A stock market, or (equity market), is a private or public market for the trading of

company stock and derivatives of company stock at an agreed price; these are securities
listed on a stock exchange as well as those only traded privately.

The size of the world stock market is estimated at about $60.9 trillion USD at the end of
2007 [1]. The world derivatives market has been estimated at about $480 trillion face or
nominal value, 12 times the size of the entire world economy. It must be noted though
that the value of the derivatives market, because it is stated in terms of notional values,
and cannot be directly compared to a stock or a fixed income security, which traditionally
refers to an actual value. Many such relatively illiquid securities are valued as marked to
model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities a corporation or
mutual organization specialized in the business of bringing buyers and sellers of stocks
and securities together. The stock market in the United States includes the trading of all
securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional
exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges include
the London Stock Exchange, the Deutsche Börse and the Paris Bourse, now part of
Euronext

Participants in the stock market range from small individual stock investors to large
hedge fund traders, who can be based anywhere. Their orders usually end up with a
professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading
floor, by a method known as open outcry. This type of auction is used in stock exchanges
and commodity exchanges where traders may enter "verbal" bids and offers
simultaneously. The other type of stock exchange is a virtual kind, composed of a
network of computers where trades are made electronically via traders.

Actual trades are based on an auction market paradigm where a potential buyer bids a
specific price for a stock and a potential seller asks a specific price for the stock. (Buying
or selling at market means you will accept any ask price or bid price for the stock,
respectively.) When the bid and ask prices match, a sale takes place on a first come first
served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers
and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-
time trading information on the listed securities, facilitating price discovery.

Now that computers have eliminated the need for trading floors like the Big Board's, the
balance of power in equity markets is shifting. By bringing more orders in-house, where
clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees
and capture a bigger share of the $11 billion a year that institutional investors pay in
trading commissions.
Market participants

Many years ago, worldwide, buyers and sellers were individual investors, such as
wealthy businessmen, with long family histories (and emotional ties) to particular
corporations. Over time, markets have become more "institutionalized"; buyers and
sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds,
hedge funds, investor groups, and banks). The rise of the institutional investor has
brought with it some improvements in market operations. Thus, the government was
responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small'
investor, but only after the large institutions had managed to break the brokers' solid front
on fees they then went to 'negotiated' fees, but only for large institutions[citation needed].

However, corporate governance (at least in the West) has been very much adversely
affected by the rise of (largely 'absentee') institutional 'owners’

History

Historian Fernand Braudel suggests that in Cairo in the 11th century, Muslim and Jewish
merchants had already set up every form of trade association and had knowledge of many
methods of credit and payment, disproving the belief that these were originally invented
later by Italians. In 12th century France the courratiers de change were concerned with
managing and regulating the debts of agricultural communities on behalf of the banks.
Because these men also traded with debts, they could be called the first brokers. A
common misbelief is than in late 13th century Bruges commodity traders gathered inside
the house of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse",
institutionalizing what had been, until then, an informal meeting, but actually, the family
Van der Beurze had a building in Antwerp where those gatherings occurred [2]; the Van
der Beurze had Antwerp, as most of the merchants of that period, as their primary place
for trading. The idea quickly spread around Flanders and neighboring counties and
"Beurzen" soon opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351 the Venetian government outlawed spreading rumors intended to lower
the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began
trading in government securities during the 14th century. This was only possible because
these were independent city states not ruled by a duke but a council of influential citizens.
The Dutch later started joint stock companies, which let shareholders invest in business
ventures and get a share of their profits - or losses. In 1602, the Dutch East India
Company issued the first shares on the Amsterdam Stock Exchange. It was the first
company to issue stocks and bonds.
The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first
stock exchange to introduce continuous trade in the early 17th century. The Dutch
"pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts
and other speculative instruments, much as we know them" (Murray Sayle, "Japan Goes
Dutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets in
virtually every developed and most developing economies, with the world's biggest
markets being in the United States, Canada, China (Hongkong), India, UK, Germany,
France and Japan.[2]
The Bombay Stock Exchange in India
Importance of stock market

Function and purpose

The stock market is one of the most important sources for companies to raise money.
This allows businesses to be publicly traded, or raise additional capital for expansion by
selling shares of ownership of the company in a public market. The liquidity that an
exchange provides affords investors the ability to quickly and easily sell securities. This
is an attractive feature of investing in stocks, compared to other less liquid investments
such as real estate.

