What is the stock market? Definition and meaning
The stock market, also called the equity market, is where buyers and sellers trade equity (stocks, shares) either through a stock exchange or over the counter. Listed shares are traded through a stock exchange and unlisted shares over the counter (privately).
What is the difference between a stock exchange and the stock market? A stock exchange is the physical facility where shares are traded, such as the New York Stock Exchange or the London Stock Exchange.
The stock market is a generalized term that refers to a loose network of economic transactions – it is the organized mechanism under which shares are traded, not a physical facility. It is like the difference between the oil market and a gas station (UK: petrol station) – one is a generalized term for a specific market, while the other refers to a physical place.
Almost 24% of world’s financial asset value is wrapped up in stocks. (Data Source: marketwatch.com)
In the media, stock market and stock exchange are often used interchangeably.
The FT Lexicon defines stock market as:
“Organised stock trading either through a stock exchange or over the counter.”
Stock market in French is marché boursier; Spanish – bolsa de valores; Portuguese – mercado de ações; German – Aktienmarkt, Italian – borsa; Russian – фондовый рынок; Japanese – 株式市場; and Chinese – 股市.
In the stock market, shares may be categorized in several different ways. One common way is by the country where the company is headquartered. For example, GlaxoSmithKline and HSBC are domiciled in the UK, so they may be considered as part of the London Stock Exchange, although their shares can also be traded at exchanges across the world.
At the end of 2014, the size of the global stock market (total market capitalization) was approximately $69 trillion, according to MarketWatch. The largest market in the world is in the United States (34% of world total), followed by Japan (approx. 6%) and then UK (approx. 6%).
Stock markets emerged soon after first stocks
The first joint-stock company (as we know it today) was the Dutch East India Co. It issued the first paper shares, which traders could conveniently buy, sell and trade with other shareholders and investors.
The buying and selling of shares began to grow rapidly, especially as trade with the New World increased. The expansion of what was effectively a nascent stock market increased the need for a properly-organized marketplace to exchange these shares.
Stock traders started meeting at a London coffeehouse, which they utilized as a marketplace. The coffeehouse was taken over by stock traders, and in 1773 called it the ‘Stock Exchange’ – the London Stock Exchange, the world’s first, was founded.
In 1790, the first stock exchange in the New World opened in Philadelphia.
The term ‘stock market’ may also refer to the value of shares being traded in a geographical area, as seen in this phrase “The Japanese stock market declined sharply this morning.”
Famous quotes about the stock market
American business magnate, investor and philanthropist, Warren Buffett, seen by many as the most successful investor of the 20th century, said:
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
American business magnate, investor, author, and philanthropist, George Soros, said:
“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.”
Anita Roddick (1942-2007), the British businesswoman who founded The Body Shop, said:
“But the minute we went public on the stock market, which is how our wealth was created, it was no longer how many people you employed, it was how much you were worth and how much your company was worth.”
An Active Market – this is a market with many buyers and traders. Trading volume is heavy and liquidity is high. Share prices in an active market are not disproportionately affected when massive transactions occur.