Stock Market Basics 101

The stock market is exactly how it sounds: it's a market for stocks or shares of a company. The world's stock markets are fundamental to the economy; they allow businesses to raise money for expansion and give individuals the opportunity to prosper from the success of a business. Without the world's stock markets, it would be impossible for growing businesses to find the money they need. The markets are also very important to world governments and tax accounts, as they generate amounts of money in capital gains.

How the Stock Market Works

Participants in a stock market agree to buy and sell shares to each other. The stock markets run on a very small amount of capital compared to the overall amounts of equity that currently exists in the combined world market. Shares of stock are never without an owner; buying stock means you're buying it from someone who currently has it and is willing to sell it at a specified price. This is the most important thing to understand is that every little bit of stock trading hands will be in someone else's possession at a later time. As the market ebbs and flows, some people lose while others hit it big.

The stock market also plays a critical role of valuing the world's wealth. Without a common market, prices for shares of stock would vary greatly from owner to owner. With one centralized location for trading, trillions of dollars of equities can be bought and sold in minutes. The stock market also plays a critical role of distributing liquidity throughout a particular geographic area.

Stock Markets Have Outgrown Their Predecessors

The founders of the first stock markets would have never imagined a time where day traders could buy a portion of a company one minute and sell it the next. The first stock markets were small - originally just comprised of a few people who agreed to trade their holdings with each other and charge fees for access to their trading. Today, the market has exploded to the point where everyone has stock either through mutual funds, or pension programs and 401Ks. Everyone is invested in the stock market one way or another, with or without holding shares of stock.

Markets Set Standard Prices

The main role of the stock market is to set stock prices and make them standard. Now investors have access to a plurality of stock markets and can trade their stock on a whim. The value of businesses goes up and down by the day, as they are bought and sold and as their underlying assets increase or decrease in value.

The importance of the stock market is often underestimated as a pool of people speculating on prices. While that may be true in the short term, IPOs and newly released stock plays an important role of funding businesses and allowing people to profit off the good fortune. And while it may seem that the stock market does not affect our daily lives, it certainly does. The crash of 1929 affected everyone, it caused banks to fail, people to starve and an economic epicenter to collapse.  The power of the stock market, along with its profit potential for investors, can never be underestimated.