How Does Stock Market Function

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 financial 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 Stock Tips for investing in stocks, compared to other less liquid investments such as real estate.

The stock market is simply a central place where people come together to buy and sell stocks. However, the stock market is not a store or a single building. It doesn't really have a physical location. However, when people think of the stock market they typically think of Wall Street or the New York Stock Exchange, also known as the NYSE. These places do not encompass the entire stock market, but they are locations where much of the activity in the stock market occurs. According to one interpretation of the efficient-market hypothesis (EMH), only changes in fundamental factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the short term, where random 'noise' in the system may prevail. (But this largely theoretic academic viewpoint—known as 'hard' EMH—also predicts that little or no trading should take place, contrary to fact, since prices are already at or near equilibrium, having priced in all public knowledge.) The 'hard' efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent—the largest-ever one-day fall in the United States.

When hearing of a drop of X% for the TSX, or Y% for the Nasdaq, people refer to the change in the indices of such markets. The indices represent the overall performance of the companies listed on the markets. In the case of the Nasdaq, the main index looked at in the news is the Nasdaq Composite – an index of all common stocks listed on the Nasdaq. It is value-weighted based on the capitalization of the more than 3,800 companies listed there. Various indices exist, for the Nasdaq and other markets, and are used to analyze the performance of various sectors and sub-sectors by compiling value-weighted data from relevant companies.