Companies that complete an Initial Public Offering or IPO can make their shares public and tradable on a stock market. Definition wise, a stock market is a venue where sellers and buyers of share come across and decide on a specific price to place a tradeoff. While many exchanges can be found on physical locations wherein transactions are done on a trading floor, the increase in virtual stock exchanges is also incredible. Mainly, a virtual exchange is an online site which comes into existence as a result of composition of networks of computers where trades are carried out and recorded electronically.
Stock markets allow existing owners of shares to transact with potential buyers. Companies registered on stock markets do not purchase or sell their own shares regularly. Though corporations may repurchase stocks or release new shares, these cannot be referred to day-to-day operations and so often take place outside of an exchange. Accordingly, when you purchase a share of a stock in the stock market, you actually do not purchase it from the company; instead, you buy that share of stock from another existing shareholder. Similarly, when you sell the share, you do not sell it back to its company; you sell it to some other investor.
The prices of shares are set in many different ways and one of the most common ways is to do the same through an auction process which allows buyers and sellers to place offers or bids to purchase or sell the shares. Technically, a bid refers to the price at which an investor wants to buy the share while an offer (also known as ask price) is the price at which the seller wants to sell their shares. In order to make a trade successfully, the bid price and ask price has to be coincided. Many stock markets rely on market makers or specialists to maintain nonstop trades so motivated traders continue to place trades with continence.
The spread is another term commonly used in stock trading. It is basically the difference in the price that stands between the bid and the offer. Usually, the amount of shares on the side of the bid and the offer determines how liquid a share of stock could be. Accordingly, the narrower the price spread and the bigger size of bids and offers is, the greater liquidity of the stock will be. High quality stock markets usually have small bid and ask spreads, good depth, and high liquidity ration. Also, high quality individual stock and large companies tend to work with similar characteristics.
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