What is a stock market?

Stock markets enable companies to raise long-term capital by offering shares (and on occasion corporate bonds) to investors which in turn enables these investors to (hopefully!) benefit from the future financial growth and success of the listed company.  It is in effect an aggregation of buyers and sellers and where the listed company’s shares can be traded in an organised manner. 

The shares of larger companies usually trade through specific Stock Exchanges such as the FTSE100 (London’s flagship Index).

In essence it doesn’t matter whether it is shares, livestock or fruit and vegetables; a market is simply the mechanism to allow the possibility of trade between individuals and organisations.

You will often hear reference to the primary and secondary markets.  The primary market is where new issues of shares are first sold through Initial Public Offerings (IPOs) and core investors into IPOs are typically institutions (they in effect underwrite the issue).  The listed entity will utilise the working capital raised from an IPO to fund its growth and development.  Post IPO, all subsequent trading happens through the secondary market where the trading of shares is in effect the transfer of shares and cash between buyers and sellers.

FTSE stands for Financial Times Stock Exchange and there are in fact currently 101 listings as Royal Dutch Shell Plc has two share classes.  The FTSE100 is the most prominent Index in the UK and its 100 constituents represent the largest (by market capitalisation; this being the number of shares issued by a company multiplied by its prevailing share price) listed UK companies.  A large number of the listed companies are international and as such the index provides global diversification for investors.  It is also actually therefore a fairly weak indicator of how the UK economy is fairing.