How does the stock market work?
The mechanism of a stock market is actually very simple: The stock market is a marketplace where prices for securities or commodities are determined by supply and demand. Trading on the stock market does not take place directly between buyers and sellers – as it would, for example, in a market hall – but rather through authorized individuals known as brokers.
- Why it matters for investors: On a securities exchange, investors can buy and sell securities at any time. Trading follows specific rules that apply equally to all market participants. The stock market ensures the rapid buying or selling of securities.
- Why it matters for companies: Going public provides companies with additional capital. This enables them to finance investments, research, and market expansion. In this way, companies ensure their continued competitiveness.
The stock exchange strengthens the economy
The central role of the stock exchange is to connect investors (who want to invest their money for the long-term) and entrepreneurs (who need capital to prepare their companies for the future). Thus, it plays an important role for the entire economy. A well-functioning stock market makes it easier for companies to invest, thereby helping to secure existing jobs and create new ones.
A well-functioning capital market is a key factor for the prosperity of any economy. The strength of a country’s capital market is reflected, among other things, by the so-called market capitalization of its stock exchange.
In addition, the stock exchange also has other functions:
- Provision of a trading platform
- Ensuring transparency regarding prices and trading volumes
- Listing of new issues on the stock exchange
- Calculating indices (which can be understood as “barometers of sentiment” for the stock market and the economy)
