Over-the-Counter Market

Stocks can also be traded "over the counter" (OTC). These OTC
markets are where you buy or sell stocks directly with another investor,
typically without the same level of regulation or public scrutiny. OTC
trading involves a network of brokers and dealers who negotiate directly
over computer networks and by phone.
This type of trading is commonly used for smaller, less liquid companies
that may not meet the stringent listing requirements of the stock
exchanges. This can make it more challenging for investors to get
reliable information about the companies they are investing in.
Other Assets Sold on the Stock Market
In addition to common stocks, many other assets are traded on stock
exchanges and OTC. These are also considered part of the "stock
market":
•American depositary receipts: These represent shares in foreign
companies and are traded on U.S. stock exchanges. They let U.S.
investors invest in foreign companies without dealing with foreign
stock exchanges or converting their currency.
•Derivatives: This is a broad category that includes options and
futures, whose value is derived from the value of an underlying
asset, such as stocks, bonds, commodities, currencies, interest
rates, or market indexes. So, in derivatives trading, you're not
directly buying or selling the actual asset (like the stock). Instead,
you're trading something whose value is influenced by the changes
in the price of an underlying asset.
•Funds: These include mutual funds, which pool money from many
investors for a basket of stocks, bonds, and other securities, and
exchange-traded funds, which trade on stock exchanges like
individual stocks and "track" or try to mirror how a sector, index, or
theme of stocks is doing.
•Preferred stocks: These stocks generally provide a set dividend
and, as the name suggests, have priority over common stock in
getting a share of the profits or what's left over if the company goes
bankrupt.
•Real estate investment trusts (REITs): These are worth
mentioning to get an idea of the breadth of what counts as the
stock market. REITs are companies that own, manage, or finance
 real estate. Investors can buy shares in them, and they legally
must provide 90% of their profits as dividends each year. 2
More loosely, while separate markets, people often talk about these as
part of the "stock market":
•Bonds: These represent debt, and governments and corporations
issue them to raise capital. Investors who buy bonds effectively
lend money to the issuer in exchange for interest payments and
the return of the bond's face value at maturity.
•Commodities: There are 50 major commodities exchanges
worldwide where you can buy raw materials like oil, steel, wheat,
and coal directly or buy futures contracts based on where their
prices might go.
Investors and Traders
Those in the stock market include institutional investors, such as
pension funds, mutual funds, insurance companies, and hedge funds,
that manage large amounts of money and often have a significant
influence over the market since they are trading in large volumes. Retail
investors buy and sell securities for their accounts, not for an
organization. They can range from beginners to experienced traders,
and today, most use online platforms. Another key group is accredited
investors, high-net-worth individuals with the money and investing
experience, so the SEC allows them access to more complex
investments, like venture capital and private equity.
Generally speaking, investors approach the market from a long-term
perspective. They put money in stocks, ETFs, mutual funds, and other
securities, expecting their value to grow over time; these are not the
quick trades you see in movies to get in and out fast. These investors
are often more concerned with the fundamental strength of the
companies or assets they invest in, such as their financial performance,
market position, and growth potential. They decide on investments after
research and analysis or after getting recommendations from financial
advisors while trying to build wealth steadily through a portfolio that
increases in value over time.
Traders, for their part, take a more short-term approach to the stock
market. They aim to capitalize on the market’s volatility, trading stocks,
options, futures, and other financial instruments within shorter time
frames—from seconds and minutes to days and months. Traders often
rely on technical analysis, which involves studying market trends, charts,
and other statistical measures to predict future price movements. While
trading can offer the potential for quick profits, it also comes with higher
risks than long-term investing. Quickly buying and selling securities
requires a sharp understanding of the market and a more active, hands-
on strategy for trading.
Role of Brokers
Brokers in the stock market play the same role as in insurance and
elsewhere, acting as a go-between for investors and the securities
markets. They are licensed organizations that buy and sell stocks and
other securities for individual and institutional clients. Brokerage firms
can be small boutique shops or multinationals offering investment
advice, research, and wealth management services while executing
trades for customers. Full-service brokers provide detailed financial
advice, portfolio management, and personalized services, making them
better for investors who prefer a thorough approach to managing their
investments. Further down in cost, discount brokers provide a more
hands-off experience and are typically preferred by investors who make
their own trading decisions.
