How does the stock market works?

How does the stock market works?

The Stock Market is where transactions take place between those of us who buy and sell financial securities of companies.

Despite the fact that we associate the name Stock Exchange with company shares, a wide variety of instruments are traded on it, such as private or public bonds, options, certificates and other less common securities.

I'll give you an example: imagine the typical Sunday agriculture market where several local producers gather to sell their produce to customers in the town or city.

Well, the Stock Market is the same but where the titles of the companies are put at stake.

The companies would become the farmers with their production, in this case stocks, bonds or options, and the company that is in charge of providing structure for the exchange of shares and money is the Stock Market, which as we see is a private company.

The Stock Exchanges are born spontaneously to facilitate capital transactions between the different agents of the economy: savers and producers.

Once they are launched and given legal way, it is only a matter of time before they grow in great complexity, along with the economic growth of the modern economy with its countless companies.

Four actors play in this stock market game.

In addition to the two named, savers and producers, we have the State and the stock brokers.

The Stock Market was born in principle in the absence of the State, as I said, spontaneously, by the "invisible hand" as Adam Smith would say.

The objective of this was to put in contact producers who needed financing (companies) with savers (street people) who were looking for a return on their savings.

The exchange of titles was purely private.

With time and the growth of the State in the advanced world, it was definitively introduced in the Stock Market, regulating it from head to toe, something no different, after all, from the rest of what happens with other companies.

The Stock Exchange is therefore regulated privately when buying and selling and organizing the market and publicly, through the State for the necessary legislation so that the titles and transactions are legally registered.

How do you trade on the Stock Market? 

To negotiate on the modern Stock Exchange we will need some members of the Stock Exchange known as brokers who are none other than the stock companies in all its variants, also popularly known as brokers.


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However, the activity of placement and negotiation of securities is so extensive that there are a large number of agents that participate in the complex Stock markets.

Without these brokers or stockbrokers we will not be able to buy or sell securities as we are not authorized to do so. This is why this group is so important to stock trading.

In this sense, the brokers would become the authorized sellers of the titles of the companies in the Stock Exchange, so that the companies here would only have the character of providers of titles, as if they were the farmer who produced the bags of wheat but to sell them in the market you will need a market agent. Today these brokers or brokers allow us to buy and sell securities of all the stock exchanges in the world, since the vast majority of countries have their stock markets more or less advanced.

The best known are the ones I name before the United States, but we also have the Stock Exchanges of Germany, Japan, China, the United Kingdom, Spain, Brazil, Mexico, and so on. In all these Stock Exchanges the most important national titles are negotiated. With stock brokers we will not have to physically go to the stock exchanges to buy shares, as if we would have to do it if we were to buy apples in a typical market.

Today, with good brokers, we can buy securities from any country at a reasonable price and cost. Normally, to be able to negotiate the titles of the different Exchanges they will ask us to pay a monthly fee depending on the market.

Characteristics of the Stock Market

These institutions provide three fundamental characteristics for the proper functioning of today’s complex financial markets:

Profitability: the mere existence of stock exchanges entails the search for profitability both by companies seeking financing to carry out projects in order to obtain more profitability in the future, and by investors, who buy the shares seeking have a profitability of them. Furthermore, the State, through its regulation of the market, obtains great profitability through the imposition of taxes and fees.

Security: The Stock Market is in essence a variable income market with all the connotations that this entails. That is to say, in investing through the stock exchanges we cannot expect to buy securities with total security. Stock exchanges are very dynamic markets with companies that go up 1,000% in a few years and others that lose 100% of their value in a matter of months. It is a market where anything can happen. In short, the Stock Exchange is safe because the transactions that take place on it are heavily supervised. Investing in the Stock Market is not safe because no one guarantees that we can win or lose.

Liquidity: this is a fundamental component of the operation of the exchanges. They provide liquidity to the financial and capitalist system. These are the ones that channel the actions of the companies towards the savers and the money of these towards the companies with what the flow of the markets tends to be more efficient. Imagine that you want bananas but there is no market to go to buy them. You would have to go to the banana farms to do it. If your country doesn't produce bananas, there would be no way you could buy them. Imagine what would happen in the absence of food markets. Well, similar for the Stock Market. The existence of these markets channels all the liquidity of society towards the most efficient companies and businesses.

Is it worth investing in the stock market?

Without a doubt.

Despite the bad reputation it has among many citizens, the Stock Market is the investment that has given the best returns in the last 200 years in the advanced world.

Think that when you are buying shares in Apple, Facebook, Nike, Siemens, Inditex, etc., you are acquiring property in those companies. 

This, in the long run, is much better than leaving the money parked under the bed, since there it runs the risk of losing value with the inflationary processes of the modern era.

At least the shares of companies tend to rise in price over the decades, in addition to distributing their profits with the well-known dividends.




I’m not an expert when it comes to the stock market. That is why I advised you to do your research and study more before investing in the stock market.