When I was new to the world of investing, I associated the term stock market with a place where people in jackets shouted and used hand signals aggressively to transfer some sort of information between each other in a language that only they understood.
In case your wondering, with time, I learned that this hand gesturing scene made popular in the media is something called open outcry which happens in some stock exchanges, but more about this later.
Let me show you some other images that you may be familiar with.
The above images are those of the New York Stock Exchange and Wall Street. As popular as some of these images may have become, no one image tells you the whole story.
Just like if you could zoom out and see the earth from millions of miles away and see how small we are in the universe- if you could zoom out and see the stock market as a whole, you would see how big and complex the world of stock markets really is.
Now, one thing I know is that- to make sense of something complex, its best to start with the basics- the fundamental components on which something is built.
Just as we learned in high school chemistry, where atoms make up molecules that make up a substance, let's take a look at the fundamentals of the stock market by analyzing the building blocks on which stock markets are built.
1. COMPANIES
Let's start with COMPANIES
We are starting with companies because this is where it all begins.
In fact, in the truest sense, companies are the reason stock markets exist.
The primary purpose stock markets were built was to provide capital to companies which they can use to fund and expand their businesses and its core, that is still what they do.
When a big privately held company decides it needs funding, the stock market is one of the avenues where they can generate lots of cash by selling ownership rights of the company.
Company ownership is sold in exchange for cash. These pieces of ownership are called a stock, also commonly referred to as a share, as in a share of ownership.
Now, remember, because raising money for companies is the primary purpose of the stock market, this part of the Stock Market system is also commonly referred to as The Primary Market.
2. INVESTORS
The secondary purpose of the stock market is to give investors – both buyers and sellers, the opportunity to share in the profits of publicly-traded companies.
These pieces of ownership are bought and sold by investors all over the world and their trading behavior (which is the cumulative action of these purchases and sales) leads to the movements of stock prices that go up and down.
You may be familiar with images such as the ones above which are graphs reflecting the movement in stock prices.
This part of the market is called Secondary Markets.
3. STOCK EXCHANGES, STOCK BROKERAGES & INVESTMENT BANKS
No Stock Market operates in a vacuum.
In fact, there's an entire support system on which Primary Markets and Secondary Markets are built.
This is where Stock Exchanges and Stock Brokerages come into play.
Stock Exchanges are places where Stock Brokerages buy and sell the stock of companies on behalf of the public.
Stock Exchanges may have a physical presence such as the New York Stock Exchange (NYSE) OR may just be complete electronic trading systems and not have a physical presence such as the NASDAQ.
Interesting Fact
Both the NYSE & NASDAQ exchanges, being two of the biggest and most highly traded exchanges in the world are headquartered in New York making New York the Financial Capital of the world.
Also, since the New York Stock Exchange is located on Wall Street in New York, the street itself has gained huge popularity and people often reference the Street itself when talking about the stock market.
Another pillar on which Financial Markets are built are Investment Banks.
Investment Banks permeate the entire financial system being involved with both Primary as well as Secondary Markets.
Within primary markets, they help corporations raise money by counseling, underwriting, and helping bring a company shares to the market.
And once company shares are openly traded in the stock market, Investment Banks offer brokerage and advisory services where they buy and sell financial products targeting institutional and high-net-worth investors as clients with the goal of making money on each trade.
Some famous investment banks you may have heard of maybe Goldman Sachs, Morgan Stanley, J P Morgan Chase, Citigroup, Bank of America, Credit Suisse, and Deutsche Bank.
4. REGULATORS
Whenever you have so many people and so much money at stake, governments need to make sure that the game is played right and everyone is following the rules.
Countries appoint multiple authorities to play a supervisory role at different levels of power and capacity called REGULATORS.
One such body watching over the entire system in the United States is the Securities and Exchange Commission (SEC) and there are also other smaller players with different degrees of responsibility such as the Financial Industry Regulatory Authority or FINRA to make sure that there are no cracks in the financial infrastructure.
These smaller players also include Auditing Firms, Banking and Financial Regulators, Oversight Committees, Compliance Professionals, and the like.
Now, the stock market doesn't operate in a vacuum.
In any developed country, the stock market operates side by side with other financial systems such as the bond market, commodities market, foreign exchange markets, and collectively these are known as Financial markets.
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