The term stock market refers to several exchanges where shares of publicly traded companies can be bought and sold. Such financial activities are carried out through formal exchanges and over-the-counter (OTC) marketplaces that follow a set of rules.

The terms “stock exchange” and “stock market” are frequently used interchangeably. Stock market traders buy and sell shares on one or more of the stock exchanges that comprise the overall stock market.

The New York Stock Exchange (NYSE) and the Nasdaq are the two most important stock exchanges in the United States.

What Are the Functions of a Stock Market?

The stock exchange ensures price transparency, liquidity, price discovery, and fair trading practices.

The stock market ensures that all market participants interested in buying and selling securities have access to data for all buy and sell orders, assisting in the fair and transparent pricing of securities. The market also ensures that appropriate buy and sell orders are efficiently matched.

Stock markets must facilitate price discovery, in which the price of any stock is determined collectively by all of its buyers and sellers. Those who are qualified and willing to trade should have immediate access to place orders, and the market should ensure that the orders are executed at a reasonable price.

Market makers, investors, traders, speculators, and hedgers are all types of stock market traders. For example, a long-term investor may buy stocks and hold them, whereas a trader may enter and exit a position in seconds. In addition, a market maker provides market liquidity, whereas a hedger may trade in derivatives.

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What Is the Significance of the Stock Market?

A free-market economy includes the stock market. It enables companies to raise funds by selling stock shares and corporate bonds, allowing investors to share in the companies’ financial successes, profit from capital gains, and earn income from dividends. In addition, the stock market serves as a platform for individuals’ savings and investments to be efficiently channelled into productive investment opportunities that contribute to the country’s capital formation and economic growth.