Understanding How the stock exchange works

Understanding How the stock exchange works

Stock markets are some of the most crucial parts of today's global economy.  And, although most of us think we understand what stock markets and exchanges are, our knowledge probably doesn't go beyond a ringing bell, a bunch of people yelling at each other and Leonardo DiCaprio quoting, "Sell me this pen!"


A BRIEF TIMELINE


While the New York Stock Exchange (NYSE) and Nasdaq are arguably the most powerful in the world, history far supersedes these exchanges, with the first genuine stock market arriving in the late 1500s in Antwerp (Belgium) and the first modern stock trading created in Amsterdam in 1611.


Between the late 1700s, when the U.S. stock market entered the game, and 1923, a small group of men would meet daily to buy and sell stocks and bonds. 


This Buttonwood Tree Agreement would eventually become the practice today known as the New York Stock Exchange (NYSE), which faced very little domestic competition for the next two centuries.


In the same period, the Dow Jones Industrial Average started,  initially consisting of 12 industrial companies, while the early version of the S&P 500, formed by Poor's Publishing, started tracking 90 stocks by 1926.


Most notably, trading began on another U.S. stock exchange in 1971, the National Association of Securities Dealers Automated Quotations, widely known as the NASDAQ.


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HOW THEY WORK


To raise capital, the first-ever publicly-traded company, the Dutch East India Company, changed the way business was done when it decided to sell stock and pay dividends of the shares to investors by issuing stakes on a piece of paper.


Soon after, the 1600s experienced a financial boom that followed a bust when it was revealed that very few other emerging East India companies conducted actual business.


Countries all-over started to adopt these practices when eventually, stock exchanges began to operate like auctions, allowing investors to buy and sell shares of stocks.

WHAT THE STOCK MARKETS DO TODAY


Today, many large companies have their stocks listed on a stock exchange as this makes the stock more liquid and thus more attractive to many investors.  And while it may have taken centuries to exist as we currently know it, the stock market continues to evolve. 


The stock market works through a network of exchanges to list shares of their stock on an exchange, called the Initial Public Offering (IPO). 


The supply and demand of a business help determine the price for each security or the levels at which stock market participants (investors and traders) are willing to buy or sell.


The stock market also plays a significant role in the financial structure of a country or region and is thus, considered a barometer of the economy in that area.


Institutional and retail investors can buy shares of a company that trades on a stock exchange through a stockbroker - Buying a stock represents ownership of a company or corporation, permitting you to a proportionate claim on its assets and profits.


CONCLUSION


With many online brokerages widely available, you can effortlessly put your trading and investing skills to the test.  Signup processes have become increasingly simple, and once you fund your account, you will be able to select the right investment strategy that works for you.


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