Tuesday, September 20, 2016

Characteristics of a well-functioning stock market

You often hear people make money or lose money in the stock market. You have the impression that investing in the stock market is risky, even though you have invested in mutual funds or index funds.

Most people have no idea what the stock market is. They heard so many horror stories about bad investments in the stock market. To them, they think that the stock market is a money-sucking monster.

What is a stock market? What are the characteristics of a well-functioning stock market?

Stock market is a mechanism for buyers and sellers to meet. The buyers are investors who want to put their money in growing companies. There are two types of sellers in the stock market. One type of sellers is the companies that need money for expansion. Another type of sellers is investors who want to sell off their stock. Stock market serves as a platform for trades to take place.

The stock market does not own the stock of the listed companies. The New York Stock Exchanges does not own the stock traded on its trading platform.

A well-functioning stock market must be transparent. The prices and volumes of the stock market are available to the public. The stock exchange requires that listed companies disclose timing and accurate information to the public. The stock exchange requires that listed companies disclose important information that has an impact on the share prices to the public.

A well-functioning stock market must be liquid. Liquidity means that buyers and sellers can buy and sell quickly.

Investors like to invest in the stock market because of the liquidity. They take a few months to finalize sales of real estate. However, they take just a few minutes to buy or sell in the stock market.

Many people like to boost of making a killing in the stock market. They like the thrill of buying shares in the morning, and selling shares in the evening. In a matter of hours, they are able to make a few hundred to a few thousands dollars.

The liquidity of the stock market is helping people to make quick bucks. On the other hand, the liquidity of the stock market is causing huge losses for those speculators.

A well-functioning stock market reduces transaction cost to buyers and sellers. Compared to real estate investment, the transaction cost of buying or selling shares are very low. The low transaction cost increases the profits to the investors.

A well-functioning stock market adjusts quickly to new information. Many new investors are surprised at the speed that the stock market responses to bad news. A few words of doom by a high-ranking government officer can send the prices of the stock market to a new low.

So folks, before you sink your hard-earned money into the stock market, make sure you understand the function of the stock market. Do learn the basics of stock market investment.

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