For those who purchase stock in a company and expect to make a profit they might hang on to it and wait for dividends on their investment. For others, there is more money to be made by buying and selling their stock options, trading them with others and attempting to make a profit in this manner. When stocks are traded this is done on what is referred to as exchanges. Exchanges are nothing more than a place (real or virtual) where buyers and sellers can come together to determine an acceptable price on the value of a stock. In many cases the exchange is a physical location where traders come together to work out transactions. Images of trading floors exist where you can see traders yelling and signaling to each other, throwing their hands in the air in frustration, and other gestures of triumph or disgust as they struggle to make the best trade for themselves and other shareholders. The other type of exchange doesn’t really have pictures you can observe as they are virtual in nature. They are nothing more than computers networked together in order to make trades of stock electronically.
Stock markets serve the purpose of facilitating stock trades – exchanges – between sellers and buyers and by using this technique many of the risks of investments are reduced. Picture the risk incurred by someone who must sell shares of his stock by going about door-to-door in search of a buyer. In a sense the stock market is a ultra sophisticated from of a farmer’s market that electronically links buyers with sellers.
There is a hierarchy of securities involved with the stock market. They are distinguished by the terms “primary market” and “secondary market.” The primary market consists of securities that have just been created and are ready to trade. The secondary market on the other hand consists of investors who are trading previously issued securities, meaning shares that no longer directly involve the companies that issued them. The secondary market is generally what is meant when people discuss the stock market. When a company stock is traded, the company itself isn’t necessarily directly involved in this process.