History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood. An
economy where the stock market is on the rise is considered to be an up coming
economy. In fact, the stock market is often considered the primary indicator of a country's
economic strength and development. Rising share prices, for instance, tend to be
associated with increased business investment and vice versa. Share prices also affect the
wealth of households and their consumption. Therefore, central banks tend to keep an eye
on the control and behavior of the stock market and, in general, on the smooth operation
of financial system functions. Financial stability is the raison d'être of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect
and deliver the shares, and guarantee payment to the seller of a security. This eliminates
the risk to an individual buyer or seller that the counterparty could default on the
transaction.

The smooth functioning of all these activities facilitates economic growth in that lower
costs and enterprise risks promote the production of goods and services as well as
employment. In this way the financial system contributes to increased prosperity.

Relation of the stock market to the modern financial system

The financial system in most western countries has undergone a remarkable
transformation. One feature of this development is disintermediation. A portion of the
funds involved in saving and financing flows directly to the financial markets instead of
being routed via banks' traditional lending and deposit operations. The general public's
heightened interest in investing in the stock market, either directly or through mutual
funds, has been an important component of this process. Statistics show that in recent
decades shares have made up an increasingly large proportion of households' financial
assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid
assets with little risk made up almost 60 per cent of households' financial wealth,
compared to less than 20 per cent in the 2000s. The major part of this adjustment in
financial portfolios has gone directly to shares but a good deal now takes the form of
various kinds of institutional investment for groups of individuals, e.g., pension funds,
mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards
forms of saving with a higher risk has been accentuated by new rules for most funds and
insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be
found in other industrialized countries. In all developed economic systems, such as the
European Union, the United States, Japan and other developed nations, the trend has been
the same: saving has moved away from traditional (government insured) bank deposits to
more risky securities of one sort or another.

The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage the
associated increased risks. Stock prices fluctuate widely, in marked contrast to the
stability of (government insured) bank deposits or bonds. This is something that could
affect not only the individual investor or household, but also the economy on a large
scale. The following deals with some of the risks of the financial sector in general and the
stock market in particular. This is certainly more important now that so many newcomers
have entered the stock market, or have acquired other 'risky' investments (such as
'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television
commentators, financial writers, analysts, and market strategists are all overtalking each
other to get investors' attention. At the same time, individual investors, immersed in chat
rooms and message boards, are exchanging questionable and often misleading tips. Yet,
despite all this available information, investors find it increasingly difficult to profit.
Stock prices skyrocket with little reason, then plummet just as quickly, and people who
have turned to investing for their children's education and their own retirement become
frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

From experience we know that investors may temporarily pull financial prices away from
their long term trend level. Over-reactions may occur—so that excessive optimism
(euphoria) may drive prices unduly high or excessive pessimism may drive prices low

Irrational behavior
Sometimes the market tends to react irrationally to economic news, even if that news has
no real effect on the technical value of securities itself. Therefore, the stock market can be
swayed tremendously in either direction by press releases, rumors, euphoria and mass
panic.

Over the short-term, stocks and other securities can be battered or buoyed by any number
of fast market-changing events, making the stock market difficult to predict.

Crashes

A stock market crash is often defined as a sharp dip in share prices of equities listed on
the stock exchanges. In parallel with various economic factors, a reason for stock market
crashes is also due to panic. Often, stock market crashes end speculative economic
bubbles.