Stock exchange definition

Stock Exchange

The stock market is a physical or virtual market where applicants and suppliers of capital come into contact with those who carry out transactions through authorized intermediaries. Itis often referred to simply as “the bag.”

They allow negotiation and exchange between companies that require financing and savers (individuals or organizations). The latter seek to invest their surplus money to obtain a return.

Stock markets normally trade both variable income (shares) and fixed income (debt), with the first case being the best known.

Private organizations can run them as physical or virtual locations. This requires prior authorization from the corresponding government or regulatory entity.

Perhaps when you read “stock market,” you think of a large building with people running and shouting, where it is very easy to lose money. That’s why many investors avoid it without realizing its benefits, thinking it’s just for the elite..

In reality, that is not the case. What is more, the rich do not need to invest; they are already rich. We are the non-rich people who can benefit the most from investing in the stock market. Stand out from the crowd and take a look at our basic stock investing course to learn how to invest correctly.

Stock markets began in Bruges, Belgium, when the Van der Bursen banking family held meetings in their palace to trade assets and conduct business. The concept of “bag” arose from the family crest, which had three leather bags.

The first modern stock exchange arose in the year 1460 in Antwerp, Belgium. Subsequently, in 1570, the London Stock Exchange was created; in 1595, that of Lyon (France); and in 1792, that of New York.

Among the most important functions of the stock market are:

  • Channel savings into productive investment.
  • It provides truthful and permanent information about the values, the situation of the companies registered in the stock market, the operations carried out, etc.
  • It offers liquidity since investors can convert their assets (shares or others) into money.
  • It provides legal certainty. That is, the transactions are supported, and they will be held accountable for them.

Stock markets play a fundamental role in economic development since they facilitate transactions and channel savings. In this way, a better allocation of resources is feasible.

Advantages of the stock market for companies

Participating in the stock market can bring several benefits to companies, among which are:

  • Greater access to financing.
  • Best image for the public.
  • It allows estimating the value of the company at a given time and encouraging its administrators to increase this value.
  • Shareholders can obtain liquidity if they choose to sell their shares.

Advantages of the stock market for savers

For people or entities that have savings, the stock market can provide several benefits, among which are:

  • Greater options to make your savings profitable.
  • Greater access to information.
  • It allows you to buy and sell an asset as many times as necessary.
  • Access a regulated market that offers security.

How does a stock market work?

The stock market is a secondary market because financial assets issued in the main market are sold there.

Transactions are made through authorized financial intermediaries, popularly known as brokers or stockbrokers. These professionals operate on behalf of the company or individual that hires them. In return, they charge a commission or fee for their services.

It is worth mentioning that there are currently virtual stock exchanges on which it is easy to contact a broker and buy shares online.

On the other hand, companies that want to participate in the stock market must make their financial statements public. In this way, it is possible to obtain precise information about its current situation and growth potential.

In Spain, there are four stock exchanges: Madrid (founded in 1831), Bilbao (1890), Barcelona (1915), and Valencia (1970).

Criticism of the stock market

Despite what was described above, the stock market does not only have advantages. While this market has boosted access to finance and allowed many successful businesses to grow, it also carries risks.

In this sense, we must emphasize that in the stock market, prices (quotes) can fluctuate strongly. A share today can be worth 4, tomorrow 3.7, or even go bankrupt (become worth 0). Therefore, just as positive returns can be generated, money can also be lost.

It should be noted that the variability of the price of an asset is called volatility. The higher it is, the more risk it represents.

Therefore, investing in the stock market is an activity that can offer benefits. However, all or part of the investment may be lost.If a stock is over- or undervalued, this can happen.

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