The average investor typically thinks of the stock market and a stock exchange as two interchangeable concepts. The two are related but are not exactly the same. Although it is often harmless to use one term in place of the other, the stock market is an economic concept, while a stock exchange is a business entity. Using the terms with precision makes it easier for the average investor to understand how the stock market works.
A stock market is an economic construct, comparable to the market for other goods or services, such as the real estate market or the market for consumer goods. It represents the notion of supply and demand. The phrase "stock market" is a recognition of the existence of a product that the public wants to buy. There is a market for stocks because stocks have an established basis for comparison that allows people to determine a market price for stocks in an arm's length transaction.
The stock market also represents a sector of a country's economy. The market for stocks is part of an economy's financial sector and is the manifestation of the public's desire to buy equity in public corporations. When the stock market is high, people are investing and that section of the economy is strong. When the stock market falls, people have lost confidence in the value of the products being sold on the market and are spending their money in different ways.
Conversely, a stock exchange is a mechanism for trading stocks. It is part of the stock market but does not represent the entire market. The stock market is made up of numerous stock exchanges, each establishing an array of rules and procedures that control the way stocks are listed, bought and sold. Popular stock exchanges include the New York Stock Exchange, the NASDAQ and the Tokyo Stock Exchange. These exchanges are business entities that play a role in the stock market, but if any one of these exchanges were to go out of business, the market for stocks would continue to exist.
A stock market can be compared to a shopping mall. It is the general construct that validates the efficacy of buying and selling through its very existence. A stock exchange is analogous to the shops in a mall. The shops make it possible for customers to complete a sales transaction for anything that is carried on the shop's shelves. Stock exchanges have stocks sitting on their shelves that people buy through a broker. The exchanges give stock sales transactions rules and structure; otherwise, people would be running around the mall, waving money, without an effective way to complete a transaction for the particular item they want.
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