Before explaining how the stock market works, you should know precisely what the stock exchange is and who participates in this market.
The stock market is a private entity that facilitates the exchange of financial assets such as shares, debt, etc. The stock exchange is a virtual and not a physical place. It is an interconnected network of computers with a central computer that contains all the current information. For example, New York is called The New York Stock Exchange.
Investments in the stock market allow companies to raise money to develop their activity, issuing shares to be sold to savers so that they become shareholders of the company. It plays a fundamental role in the economy. As it fulfills such an essential function in a country, its correct operation must be supervised and protected. In the case of Spain, the official supervisory body is the National Securities Market Commission, a public body.
Who participates in the stock market?
It is interesting to know the role of each actor participating in this stock market:
- The issuer of the shares is the company that issues its securities to be traded on the stock market.
- The stock exchange regulator oversees the operation of the stock market.
- Intermediaries or brokers facilitate trading by offering services and mechanisms to determine what to invest in on the stock market.
- Investors, individuals, or entities buy or sell these shares to make a profit.
- Stock market indexes are benchmark indexes formed based on a set of securities listed on a stock market.
How does the stock market work?
To start investing in the stock market, you must choose a broker who will facilitate your transactions on the stock market. Stock negotiations between buyers and sellers are carried out through an intermediary, i.e., a stockbroker or broker since the intervening parties cannot contact each other without the broker. Similarly, the seller of the shares will use a broker to introduce his shares in the stock market.
The next step is to define the composition of your portfolio so that each investor will buy the selected assets on the stock exchange. This purchase of shares is registered in the securities depository account, whose holder has to manage the capital, buying and selling shares through the broker.
How does the stock market function?
The key to the functioning of the stock market is in the stock exchange auction. It is where sellers propose to sell shares at a specific price, and buyers propose to buy shares at a specific price. By using the stock market order system, they send to the market the information about what they want to buy, at what price, and under what conditions.
Let’s see a simple example so that you can adapt it to the stock market and understand how it works. Imagine you go into a greengrocer’s where anyone can buy and sell products. You ask for tomatoes at 2 euros, and the greengrocer replies that he has no tomatoes left and only has 4 euros and 1 kg left.
In this situation, a purchase action would have been launched (tomatoes at 2 euros). Still, as it does not fit any situation, it will not be executed. In this case, the buyer decides whether to wait for the price to decrease or not. A new buyer arrives at the greengrocer’s and says he is buying a kilo of tomatoes for 3 euros. The greengrocer executes the purchase order because he is happy to sell his product for the price offered by the second buyer.
And finally, imagine that another new greengrocer comes in who needs to sell the product as soon as possible. And sees that the first buyer is there and pays 2 euros to buy the kilo of tomatoes, then executes the sale, causing a decrease in the price of that product, going from 4 euros to 2 euros. Well, the operation of the stock market is exactly the same as this market. Still, on a large scale, you just have to add more participants (buyers and sellers) and products (financial assets).