Online brokerage firms have become increasingly popular with user-
friendly platforms that allow investors to trade securities electronically at
lower costs and with more convenience. These platforms often have
educational resources, analytical tools, and real-time market data. There
has also been a rise in robo-advisors, automated financial planning
services offered at a very low price.
Whatever type of broker, they are all regulated by the SEC and the
Financial Industry Regulatory Authority (FINRA) in the U.S.
Regulators
A significant aspect of the stock market—dictating what’s traded and
how—is the regulations and regulators involved. In the U.S., the latter is
the SEC, an independent federal agency set up in 1934 on the heels of
the 1929 market crash and the travails of the Great Depression. The
mission of the SEC is “protecting investors, maintaining fair, orderly, and
efficient markets, and facilitating capital formation.”3
The SEC enforces laws against market manipulation, insider trading,
and other forms of fraud while verifying that public companies reveal any
significant financial information investors should know when trusting a
firm with their money by buying its stock. The SEC also oversees stock
exchanges, broker-dealers, investment advisors, mutual funds, and
public utility holding companies.
In addition, the exchanges have their own requirements, such as filing
timely (usually quarterly) updates to company financial reports and
instant reporting of relevant corporate developments to ensure that
everyone looking to trade has the same information.
FINRA oversees brokerage firms and their registered securities
representatives and is more focused than the SEC on protecting retail
investors. Similar agencies exist worldwide, which is crucial given how
the stock market is global and a calamity in one corner of the world soon
reaches the other—it’s not just something that happens from a few
buildings on Wall Street.
While many countries’ regulations differ significantly—they answer to
diverse populations and cultural expectations—general rules are
enforced to ensure fair practices, protect investors, and promote
confidence in the broader stock market.
How Stock Prices Are Determined
Textbook descriptions of stock prices tend to start off talking about
investors and dealers coming together, and for there to be a stock trade,
the buyer and seller must agree on a figure. But most investors find
prices as they are listed in online brokerage accounts or online graphs
of stock prices over time, not as coming from tough negotiations. That
said, you do have to agree to buy stocks, and each investor or trader
making this decision collectively shapes the demand for stocks, which,
taken against the supply on hand in the market, produces the prices on
our screens.
The factors that influence these prices fall into two main types:
fundamental and technical. Fundamental factors are rooted in a
company's earnings, profitability from its operations, and the goods or
services it offers. Meanwhile, technical factors relate to market
sentiment and statistical analyses of historical market activity and stock
price trends.
High stock prices can indicate a company's success—or at least the
feeling of buyers that they are doing well—but they can also result from
stock splits, dividends, and share repurchases. When a stock price
drops, this doesn't mean that money is lost from the market as a whole.
Instead, it signifies a decrease in the market value of the specific stock.
For instance, if a company reports higher profits than expected, its stock
price might increase as more investors want to buy shares, hoping for
future growth. Similarly, economic events like interest rate changes or
geopolitical issues can affect investor confidence and stock prices.
Market Indexes
Most Americans first learn about the stock market through indexes,
since reporting on the ups and downs of the Dow Jones Industrial
Average (DJIA) or S&P 500 has long been a staple for financial news.
Indexes can include the DJIA, which includes 30 large publicly owned
companies, or the the S&P 500, representing the 500 largest U.S. public
companies.
These indexes can give a picture of the wider stock market, or a specific
sector like technology, or healthcare.
Indexes are important since they are used as benchmarks for stocks
and portfolios. For example, if you're invested in technology stocks,
you'll want to see how your stocks are doing against a tech index.
Roles of the Stock Market
The stock market fills several different roles:
Corporate governance: Publicly traded companies follow stringent
reporting regulations, which makes them far more transparent and
accountable. This information allows investors to make informed
decisions and helps maintain investor confidence in the market. It's also
a boon for everyday Americans to gain a view inside major U.S.
corporations since, without these transparency requirements, they could
close down much of what we know about them.
