What is the stock market?
Key Points
The stock market consists of two parts: the issuance market (primary market) and the trading market (secondary market).
The stock market provides a place for companies to raise funds and offers investors a channel to invest in companies, while also reflecting the economic situation and promoting economic development.
The stock market is constantly changing, involves speculative activities, and extreme situations may occur.
Concept Explanation
The stock market is formed by activities related to stocks, including stock issuance and stock trading.
The market for stock issuance is also known as the primary market. This market includes issuers, underwriters, and investors, although it usually does not have a fixed location, so it is actually an abstract concept.
The market for stock trading is also known as the secondary market. In the secondary market, transactions between buyers and sellers require intermediaries to match, with the most authoritative intermediary being the exchange.
Currently, many countries have exchanges, such as the New York Stock Exchange, Nasdaq Stock Exchange, London Stock Exchange, Tokyo Stock Exchange, Hong Kong Stock Exchange, and so on. In fact, these exchanges can trade not only stocks, but also futures, funds, and other varieties.
Of course, besides being exchanges, matchmakers can also be other institutions. For example, the "Dark Pool" in the Hong Kong stock market is also a secondary market, which is a trading platform built by brokerage firms themselves.
The terms "on exchange" and "off exchange" that we often hear both refer to the secondary market, with the former being inside the exchange and the latter being outside the exchange.
The role of the stock market
For companies, the stock market provides an efficient venue for raising funds, promoting corporate development. Price changes in the stock market, investor behavior and opinions can also reflect the company's operational status, helping companies improve their operation strategies.
For investors, the stock market provides a channel to invest in companies, allowing them to use idle funds to participate in social reproduction and share the dividends of corporate growth.
For the overall economy, the stock market's performance to a certain extent reflects the market's supply and demand situation and changes in the overall economic situation, hence it is often referred to as the "barometer of the economy". In addition, by promoting corporate development, the stock market indirectly promotes the development of the overall economy.
The risks of the stock market
The only constant in the stock market is constant change. Various factors including economic situation, macro policies, industry trends, company performance, and investment behaviors will affect the stock market trends. Therefore, before entering the stock market, one must be prepared to deal with changes.
In the stock market, there are speculative activities that need to be identified and avoided. For example, some big players may use their financial advantage to influence stock price fluctuations through large-volume buying or other behaviors, in order to profit from it.
In the stock market, extreme situations may occur and it is important to try to avoid losses when such situations arise. For example, if the market drops too much, exchanges may implement trading suspensions to control risks, known as circuit breakers. In March 2020, influenced by factors such as the COVID-19 pandemic, drastic drop in oil prices, and uncertainties in the U.S. economy, the U.S. stock market experienced a continuous decline, triggering four circuit breakers over eight consecutive trading days.
