If you knew a small business owner and wanted to buy their business off them, you could make them an offer, and if the offer got accepted you would get the legal and administrative paperwork completed, hand over the money and become the new owner of that small business. And if you wanted to buy a part of someone’s business rather than the entire business, the process would be similar.
Likewise, if you knew someone that wanted to buy the business off you at a later point, again, there would need to be an offer for the business, an acceptance of that offer, the legal and administrative paperwork would need to be done again then the sale would be complete.
The above scenario relies on the seller of the business and the buyer of the business knowing each other. But what if they didn’t know each other already? How would such a transaction occur?
One way could be via a middleman system. A person wishing to buy a business could be connected to a person wishing to sell a business by a middleman. This works well when the business owner wants to sell the whole business, and the buyer wants to buy a whole business. The middleman could then take a fee and since the transaction value would be large, the fee earned by the middleman would sufficiently compensate him or her for their time and effort.
But what if the business owner wants to sell a part of the business (‘shares’ in other words)? If lots of businesses wanted to sell shares, there’d be a situation where millions of shares were put up for sale. This poses many problems: would there be enough middlemen around to help people buy shares? what if there were people wishing to buy shares, but only in small quantities, would it still be worth the middleman’s time and effort to work on such small deals? What if people wished to buy shares in a foreign country, could a middleman help?
It would seem the middlemen system would not work effectively when transacting shares, particularly in small quantities.
This is where the stock market comes in. Companies that are ‘publicly listed’ offer their shares (also known as equities) for sale (perhaps because the founder of the company believes the company’s value has reached its peak and therefore it’s the best time to sell shares). Of course, a market consists of both sellers of ‘stock’, but also buyers. The stock market is normally a centrally located market (perhaps in the capital city), where information on the price of stocks is publicly available (printed in a newspaper, for example). Like any product, if there are lots of people willing to buy it, the price of that product increases. Likewise, if there is not enough demand for a particular product, the price of it falls. The price of stocks in a company work on that same universal principle of supply and demand.
So, in short, a stock market is a central, accessible place (market) where people wishing to sell their ‘stock’ (shares in a company they own) go to in the hope of finding someone who will buy the stock off them. The buyer could be a very wealthy person who will buy thousands, or even millions, of shares in one particular company (stock). Alternatively, it may be a business that uses its surplus money to buy shares in other companies. In fact, there are some businesses whose sole business is to buy shares in companies and then sell those shares some time in the future for a higher price. These businesses are called ‘investment banks’.
Of course, the above is a very basic description of what the stock market is and how it works. Nowadays, technology has changed how the stock market works in a major way. For starters, no serious investor checks the newspapers for stock prices anymore. By the time the newspaper is printed, the information would be out of date. Services like Google Finance are more up to date, with a lag time of up to 15 minutes. In the past, buying and selling shares were done via the phone. Now, hundreds of millions of dollars’ worth of buying and selling can be done in a matter of seconds via the internet. But perhaps the biggest change to the stock market is that now retail investors (ordinary people) can participate in the stock market. Today, it is possible to invest a few pounds or dollars and be an investor. In fact, according to Business Insider, retail investors now make up 25% of all investors.
The organisation that facilitates all this trading and provides the infrastructure to make it all work is called a stock exchange. So, for the United Kingdom, it will be the ‘London Stock Exchange’ (LSE).
Where are stock markets located?
You may have heard of the FTSE 100 index (an index is a measurement of something). In this case, it is a measurement of the 100 largest companies listed on the London Stock Exchange by market capitalisation. To be included on the FTSE 100, a company must be listed on the LSE, it must be denominated in pounds, and it must meet minimum float and stock liquidity requirements. This measurement is taken every three months, which means companies can enter the FTSE 100 or drop out of it accordingly. Any publicly listed company that doesn’t make it onto the FTSE 100 may go into the FTSE 250 or even the FTSE AIM (where ‘penny’ stocks can be found). The largest stock exchange, however, is the New York Stock Exchange (NYSE). In fact, the US is also home to two additional exchanges: Nasdaq and NYSE American. A very large stock exchange operator called Euronext operates the stock exchanges in the Netherlands, Belgium, Ireland, Portugal, Norway and France. Other major stock exchanges operate in Germany, Canada, China and Japan. Besides these, there are many more minor stock exchanges around the world, however these are not necessarily easy to invest in.
Given that shares can be bought and sold online, the question of where stock markets are located seems slightly redundant. But actually, there is some value in knowing about the location.
Depending on which country a stock market is located in, you may wish to keep in mind:
Stock markets in a different country open and close at different times (due to global time differences). The US stock market, for example, opens six and a half hours after the UK stock markets open.
If you invest in a stock market outside of your home country, you may need to factor in exchange rates
You may need to pay tax to invest in companies belonging to certain indexes, but not on others. For example, investing into a FTSE 100 company attracts a 0.5% tax.
You may need to fill out a form before you invest in a foreign stock market. For example, if a British investor wants to invest in the US stock market, they’d need to fill in a ‘W-8BEN’ form.
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