How Does The Stock Market Work? – Real Vision
A stock market has two basic functionalities. Firstly, companies and banks offer newly issued shares, bonds and other financial products to investors. Secondly, investors offer their financial instruments to other investors.
Today’s stock markets are fully automated and digitalized. They allow for real-time trading and orders are usually fulfilled within seconds. Prices of financial instruments are determined through an order book, which displays all the buy and sell orders for each instrument. As soon as the bid and ask price of a buy and sell order matches, the trade is automatically executed.
What time do stock markets open & close?
Stock markets have conservatives trading hours. Wall Street exchanges are open from 9:30 am to 4:00 pm Easter Standard Time (GMT-5) on weekdays and closed on weekends. The London Stock exchange is open for trading from 8:00 am to 4:30 pm UK time on weekdays only. Similar hours apply for most other stock markets, like Zurich or Frankfurt.
As stock markets are spread around the world (New York, Shanghai, Tokyo, Sydney, … ), stock trading happens around the clock on different exchanges in different time zones and only rests on weekends.
What is a stock? A stock (also share or equity) represents fractional ownership in a company. Stock owners are entitled to parts of a company’s assets in proportion to how much stock they own. Usually, owing stock comes with certain privileges, such as voting rights and the right to possible dividend payouts.
Stock exchanges: Stock exchanges (also stock markets) are marketplaces where stocks are purchased and sold. In the past, these were physical locations where brokers would meet to fulfill their clients orders. Today, stock exchanges are fully automated digital platforms running on computer servers. Nevertheless, running a stock exchange is strongly regulated and requires the financial regulator’s permission.
Stock brokers: Stock brokers are the intermediaries between an investor and a stock exchange. Most exchanges only accept orders from members of that exchange. Individual traders and investors are therefore reliant on the service of an exchange member. Brokers provide such services and are compensated through trading fees, commissions and other means.
Stock market indices: Stock market indices track the performance of a basket of shares. Their goal is to provide a simple market overview over a specific market segment. Shares represented in an index usually have a common denominator, such as jurisdiction, industry, or market capitalization. The most common stock market indices are the S&P 500 (500 largest US companies), the Nasdaq 100 (100 largest US tech companies) and the Dow Jones Industrial Average (30 largest US companies from all industries).
How are prices set? Prices are determined according to supply and demand. Normally, prices are dependent on the expected future performance of a company, but can also have other drivers. The current price of a stock is the price of the last fulfilled order. Investors wanting to sell a stock can place an offer with a quantity and a price in the order book. The same goes for buyers. Matching or accepted offers are automatically executed.
What happens when you buy a stock? Once an order has been fulfilled, the purchased stock will be visible in your personal account immediately. You now have all the rights that come with owning this stock, such as voting rights and the right to dividend payments. You can also resell the stock, within the stock market’s trading hours, any time you’d like.
Note: technically, the final settlement for stock deliveries is T+2, meaning the counterparty has to hand over the stock to your broker only two business days after your purchase. During this period, you carry the counterparty risk, should the other party become insolvent.