Stock market definition
The stock market represents the aggregate value of all publicly traded shares, also known as stocks or equities, across all stock exchanges around the world.
Shares of public companies can be traded on stock exchanges during trading hours on working days, which means that the live market value of the stock market constantly fluctuates during the week.
When a financial news organisation reports that the ‘today stock market has risen by 2%’, this means that the total market value of all of the shares of the main publicly traded companies has increased day on day.
Rather than tracking the price of every single share, media and investors tend to refer to a stock market index, such as the FTSE 100, which measures the price of a basket of shares of large UK companies. Their value is expressed as a single number which can be easily monitored over time, such as ‘6,660’.
A stock exchange is an institution that brings together buyers and sellers of publicly traded shares, allowing them to add open orders onto the book, or accept existing offers already placed. Stock exchanges, and the member brokers that physically make orders on behalf of clients (such as investors), represent the gears and cogs that make the stock market work.
The UK’s stock market
The UK’s only active stock exchange is the London Stock Exchange. Stock exchanges are few in number due to the advantage of networking effects and economies of scale. The history of the London Stock Exchange saw it beat or buy other regional exchanges until it was the only recognised equities exchange left in the UK.
One large market is more effective than three small markets, as all buyers can be confident that they are using the same market that all the sellers will be at, meaning they will be offered the best price for their trade. When multiple stock exchanges trade the same securities, traders & brokers would never be sure where most buyers and sellers were at that given moment and the competitiveness of prices would suffer due to dilution.
The main indices that track the UK stock market are:
FTSE 100 – 100 of the largest companies on the LSE that meet governance and other requirements (such as they must be a trading business and not an investment fund that invests in other companies). The value of constituent companies of this index ranges from £3.5 billion to £160 billion at the time of writing.
FTSE 250 – The next 250 largest companies, which makes this a collection of mid to small-cap companies. As of writing, the smallest company in the FTSE 250 is worth £470m.
FTSE All-share – Comprises 600 of the largest UK companies, which means it includes the FTSE 100 and FTSE 250 plus 250 additional companies. The ‘All-share’ name is misleading because the full list of companies traded on the LSE exceeds 2,000.
Index values are ‘weighted’ by the relative size of the companies that comprise it. This means that a 2% change in the price of the largest firm will have a larger impact on the index value than a 2% swing in the smallest. Due to the concentration of value in the largest firms, indices tend to be dominated by 5 – 10 companies.
To illustrate, as of writing, the largest firm in the FTSE 100 is Astrazeneca which has a greater influence on the index than the bottom 20 companies combined. This effect is even more pronounced when larger companies are mixed with smaller firms such as in the FTSE All-share.
How do stock markets work?
Before the use of computers, stock markets operated using paper share certificates, which were traded in person using brokers to enter a physical trading room and strike a deal with another party. Paperwork and cash transfers were completed in a back office after the trade was arranged. This process is known as settlement.
In the modern age, a stock market is an electronic system that provides information on open orders and allows traders to place a new order in the system. Brokers interact with the exchange through purely electronic means, and settlement takes place via a trusted third party called a clearing house which can offer a guarantee that each side will make good on their side of the bargain, which makes settlement swift and assured.
Which companies can you invest in using the stock market?
An exchange will only allow participants to trade securities that are issued by an approved list of companies. This is why publicly traded companies are also known as ‘listed companies’. This measure prevents fraud and ensures that companies invested in via the exchange meet a minimum standard of governance and financial transparency.
This means that you cannot invest in private companies that have not listed their shares on a public exchange. Examples of large private companies include Aldi, Huawei and Bosch.
Most major household names are public companies, including Nike, Tesco, Disney and Apple.
If you’d like to learn how to invest in the stock market, read our helpful guide.
The largest stock markets
The largest national stock market in the world is the New York Stock Exchange. The combined value of all companies listed on the exchange (known as market capitalisation) is $25.9 trillion US dollars.
This compares to £3.7 trillion pounds for the UK. The difference in value reflects more than the difference in size between the British and American economies. Companies have a choice about where they list, and therefore the larger size of the US stock market means investors have deeper pockets and companies logically assume that they will be able to raise money at a more attractive valuation there as a result.
The US stock market has also benefitted from incredible growth in several tech giants, namely IBM, Microsoft, Google, Apple, Facebook, Tesla and Netflix which alone account for $ trillions more value than the entire London Stock Exchange. This is one reason why investors invest in both domestic and international companies to ensure they don’t miss out on success occurring in emerging markets and other developed nations.
The latest stock market outlook is mixed for the direction of such companies, which have recently fallen from record-high valuations set in late 2021.