What the stock market is about

The stock market is a system of events and mechanisms where interested parties can buy and sell securities or assets by specific rules. The notion of the stock market includes exchanges and OTC platforms, as well as alternatives.

Work principles of the stock market

The stock market is a rather complex phenomenon. We will, therefore, discuss its work principles in the example of stock exchanges:

  1. State-funded or commercial institutions issue securities: stocks, bonds, and other assets
  2. The assets are registered with an exchange
  3. A clearing company controls the movements of the securities on the exchange
  4. The securities appear in the trading system for free trading. Information about the issuer and the asset characteristics are made available
  5. Market players trade the asset The issuer gets the money from the initial sales
  6. Purchased securities get written down to the depositary as the property of their new owner
  7. The owner may receive an income from the securities, such as dividends
  8. The securities may be sold again later

Organisations that facilitate the work of the stock market

  • Exchanges are platforms where securities are traded
  • Clearing chambers are mediators between market participants that facilitate communication between the sellers and buyers
  • Depositaries are entities that store securities, mediate communication between issuers and investors, control transactions, and guarantee the safety of securities
  • Registrars register stockholders by an agreement with the issuer

The role of the stock market

The stock market provides for:

  • redistribution of profits
  • transparency of trading operations with financial instruments
  • free flow of capital
  • liquidity of securities
  • connection between buyers and sellers
  • mediation between buyers, sellers, and issuers

Stock market participants

  • Investors, either physical persons or legal entities, invest in financial assets to make a profit
  • Issuers are organisations issuing securities
  • Professional traders are people who professionally sell and buy assets on the stock exchange
  • Organisers and regulators are legal entities in charge of the trading process and following the rules of the stock market

Stock market regulation

Processes in the stock market are regulated and controlled by special state institutions. For example, in the US, this is the Securities and Exchange Commission (SEC), in China, it is the China Securities Regulatory Commission (CSRC), while in the UK, this is the Financial Conduct Authority (FCA).

The tasks of the regulators are:

  • To grant permissions and licenses to professional market participants
  • To control over and publish necessary financial information
  • To investigate suspicious transactions and violations of transaction rules
  • To punish those who have violated the rules of financial activities