The stock market is a physical or virtual market where applicants and suppliers of capital come into contact, those who carry out transactions through authorized intermediaries. It is often referred to simply as "the bag."
Stock exchanges allow negotiation and exchange between companies that require financing, and savers (people or organizations). The latter seek to invest their surplus money to obtain a return.
Both equities (shares) and fixed income (debt) are normally traded on exchanges, the first case being the best known.
It should be noted that stock exchanges can be physical or virtual places that are managed by private organizations. This, with prior authorization from the corresponding governmental or regulatory entity.
Origin of the stock market
The stock exchanges have their origin in the city of Bruges, Belgium, where the Van der Bursen family of bankers organized meetings in their palace where assets were traded and commercial operations were carried out. The concept of "bag" arose from the family crest that had three leather bags.
The first modern stock exchange emerged in 1460 in Antwerp, Belgium. Subsequently, in 1570 the London Stock Exchange was created, in 1595 that of Lyon (France) and in 1792 that of New York.
Functions of the stock exchange
Among the most important functions of the stock market are:
- Channel savings into productive investment.
- It provides accurate and permanent information about the values, the situation of the companies listed on the stock exchange, the operations carried out, etc.
- It offers liquidity, since investors can convert their assets (shares or others) into money.
- Provides legal security. That is, the transactions are supported and will be answered for them.
Stock exchanges play a fundamental role in economic development as they facilitate transactions and channel savings. Thus, a better allocation of resources is feasible.
Advantages of the stock market for companies
Participating in a stock exchange can bring several benefits to companies, among which are:
- Greater access to financing.
- Better image for the public.
- It allows estimating the value of the company at a given moment and incentivizing its administrators to increase this value.
- Shareholders can obtain liquidity if they choose to sell their shares.
Advantages of the stock market for savers
For people or entities that have savings, the stock market can give you several benefits, among which are:
- Greater options to make your savings profitable.
- Greater access to information.
- It allows you to buy and sell an asset as many times as necessary.
- Access a regulated market that offers security.
How a stock exchange works
The stock market is considered a secondary market since it transfers the ownership of financial assets that have already been previously issued (in the primary market)
Transactions are carried out through authorized financial intermediaries, popularly known as brokers or stockbrokers. These professionals operate on behalf of the company or individual that hires them. In return, they charge a commission or fee for their services.
It is worth mentioning that there are currently virtual stock exchanges in which it is easy to contact a broker and buy shares online.
On the other hand, companies that wish to participate in a stock exchange must make their financial statements public. In this way, it is possible to obtain accurate information about your current situation and growth potential.
In Spain there are four stock exchanges in: Madrid (founded in 1831), Bilbao (1890), Barcelona (1915) and Valencia (1970).
Criticism of the stock market
Despite the above, the stock market does not only have advantages. While this market has boosted access to finance and allowed many successful companies to grow, it also carries risks.
In this sense, we must emphasize that in the stock market prices (quotes) can fluctuate strongly. A share today can be worth 4 and tomorrow 3.7 or even go bankrupt (become worth 0). Therefore, in the same way that you can generate positive returns, you can also lose money.
It should be noted that the variability of the price of an asset is called volatility. The higher it is, the more risk it represents.
Therefore, investing in the stock market is an activity that can offer benefits. However, you can also lose some or all of the money invested (sometimes even more). This can happen, for example, when a stock is not valued accurately, that is, if it is overvalued or undervalued.