OVERVIEW
Stock markets are the mechanism that allows and propagates the buying and selling of company stocks as well as other securities and derivatives. These markets can be physical settings or they may even be virtual. In a physical marketplace, buyers and sellers are brought together and interact in an auction environment through a method called open outcry. In this type of market, traders enter verbal bids and offers at the same time, selling and buying when the price is right. Virtual markets are networks of computers through which traders are connected, but the system is essentially the same. Stock exchanges operate in an auction market paradigm, where sellers set an asking price and buyers set an offering price, and when the two prices are equal, a sale takes place. Professionals who work in the stock exchange usually do so on the behalf of others, who may be individual investors or large hedge funds based anywhere in the world.
In the past, buyers and sellers tended to be wealthy individual investors with ties to specific corporations. However, as markets have developed and shifted over time, major investments now tend to be institutional. Whether they are companies, mutual funds, or hedge funds, these institutions have changed the way that the markets operate.
The fundamental function of the stock market is as a source of capital for companies to go public or raise the money required for expansion. The liquidity provided by the stock exchange is very attractive to investors, who can quickly and easily buy and sell stocks, as opposed to real estate or similar equities. Critical to the dynamics of economic activity, stock markets are often an influence on or indicator of social mood. When stock prices are high, household wealth and consumption increase and it tends to indicate that business investment is high as well. The reverse is also true. For this reason, central banks often keep a very close eye on the stock market and have an interest in the smooth operation of the financial system. In order to provide security and eliminate the risk that a buyer or seller’s counterpart will default on the transaction, exchanges physically collect and deliver the shares, as well as guarantee payment to the seller.
This website was created to teach everyday people about stock markets and the exchange process. It focuses on one of the newer markets, the Alternative Investment Market, which is the London Stock Exchange’s international market for smaller growing companies. Some of the companies that are publicly traded on the AIM are profiled on this site as well. They are India Hospitality Corp., Leadcom Integrated Solutions, Neteller, and Majestic Wine Warehouses.