Although the terms stock market and stock exchange may be used synonymously, there are slight differences between the two words that, depending on the circumstance, could be used incorrectly. In fact, the two complement each other, as neither would exist without the other. This article will give information on the main differences between stock markets and stock exchanges, and their role in the economy.
For those that are not involved in stock investing or trading, the idea of a stock market can seem somewhat abstract or even confusing. The stock market represents all these different entities and parties that make-up the actual market. Stock exchange-listed corporations through their stocks or other equity-linked securities, institutional and individual investors, market makers and dealers, all create what we call the “stock market”. The stock market doesn’t refer to an exact physical location, but rather to the network of transactions that take place every single day around the world and facilitate corporations to either raise new capital publicly for the first time or at multiple times after. Therefore depending on the different timing and functions, the stock market can be even further split into two types: the primary market and secondary market.
When an investor is involved in the primary market, he or she is buying newly issued stocks when a company or organization goes public for the first time. In other words, the stock securities, have not been previously traded and the investor is present for the company’s Initial Public Offering (IPO). This initial transaction is on the primary market, but any future transaction will take place in the secondary market. The primary market is considered to be more unpredictable and volatile than the secondary market because it can be unclear what the public’s final demand for these securities is going to be.
The majority of investors are in what is called the secondary market. This market allows for the stocks to be traded freely, without the involvement of the company that initially issued them. The transactions flow from investor to investor, rather than from the newly public company to investor.
A stock exchange is a physical marketplace where stocks and securities are bought and sold on the secondary market. Stock exchanges refer to the specific places where the transactions take place like the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE). These exchanges facilitate the buying and selling of stocks and other issued securities that happen within the secondary market.
Role in the Economy
The role of the stock market mechanism and its respective stock exchanges around the world is very important for companies and the economy as a whole. It assists companies to raise the necessary capital promptly that will allow them to take advantage of potential opportunities and finance new assets or business acquisitions. The stock market also helps companies to obtain more visibility and transparency that is something that most of the investors want. International access to capital is another key feature of the stock market especially for companies that wish to double list their stock also on a second stock exchange in another country. On the other hand, investors can also invest in global markets, and better achieve their portfolios’ international diversification goals. In simple terms, an efficient and well-organized stock market promotes a dynamic market economy that not only helps corporations and investment firms but also society as a whole.