The expression 'stock market' refers to the system that enables the
trading of company stocks (collective shares), other
securities, and
derivatives. Bonds are still traditionally traded in an informal,
over-the-counter market known as the
bond market. Commodities are traded in
commodities markets, and derivatives are traded in a variety of markets (but, like bonds, mostly 'over-the-counter').
The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the 'stock market' is estimated at about $51 trillion. The world derivatives market has been estimated at about $480 trillion 'face' or
nominal value, 30 times the size of the U.S. economy…and 12 times the size of the entire world economy.
[1] It must be noted though that the value of the derivatives market, because it is stated in terms of
notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an
actual value. (Many such relatively
illiquid securities are valued as
marked to model, rather than an actual
market price.)
Participants in the stock market range from small individual
stock investors to large
hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.
Some exchanges are physical locations where transactions are carried out on a
trading floor, by a method known as
open outcry. This type of auction is used in stock exchanges and
commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.
Actual trades are based on an
auction market paradigm where a potential buyer
bids a specific price for a stock and a potential seller
asks a specific price for the stock. (Buying or selling
at market means you will accept
any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a
marketplace (virtual or real). The exchanges provide real-time
trading information on the listed securities, facilitating price discovery.
Now that computers have eliminated the need for
trading floors like the
Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock
anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in
trading commissions
[citation needed].
Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g.,
pension funds,
insurance companies,
mutual funds,
hedge funds, investor groups, and
banks). The rise of the
institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees (they then went to 'negotiated' fees, but only for large institutions).
However,
corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners.'
