Posted on 06 October 2012.
A question often asked by the general public that is unfamiliar with the world of investment is: what is the stock market? The stock market is a generic term that includes both stock exchanges and stock quotations systems that facilitate the trading of stocks that are publicly traded. The stock market can include everything from the tinniest of penny stock companies to enormous multinational blue-chip stock companies. Companies sell their company stocks to the investing public on stock markets to raise money for corporate purposes. Once stocks are trading on the stock market, supply and demand forces determine the price of the stocks going forward.
Not all trading platforms for trading stocks have equal rules that govern the trading of stocks that they quote. This is an important distinction that needs to be understand when considering what is the stock market. Stock exchanges have listing requirements, while stock quotation systems either have no listing requirements or very limited listing requirements. This means that companies that list on stock exchanges have achieved rigorous listing requirements, but stocks that trading on stock quotation systems have not, and therefore warrant additional scrutiny by the investing public.
The next question the general public has after they understand what is the stock market is: how to invest in the stock market? There are a number of ways to invest in the stock market, which are important to understand to gain a firm understanding regarding what is the stock market. The best way to invest in the stock market depends upon an investors time horizon and risk tolerance.
The three primary ways that the general public can invest in the stock market is by buying stocks in individual company’s stocks, buying mutual funds that include a number of stocks, or buying Exchange Traded Funds (ETFs) that also contain a number of stocks. Investments in the stock market can be made through a brokerage account, and Individual Retirement Account (IRA), or a company managed retirement account, such as 401-K retirement account. Buying stocks in individual companies is considered more risky than buying stocks in mutual funds or ETFs since nobody knows how a particular company will do in the long run in the competitive business marketplace, and holding individual stocks exposes an investor to the risk that a company may go bankrupt and the shares they hold become worthless. Since mutual funds and ETFs spread the risk out amongst a number of stocks, the risk of total loss is mitigated.
Another way to answer the question “what is the stock market?” is to say what the stock market is not meant to be, despite public perceptions to the contrary. The stock market is not meant to be a casino where traders bet on stock’s short term moves, but is rather supposed to be a mechanism whereby companies can raise capital to expand or improve their businesses.
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