The Stock Market How it Works

The Stock Market
The Stock Market

A stock market may be thought of in terms of two separate functions:

1. The Primary Market Function:

Where companies can raise long-term funds for their operations by issuing shares (and other securities) to investors.

2. The Secondary Market Function:

Where investors can buy and sell those shares at current prices as determined by other investors in the market.

A Place where Companies Can Raise Capital

A Company that wishes to set up a new business or expand its existing business can raise the capital it requires either by borrowing money or by issuing shares to investors.

The investors become shareholders in the Company, meaning they are part owners of the Company and share in its profits and growth.

Companies wishing to have their shares traded must first be listed.

To become listed, a Company must be large enough for there to be a market in its shares and it must agree to abide by the listing rules which, amongst other things, require it to keep the market informed of its activities and to regularly reports profits and other financial information.

A Marketplace for Buyers and Sellers

After a Company has listed and issued shares to investors, the shares can then be sold to other investors in the stock market.

Private individuals can buy shares directly through an adviser at a stockbroking firm, or they can place their money with a fund manager or financial institution, perhaps one which manages an equity trust or superannuation fund.

The Stock Market How it Works

The fund manager will decide where and how to invest the money.

The buying and selling of shares takes place on the electronic trading system with staff at stockbroking firms entering buying and selling orders on behalf of investors.

The price of the shares is determined by the forces of supply and demand, as private investors and fund managers decide at what price they will buy and sell.

Private investors are very important in the process as they control a large percentage of total funds invested in the sharemarket.

The sharemarket provides an opportunity for investors to contribute to and benefit from the wealth-creating activities of companies and in that way participate in the broader economy.

When you buy goods or services from listed companies, you are contributing to their growth and providing an opportunity for higher profits, which enables them to pay higher dividends to shareholders.

For private investors, wealth is created in the form of dividends and other income and capital gains from selling shares as prices rise.

Companies also benefit because, if there is strong interest in their shares, they will be able to raise additional capital when they need to in the future.