality a stock market is a platform that controls the exchange of shares between different people. The market is simply a medium between people. These platforms often have rules and regulations that control how people can buy stock, how people can sell stock, and what companies can be exchanged on this stock market. A key thing to understand is a stock market doesn’t actually buy or sell shares of stock people do. Understanding this fact will help you be a better trader or investor because people change the whole game. If you were competing against a computer you’d only have to learn the formulas, learn the rules, create your game plan and follow it until it quits working when you would evaluate to see if the rules had changed. However, people have these funny things called emotions. Emotions don’t follow the same rules as business, logic, or common sense. In the end those things will generally play out because it’s about making money, but in the short term (which can be longer than you think) the stock market emotion of the buyers or sellers can override good thinking. If you remember that for any share to be transferred there has to be a buyer and a seller you’ll understand the system better.
One Buyer one Seller
When a stock price is moving up it’s because there hasn’t been any issues finding new buyers. As long as a trade happens quickly at a given price the price will move up, if there are still no issues finding buyers it will move up more. If this isn’t the case then the price will start moving down until there issues finding sellers. The stock market requires a balance. Using this thinking I would state a better stock market definition as such:
The stock market is a entity that controls the balance of buyers and sellers through price control, regulations on buying stock, regulations on selling stock, regulation on stock accepted within the market.
So if price control controls the balance between buyers and sellers why does a stock market need to regulate buyers, sellers, and the shares themselves?
Stock Market Regulation of Buyers/Sellers
If a stock market doesn’t control who can buy and sell what stock and under what conditions you get the problem of manipulation. If people who have information or influence on the information of a company more than the general public are free to trade within the system eventually no one will trade within the stock market because they will always lose. If no is willing to trust the system you have no stock market at all and you lose one of the great advantages of the stock market which is liquidity. Liquidity is the ability to convert your assets to cash or your cash to assets. If you own a small business you may understand this already. Your business might be worth $300,000 but only if you can find someone to buy it. However, if you own $300,000 in stock of a company this is traded on a stock market, you can sell some or all of these shares, do what you need to do with the cash, and repurchase the stock the same day. This is why maintaining the trust of the stock buyers and stock sellers is so critical.
Regulating the Companies’ Stock
How a stock market chooses to regulate a company stock is through validation of financial records, minimum earnings, minimum revenue, and minimum number of shares. These are the big hitter issues. If a company isn’t trustworthy and it’s legal documents are false it will not only crush the company when the news is brought to light, but give a black eye to the stock market as a whole. If a company is too small it may be too easily manipulated by larger investors. If there are not enough shares then a stock market may have a difficult time properly pricing the company through the required constant trading creating wild price swings or market manipulation.
In summary the stock market definition is an entity that publishes the going price for there to be both a buyer and a seller of a share of stock in a given company, prevents manipulation or fraud of the value of a company, and profits from the exchange in these shares by creating value to the customer by providing liquidity in what would normally be a hard to exchange asset.
