What is the stock market?
The stock market is a collection of publicly listed companies. Their shares are listed on stock exchanges around the world, which act as a trading platform for investors to meet to buy and sell shares. Other investment types like bonds, exchange traded funds (ETFs), commodities and currencies can be traded too.
Most countries or regions have their own stock exchanges. Here in the UK, we have the London Stock Exchange (LSE) which is one of the world’s oldest stock exchanges, home to some iconic British brands such as British Airways and Rolls Royce.
Across the pond, the US market is a big fish and accounts for nearly half of the global stock market. The US market has multiple exchanges. But arguably the most famous of them, located on Wall Street, is the New York Stock Exchange (NYSE).
What time does the stock market open?
“The stock market never sleeps” – sounds good, but it isn’t quite true. Most stock exchanges are open for around seven to eight hours a day and close for weekends and public holidays.
The UK stock exchange opens Monday-Friday between 8am and 4:30pm (GMT) for retail investors. Pre trading and post trading sessions happen outside of the regular trading hours for institutional traders like pension funds.
The New York Stock Exchange opens at 2:30pm and closes at 9pm (GMT).
Stock market indices
To form a market index, company shares are grouped together, and their values are combined. Often this is calculated as a weighted average (the bigger the company the larger its effect on the value of the index). Generally, companies of similar size and value are grouped together.
Often you hear the market being up or down. This relates to stock market indices rising and falling on a daily basis.
The main indices in the UK are:
- FTSE 100
- FTSE 250
- FTSE All-Share
An index of the 100 biggest companies by value in the UK. Many of these companies are multi-national and have international interests.
An index representing the next 250 largest UK companies. Since these companies are smaller than those in the FTSE 100, this index usually better reflects the fortunes of the UK’s economy.
An index of shares listed on the LSE’s main market. It includes all shares in the FTSE 100, FTSE 250 and FTSE Small-Cap indices.
Dependent on what industry or company size an index represents, a market index value gives a good indication of movement within markets. Thus, it is a particularly useful tool for investors and economists alike to describe the market, and to compare the value of similar shares or their own particular investments against.
How do stock markets work?
The days of energetic trading floors, telephone trades, and postal dealing slips are all but gone. The stock market grew too big for such manual processes and automation has taken over.
Today, like with most things, share trading is almost entirely done online. Stock exchanges now offer state-of-the-art trading systems that can process millions of trades a day. Investors now place trades through online trading platforms. The trades are added to an electronic order book and automatically linked with other investors by market makers – they essentially act as the middle man.
Electronic trading systems that pool thousands of investors into one place, matching the buys with sells, make exchanging your cash for investments and your investment for cash relatively easy. Finding the stock market winners – not the losers – is the harder part.
Why do stock markets move up and down?
The stock market is simply a collection of publicly-listed companies. The share price of these companies fluctuates based on supply and demand. If there are more investors buying into the market than there are getting out of the market, it will go up and vice versa.
Macroeconomic factors such as interest rates and inflation, political events and natural disasters like a global pandemic can affect investor sentiment towards the stock market. Other events that are more specific to an individual company, such as annual results or negative media coverage can also impact their share price.
Stock markets are forward looking in how they operate. The outlook for the economy plays a big role in the direction the stock market moves. Are things set to get better or worse?
If the outlook is bright, investors might decide it’s the right time to be invested. However, if the outlook is less rosy, investors could choose to lower their exposure to the stock market or certain stocks which is likely to force prices lower.
Stock markets fire up the economy
The stock market plays a big role in driving economies around the world forward and encourages them to grow.
It gives companies, both big and small, the opportunity to go public and make their shares available to investors. Shares list on the stock market through what’s called an initial public offering, or ‘IPO’.
In the UK, companies can either list on the main market or the AIM market. The latter is more suitable for smaller, start-up companies as the listing requirements are less demanding.
IPOs managed to drum up over $300bn globally in cold-hard cash last year. Money raised through IPOs can be used to fund a company’s future growth prospects and help them make a profit.
It’s not just the companies that could benefit though. Shareholders can too. If the company performs well and starts to make more profit, investors will likely benefit from a rising share price, although prices fluctuate up and down so you could still get back less than you invest. Volatility can also be seen especially when an IPO first starts trading on the stock market as they can be smaller and higher risk companies.
Companies that make a profit have the option to return money back to shareholders through dividends too. They tend to be larger and more established companies with less opportunity to reinvest back into the business to support further growth. Any shareholder returns aren’t guaranteed though.
In summary, stock markets act a platform for companies to sell their shares and raise capital and the opportunity for investors to grow their wealth over the long term through capital growth and dividends. It also represents the heartbeat of the market, and experts often look at stock prices as a barometer for the state of the economy.