What a Stock Market Is and How Stock Markets Work
1. What a Stock Market Is
The stock market is the market where the shares in the stocks of listed companies are sold and bought. Companies would probably have a hard time raising money from the capital market, if investors did not have any platform to exit from their holdings by selling. Because investors can always resort to the stock market to sell shares they buy, they are encouraged to invest. In reality, other securities, apart from stocks, can be traded in the stock market. Bonds or debentures, for instance.
An investor who buys the stocks of a particular company might want to exit from that holding, at some point in the future. The reason for such exit may be varied. He could be in need of cash. Or, possibly, he has seen better opportunity in another stock or set of stocks and wants to switch his holdings. He might also be attempting to re-balance his portfolio. Or, he has sensed some market direction that dictates that he exits from his current position in the stock. Whatever the reason, he can only achieve that objective if there is somebody else who wants to buy that stock and if there is a platform for them to carry out the transaction. The stock market provides that platform. It gives opportunity to new investors to buy into a stock and to old investors to sell off their stock.
2. How it Works
The stock market is usually a formal trading platform, called a stock exchange. A stock exchange normally has a physical trading floor, though much of online trading is also done, today. In Nigeria, our stock exchange is the Nigerian Stock Exchange, with its head office at Tinubu Square, Lagos. The Nigerian Stock Exchange also has branches in various states, with trading floors that give access to a wider population of investors.
Actual trading on the Nigerian Stock Exchange is only done by licensed stockbrokers. Stockbrokers trade for themselves and on behalf of their clients. An individual wishing to buy or sell shares will have to consult a stockbroker and give him a mandate (instruction/order) to buy or sell that share for him. Once he has met the requirements of the stockbroker (like providing the funding required to buy or the evidence of share ownership for shares being sold), the stockbroker will strive to meet his order and advise him.
Stocks that are traded on the stock exchange are those of companies listed on the exchange. Such companies are said to have gone public, making it possible for interested investors to freely buy or sell their shares on the stock exchange. Companies that have not listed on the stock exchange are private companies. That means you cannot buy their shares and become a part-owner, unless existing members permit you. For public companies, you need nobody's permission. Once you're interested in buying into a company, you simply tell your stockbroker to source its shares for you. If fortunately some existing shareholder is looking to sell at the same time, you're in shape - your broker just buys for you, without any need to consult other existing owners of the company.
Trading in shares is done during business hours within a specified time period. What simply happens is that stockbrokers with interest to buy a particular stock (maybe he has your mandate to buy it) and those with interest to sell that particular stock (their clients have possibly asked them to sell), will match those orders. Those buying are bidders, while those selling make offers of the stock. A settlement process follows the transactions, in a few days, during which the buying stockbroker, through his bankers, transfers the financial consideration for the purchase, while the selling stockbroker will provide the stocks going to the buyer.
The Central Securities Clearing System (CSCS), a subsidiary of the Nigerian Stock Exchange, plays an important role in the process. The CSCS handles the settlement process to ensure that all the transaction parties meet their obligations and within the expected time limit. It also houses the records relating to these transactions.
Ultimately, the stock market is for the stock investors and is actually peopled by them. The physical locations for trading only give a formal expression to the process. The good news: anybody interested in buying shares can access the stock market, as no barriers are in place.
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