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Most stocks are traded on exchanges, which are places where buyers
and sellers meet and decide on a price. Some exchanges are physical
locations where transactions are carried out on a trading floor. You've
probably seen pictures of a trading floor, in which traders are wildly
throwing their arms up, waving, yelling, and signaling to each other.
The other type of exchange is virtual, composed of a network of
computers where trades are made electronically.
The purpose of a stock market is to facilitate the exchange of
securities between buyers and sellers, reducing the risks of investing.
Just imagine how difficult it would be to sell shares if you had to call
around the neighborhood trying to find a buyer. Really, a stock market
is nothing more than a super-sophisticated farmers' market linking
buyers and sellers.
Before we go on, we should distinguish between the primary market and the secondary market.
The primary market is where securities are created (by means of an IPO)
while, in the secondary market, investors trade previously-issued
securities without the involvement of the issuing-companies. The
secondary market is what people are referring to when they talk about
the stock market. It is important to understand that the trading of a
company's stock does not directly involve that company.
Please let me know if you need any clarification. I'm always happy to answer your questions.
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