Economic indicator: The stock market's performance is often considered
a gauge of an economy's health. Rising stock prices are associated with
corporate profitability and economic growth, while declining prices signal
problems ahead.
Investment opportunities: The stock market offers the chance to invest
in companies and potentially grow a portfolio over time. The stock
market has historically delivered returns outpacing inflation, making it a
vital tool for retirement planning, wealth building, and financial security. 4
Liquidity: The stock market enables investors to buy and sell shares of
companies and other securities quickly when needed.
Raising capital: Most importantly, the stock market offers a platform
where companies raise funds by issuing stocks. This capital is essential
for business expansion, research and development, and other corporate
initiatives. By selling shares to the public, companies gain access to
these funds without incurring debt.
Resource allocation: By reflecting the collective judgment of traders and
investors through the price of different companies, the stock market is
said to help efficiently distribute capital to companies more likely to
succeed and away from those that are not.
Why Is the Stock Market So Important?
Now that we know the different parts of the stock market—who, what,
where, and how it works—we can better understand why it's such a
large part of our economy today. The meaning of the stock market can't
be understated for how our world functions.
When the earliest stock markets formed, the global economy was vastly
different. These were eras when trade and commerce were primarily
driven by physical goods, with industries like agriculture, textiles, and
early manufacturing dominating the economic landscape.
Stock markets at the time were fledgling institutions, primarily helping to
finance expeditions and trade ventures. In other words, they were used
to fund the colonial enterprises taking goods and people from South
Asia, the Americas, and Africa. These stock exchanges were already
global investment operations.5 Yet, they played a relatively minor role in
everyday economic life.
Fast forward to today, and the stock market is considered central to the
global economy, a change underscored by financialization and the
increasing dominance of financial markets and institutions. This isn't just
because over a million Americans work in finance.6 Modern economies
are characterized by a complex web of financial transactions and
instruments, with the stock market not just a barometer for economic
health but also seen as critical for distributing and creating wealth.
The Meaning of the Stock Market for Most
Americans
Financialization has also mirrored broader socioeconomic changes.
Today's stock markets are not just platforms for raising capital but have
been tied into millions of Americans' retirement and investment
strategies.
Many Americans are not directly invested in the stock market, but are
still affected by its movements. First, the market drives funding for
technological advances like smartphones and medications, which
require billions of dollars for research and development.
Market moves can also influence corporate decisions, influencing job
creation and layoffs. A healthy stock market generally correlates with a
more robust economy. But it could also mean more capital in the hands
of a wealthy few, increasing the property values of once middle-class
areas in almost every major American city.
The stock market also indirectly influences public services and
infrastructure. Pension funds are significantly invested in the stock
market, affecting the retirement security of millions of people. Many
more individuals don't have pensions and are invested in the market
directly through 401(k)s and individual retirement accounts.
What's the Difference Between the Bond Market
and the Stock Market?
The bond market is where investors buy and sell debt securities,
typically issued by governments or corporations. When you invest in
bonds, you're essentially lending money for regular interest payments
and the return on the bond's face value at maturity.
The stock market involves buying and selling shares of publicly traded
companies. Stocks offer the potential for higher returns than bonds since
investors can get both dividends when the company is profitable and
returns when the stock price goes up. They also have a higher risk, as
stock prices can be more volatile.
What Is an Alternate Trading System?
Alternative trading systems are platforms for matching large buy and sell
transactions and are not regulated like exchanges. Dark pools and many
cryptocurrency exchanges are private exchanges or forums for
securities and currency trading and run within private groups.

Who Helps an Investor Trade on the Stock

Market?
Stockbrokers act as intermediaries between the stock exchanges and
the investors by buying and selling stocks. Portfolio managers are
professionals who invest portfolios, or collections of securities, for
clients. Investment bankers represent companies in many ways, such as
helping private companies go public or planning mergers and
acquisitions.
The Bottom Line
The stock market is where shares of companies and other financial
instruments are bought and sold. The stock market is also where
companies raise capital and where investors can grow their wealth.
Even if you don't trade on the stock market directly, it influences the
products you buy, the type of jobs available, and the retirement you
might plan.