The Stock Market allows companies to access capital in return for giving investors part of the ownership in the company. The stock market makes it possible to grow small initial sums of money into larger sums, and to become wealthy without taking the risk of starting an actual business.
Stocks are traded through different exchanges. The two biggest stock exchanges in the United States are the New York Stock Exchange (NYSE), founded in 1792, and the NASDAQ, founded in 1971. Today, most stock market trades are executed electronically, and even the stocks themselves are almost always held in electronic form, not as physical certificates.
The place where stocks in the equity market are traded is known as the stock exchange. There are many stock exchanges around the world, and they can be either physical places or virtual gathering spots. For example, NASDAQ is a virtual trading post where stocks are traded electronically through a network of computers.
Electronic stock exchanges often include a market maker, which is a broker-dealer company that both buys and sells stocks in order to facilitate trading for a particular stock–We will go further into Market Makers later in the curriculum– Electronic trading posts are becoming more common and a preferred method of trading over physical exchanges.
Typically, companies that are public and trade in the stock market or “equity markets” are valued based on the valuation derived from assets versus liabilities. In fact, the actual “equity” of a company is exactly this, assets minus liabilities. Yet, because of the variety of types of assets that exist, this simple definition can have somewhat different meanings when referring to different kinds of assets.
In finance in general, you can think of equity as one’s actual ownership in any asset after all debts associated with that asset are paid off. Here’s a quick example, a house with no outstanding debt is considered entirely the owner’s equity because he or she can readily sell the house for cash, with no debt standing between the owner and the sale.
Stocks are equity because they represent ownership in a company, though ownership of shares in a publicly traded company generally does not come with accompanying liabilities of the actual underlying company.