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The stock market is an umbrella term for all of the stock exchanges in a country or region. It includes venues where companies can sell shares of their stock to the public, and investors can buy and sell those shares among one another after they’ve been issued.
There are many stock markets around the world. In the US, you might hear the stock market referred to as Wall Street.
The US stock market has two main exchanges. They are the New York Stock Exchange (NYSE) and the Nasdaq. There are also a number of smaller stock exchanges, including some named for the cities where they are located such as Boston, Chicago, and Philadelphia.
The terms stock market and stock exchange are often used interchangeably. However, they aren’t the same thing.
Stock exchanges provide the infrastructure required to buy and sell stocks. A stock exchange can be a physical space or operated electronically. Two popular examples of stock exchanges include the New York Stock Exchange and the Nasdaq.
In contrast, a stock market encompasses all of the stock exchanges of a particular region.
Both companies and investors can find upside through the stock market. When an investor buys a stock, they hope that a company will do well. If the company turns a profit, the stock owner gets a share of the profits.
Of course, if a company underperforms, investors can expect smaller returns. On the company’s end, investors buying stock offers a way to raise money.
The stock market can be further broken down into two main categories: primary and secondary.
The stock market is volatile. As market prices swing up and down, you might see reports of those movements splashed across the headlines, and with good reason. The stock market plays several key roles in a country’s economy.
“The stock market fuels economic growth by providing liquidity to investors,” says Andrew Lokenauth, professor at the University of San Francisco’s School of Management and founder of Be Fluent in Finance.
“This means that it allows them to easily buy and sell shares of publicly traded companies,” Lokenauth explains. “This liquidity allows investors to quickly and easily access capital, which in turn helps fuel economic growth.”
As an investor, the transparency of the stock market provides a level playing field when building a portfolio. Since everyone should have access to the same information, every investor expects a fair trading opportunity.
Fair trading opportunities are protected by the regulating agencies of any stock market.
“Regulations around the world have evolved to meet the ever-changing landscape of the markets, but their core purpose remains the same: to protect investors and ensure that companies behave in a fair and transparent manner,” says Daniel Colston, a CFP® professional and CEO of Upward Financial Planning.
“The regulations that govern the stock markets are designed to protect investors and ensure that companies act in a fair and transparent manner,” Colston says.
As investors continue to build wealth through the stock market, maintaining fair trade with these regulations is critical.
A stock market index tracks the performance of a select group of individual stocks. Stock market indexes often have a particular theme. For example, an index might only include individual stocks in the technology sector. Others are designed to provide a measure of the broader market’s performance.
Three of the most closely watched measures of the US stock market are the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite Index. You’ll often hear these mentioned in daily news reports about the performance of stocks.
Regardless of the index, most serve as a measure of financial health for the sectors involved. If an index is down, many investors would consider it a bad sign for the industry or the market.
In the US, the Securities and Exchange Commission (SEC) regulates the stock market. The government agency was created to protect investors and maintain a fair market.
Quick tip: If you suspect a securities crime, you can report it to the SEC. The agency may follow up with an investigation.
With an emphasis on rule enforcement, the SEC works to protect investors from financial fraud and regulate the activities of stock market professionals. Additionally, the SEC serves an educational role by providing investors with accurate market information.
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