How stock markets work

1. Trading stocks

2. Where does stock trading happen?

3. What are brokers?

4. How do companies go public?

5. Ticker symbols

6. Market capitalization

7. What affects stock prices?

Trading stocks

In this lesson, we’ll explore how global exchanges facilitate billions of dollars worth of stock trades daily—and how you can become part of the stock markets.

Where does stock trading happen?

Stocks are traded on exchanges during designated trading hours. Exchanges are platforms specifically designed for the buying and selling of stocks. Nearly every country in the world has a stock exchange for publicly traded companies, with some countries hosting multiple exchanges.

However, exchanges are not open around the clock. Stocks can only be bought and sold during the specific opening hours of the exchange where they are listed.

Overview of major exchanges:

• NYSE (New York stock exchange)
  Country: USA
  Hours: 9:30 AM – 4:00 PM (New York time)
  The NYSE is the largest exchange globally by market capitalization, with the total value of listed companies exceeding $30 trillion. Established in 1792, notable listings include Coca-Cola, Goldman Sachs, and Walmart.

• NASDAQ
  Country: USA
  Hours: 9:30 AM – 4:00 PM (New York time)
  Located in New York, NASDAQ is the world’s second-largest exchange, known for its focus on technology. Founded in the 1970s, it lists giants like Apple, Microsoft, and Amazon.

• Tokyo Stock Exchange (TSE)
  Country: Japan
  Hours: 9:00 AM – 11:30 AM and 12:30 PM – 3:00 PM (Tokyo time)
  The largest exchange in Asia, the TSE lists companies like Nintendo, Softbank, and Honda.

• London Stock Exchange (LSE)
  Country: United Kingdom
  Hours: 8:00 AM – 4:40 PM (London time)
  The LSE is one of the oldest exchanges globally, with a history spanning over 450 years.

What are brokers?

Stockbrokers are companies that execute stock investments on behalf of their clients. Exchanges impose rules determining who can directly trade on them, which is why most individual investors use brokers.

Types of brokers:

1. Execution-only brokers: Act solely on your instructions.

2. Advisory brokers: Provide trade recommendations based on expertise.

3. Discretionary brokers: Manage trades independently without client input.

IPO (Initial Public Offering)

When a private company decides to go public, it undergoes an IPO. This is when a company issues its shares to the public for the first time.

IPOs often generate excitement as they allow retail investors to invest in a company for the first time. Public companies must meet stricter regulations compared to private firms, so preparing for an IPO can take time.

The IPO Process Includes:

1. Preparation: The company ensures compliance with regulations.

2. Setting Share Prices: Shares are offered at a fixed price.

3. Trading: Once listed, shares can be bought and sold on the exchange.

Ticker symbols

Listed stock prices are displayed as tickers. A ticker symbol is a short abbreviation representing a company’s stock. For example, Apple’s ticker is NASDAQ: AAPL, and Lloyds Banking Group is LSE: LLOY.

Market capitalization

Market capitalization (market cap) represents the total value of a company’s outstanding shares. It is calculated as:

Market Cap = Total Shares Outstanding × Current Stock Price

What affects stock prices?

Stock prices constantly fluctuate due to demand changes in economies, industries, and companies.

• Company earnings: Public companies regularly report financial results. Quarterly and annual reports provide insights into performance and future prospects.

• Company news: Positive or negative headlines, such as product announcements, leadership changes, or scandals, can impact demand. For example, Volkswagen’s 2015 emissions scandal caused a sharp drop in its stock price.

• External factors: News related to the economy, industry, partners, or trade conditions affects demand and stock prices. Stocks in the same sector often react similarly to economic news.

• Corporate actions: Events like mergers, director trading, rights issues, buybacks, special dividends, or stock splits significantly influence stock prices.