Source: Investopedia
Most stocks are traded on exchanges, which
are places where buyers and sellers meet and decide on a price. Some exchanges
are physical locations where transactions are carried out on a trading floor.
You've probably seen pictures of a trading floor, in which traders are wildly
throwing their arms up, waving, yelling, and signaling to each other. The other
type of exchange is virtual, composed of a network of computers where trades
are made electronically.
Most stocks are traded on exchanges, which
are places where buyers and sellers meet and decide on a price. Some exchanges
are physical locations where transactions are carried out on a trading floor.
You've probably seen pictures of a trading floor, in which traders are wildly
throwing their arms up, waving, yelling, and signaling to each other. The other
type of exchange is virtual, composed of a network of computers where trades
are made electronically.
The purpose of a stock market is to
facilitate the exchange of securities between buyers and sellers, reducing the
risks of investing. Just imagine how difficult it would be to sell shares if
you had to call around the neighborhood trying to find a buyer. Really, a stock
market is nothing more than a super-sophisticated farmers' market linking
buyers and sellers.
Before we go on, we should distinguish
between the primary market and the secondary market. The primary market is
where securities are created (by means of an IPO) while, in the secondary
market, investors trade previously-issued securities without the involvement of
the issuing-companies.
The secondary market is what people are referring to
when they talk about the stock market. It is important to understand that the
trading of a company's stock does not directly involve that company.
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