How does the stock market work?

The concept behind how the stock market works is pretty simple. Operating much like an
auction house, the stock market enables buyers and sellers to negotiate prices and make
trades.

The stock market works through a network of exchanges — you may have heard of the New
York Stock Exchange or the Nasdaq. Companies list shares of their stock on an exchange
through a process called an initial public offering, or IPO. Investors purchase those shares,
which allows the company to raise money to grow its business. Investors can then buy and
sell these stocks among themselves, and the exchange tracks the supply and demand of each
listed stock.
That supply and demand help determine the price for each security, or the levels at which
stock market participants — investors and traders — are willing to buy or sell. Computer
algorithms generally do most of those calculations.

Buyers offer a “bid,” or the highest amount they’re willing to pay, which is usually lower
than the amount sellers “ask” for in exchange. This difference is called the bid-ask spread.
For a trade to occur, a buyer needs to increase his price or a seller needs to decrease hers.

How are stock market operations are regulated ?

The government regulates the actions of brokers to ensure fairness in this large part of the stock
market's industry. ... Registration with the Securities and Exchange Commission is a fundamental
requirement for any company that engages in stock market transactions on behalf of a client.

Day Trading

Day trading is the practice of buying and selling stock shares on the same day. While nearly anyone can
buy stock to sell at a later time, day trading carries strict restrictions. This protects novice traders from
themselves in a highly risky form of stock market participation, where ignorant traders can quickly lose
extraordinary sums of money. Additionally, the restriction reduces use of the stock market as a form of
gambling for the common man. Day traders are required to use only margin accounts, a type of brokerage
account that gives clients access to cash on loan from the broker. Additionally, day traders must maintain a
minimum daily balance of $25,000 in their brokerage accounts, which may be a combination of cash and
stocks. If this is not met, the account is suspended until new funds are added or a period of 90 days passes.
Going Public

The stock market's primary purpose is to facilitate public ownership of a corporation. When a company
chooses to "go public," it has access to large investment capital from the investing public. But to ensure
that the public has accurate knowledge of a company's health, regulations require public businesses to
disclose much more information than private companies. The company must file regular financial
statements that provide a comprehensive look at the company's debt, earnings, salaries of its principal
officers and other information.

Broker Registration

Brokers are the middle men who provide the investing public with access to activity on a stock market
exchange. Without a broker, most investors are unable to buy and sell shares. The government regulates
the actions of brokers to ensure fairness in this large part of the stock market's industry. The most
important regulation determines who in fact may operate as a broker. Registration with the Securities and
Exchange Commission is a fundamental requirement for any company that engages in stock market
transactions on behalf of a client. The regulations further distinguish between brokers and "dealers," who
execute stock transactions for the own corporate accounts. Many companies operate as both brokers and
dealers, which requires the corporation to file under both roles.

Trading Business

Some people earn their living mostly or entirely through stock market trading. For these individuals, the
government regulates how their capital gains are taxed. The Internal Revenue Service provides a special
"trader status" to individuals who meet certain criteria. Once granted trader status, these individuals are not
restricted to many of the limitations associated with capital gains taxes. Instead, their trading activity is
treated as regular income. To qualify, a trader must demonstrate that she earns the majority of her income
from trading and that her profits are significantly affected by daily fluctuations in market activity. Her
trading records must indicate a year-round daily participation in the markets to demonstrate full-time work.

How the Stock Market Works

In a nutshell, stock markets provide a secure and regulated environment where market
participants can transact in shares and other eligible financial instruments with
confidence with zero- to low-operational risk. Operating under the defined rules as
stated by the regulator, the stock markets act as primary markets and as secondary
markets.

As a primary market, the stock market allows companies to issue and sell their shares
to the common public for the first time through the process of initial public offerings
(IPO). This activity helps companies raise necessary capital from investors. It
essentially means that a company divides itself into a number of shares (say, 20
million shares) and sells a part of those shares (say, 5 million shares) to common
public at a price (say, $10 per share).

To facilitate this process, a company needs a marketplace where these shares can be
sold. This marketplace is provided by the stock market. If everything goes as per the
plans, the company will successfully sell the 5 million shares at a price of $10 per
share and collect $50 million worth of funds. Investors will get the company shares
which they can expect to hold for their preferred duration, in anticipation of rising in
share price and any potential income in the form of dividend payments. The stock
exchange acts as a facilitator for this capital raising process and receives a fee for its
services from the company and its financial partners.

Following the first-time share issuance IPO exercise called the listing process, the
stock exchange also serves as the trading platform that facilitates regular buying and
selling of the listed shares. This constitutes the secondary market. The stock exchange
earns a fee for every trade that occurs on its platform during the secondary market
activity.

The stock exchange shoulders the responsibility of ensuring price

transparency, liquidity, price discovery and fair dealings in such trading activities. As
almost all major stock markets across the globe now operate electronically, the
exchange maintains trading systems that efficiently manage the buy and sell orders
from various market participants. They perform the price matching function to
facilitate trade execution at a price fair to both buyers and sellers.
A listed company may also offer new, additional shares through other offerings at a
later stage, like through rights issue or through follow-on offers. They may
even buyback or delist their shares. The stock exchange facilitates such transactions.

The stock exchange often creates and maintains various market-level and sector-
specific indicators, like the S&P 500 index or Nasdaq 100 index, which provide a
measure to track the movement of the overall market. Other methods include
the Stochastic Oscillator and Stochastic Momentum Index.

The stock exchanges also maintain all company news, announcements, and financial reporting, which
can be usually accessed on their official websites. A stock exchange also supports various other
corporate-level, transaction-related activities. For instance, profitable companies may reward
investors by paying dividends which usually comes from a part of the company’s earnings. The
exchange maintains all such information and may support its processing to a certain extent. (For

related reading, see "How Does the Stock Market Work?")