by Edwin Ivanauskas | Tags: Personal Finance, Investing

When a company decides to issue stocks, they first get together with an investment bank who will attempt to sell the stock on behalf of the company. The investment bank will then either resell it to a large private investor or place it for purchase on the stock market.

The stock market is like any other market and provides a place for buyers and sellers to gather. The size of these markets can range from all stocks in the world to specific stock exchanges which represent markets in certain regions.

Stock exchanges

Most people have seen scenes in popular movies where stock traders are huddled around computer banks yelling "buy" or "sell". Most of these scenes depict an example of a physical stock exchange where investors are actually bidding on prices of stocks in a similar fashion to an auction. The most prominent example of this is the New York Stock Exchange (NYSE) on Wall Street. This is the largest and most prominent stock exchange in the world. Other prominent stock exchanges throughout the world include the National Association of Securities Dealers Automated Quotations (NASDAQ), Hong Kong Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange among other regional exchanges.

The NASDAQ is an example of a purely virtual stock exchange. Unlike the NYSE, there is no trading floor where traders shout out their bids and all transactions are done through computers but the process is very similar to any physical stock exchange.

Stock market within an economy

A stock market has a very important role as part of a thriving economy. It provides the structure necessary for companies to raise capital and issue stocks. At any point in time there are people who want to save their money for a variety of reasons including investments to increase their wealth, a down payment on a home, or for their children's college education. Stocks provide a higher risk / higher return investment suitable for those people attempting to increase their wealth. Along with these people wanting to save money, are people and companies wanting to borrow money with expectations that they can put that money to use expanding their business, making them more profitable than they would be otherwise.

A stock market is a place that allows companies to easily acquire this capital they need to expand and for individual investors to find investments they are comfortable with. Without such a market for these two needs, it would be far more difficult for both savers and borrowers to find someone who is willing to be part of this exchange. This in turn would leave money unoccupied in the economy instead of helping expand the wealth within an economy.

This definition is the most core and basic reason for why a stock exchange is good in an economy. Given recent times, certain activities of investors in a stock market have proven to be somewhat dangerous to an economy. These dangers have resulted from attempts on the part of investors to "game the system" and find an unfair advantage in the system to mitigate their risks and increase their returns. The specifics of stock market instruments such as derivatives and different types of investment strategies are beyond the scope of this article.

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