What Is a Stock Market?
A stock market is a platform where shares or stocks of publicly traded companies are issued, bought and sold. The stock exchange performs two main roles: allowing firms to access capital to fund their growth and giving investors a liquid venue to buy and sell securities. Stock markets are a linchpin in economic growth, providing companies with access to funding and individuals with a way to amass wealth.
For instance, Airbnb, a company that went public in 2020, issued its Initial Public Offering (IPO) on the primary market when it offered shares to the public for the first time. Now, these shares are traded daily on the secondary market, which consists of exchanges such as NASDAQ.
Types of Stock Markets
The stock market comprises multiple stock markets that serve specific purposes and facilitate different market participants and financial instruments. Let’s take a closer look at these markets.
Primary Market
The initial issuing of new securities occurs in the primary market. Companies sell shares directly to investors in order to raise capital through this market. Initial public offerings (IPOs) are an important aspect of the primary market. When Tesla went public back in 2010, for example, it also offered shares on the primary market in order to raise capital to grow.
The primary market is important for:
- Businesses seeking to raise funds for projects or expansion.
- Buyers/Early Investors Stake in a Company.
Secondary Market
Securities are bought and sold among investors on the secondary market. This is the market that most people are aware of, and it comprises major stock exchanges, including the New York Stock Exchange (NYSE), and NASDAQ.
In the secondary market:
- Companies do not trade stocks directly; they are bought and sold between investors.
- It creates liquidity so that people can buy or sell shares quickly.
Buying shares of Apple (AAPL) on NASDAQ? You’re a participant in the secondary market. The company itself is not part of this transaction, but the marketplace allows you to buy or sell shares for the existing prices.
Over-the-Counter (OTC) Market
Over-the-counter (OTC) market: A decentralized market where securities are traded directly between parties without an exchange. Here, smaller companies or those that can’t meet listing requirements of major exchanges often trade.
What you need to know about the OTC market:
- It offers the chance to invest in niche or up-and-coming companies.
- It has greater risks because it is less regulated.
Pink sheet stocks such as GameStop (GME) were traded over-the-counter (OTC) before transitioning to larger exchanges.
Derivatives Market
The derivatives market is a financial market for derivatives, which are financial contracts whose value is linked to the price of something else, such as an underlying asset like a stock or commodity. These markets are used to hedge risks, speculate on price movements, or leverage investments.
Derivative instruments include, for example:
- Stock options, which allow the holder to purchase or sell a stock at a predetermined price.
- Futures contracts are notes on commodities or indices.
The Chicago Mercantile Exchange (CME) is among the most significant participants in this constituent market, booking a large volume of derivatives trades across the world.
Equity Market
Now the equity market is a specific market to trade equity instruments like Common and Preferred stocks. It does business through both primary and secondary markets and covers only equity securities.
Examples of equity markets:
- BSE: The oldest stock exchange in Asia.
- London Stock Exchange (LSE): A key exchange for European stock trading.
Comparison of Stock Markets
| Market Type | Key Function | Participants | Examples |
|---|---|---|---|
| Primary Market | Issuance of new securities | Companies, Underwriters | IPOs like Tesla (2010) |
| Secondary Market | Trading of existing securities | Retail and institutional | NYSE, NASDAQ |
| OTC Market | Decentralized trading | Dealers, Individual traders | Pink Sheets, OTCBB |
How Stock Markets Operate
Stock on the market is simple at first glance — yet very effective. Companies go public and issue shares for the first time through IPOs in the primary market, which allows them to raise capital. These shares are then bought and sold by investors in secondary market trading, which offers liquidity and pricing driven by supply and demand.
Companies that want to find investors without meeting the stringent requirements for listing on an exchange can go public through the over-the-counter market, while the derivatives market allows traders to speculate on — or hedge — the value of stocks and other assets. In the U.S., regulators like the Securities and Exchange Commission (SEC) also regulate these markets to ensure fair and transparent practices.
Expert Tips for Navigating Stock Markets
- Identify the type of market: IPOs, secondary exchanges, OTC.
- Invest in varied portfolios: Diversify across different market types and asset classes.
Conclusion
The stock market is a complex but necessary dynamic of the global economy consisting of different kinds of markets with particular values and benefits. Each component fulfills its own duty, from the primary market that unlocks it to the secondary market that gives it liquidity to the OTC market that is responsible for specific niche investments.
Knowing how these markets work — and how they differ — will help you make smart decisions about where to invest, set your strategies accordingly, and invest with confidence.
