There are two markets that this can occur in – one is the primary market where each company creates its new securities (shares, stocks) and one is the secondary market where these shares are sold between investors for future gain.
The primary market is where a company creates securities and floats (sells) them to the public for the first time. If the company has never sold securities on the stock market before, then its first offering is known as an Initial Public Offering (IPO). The most important feature of the primary market is to understand that this is where you are buying securities if a company has decided to float (sell) a new parcel of securities, or if a new company wishes to raise capital by selling securities to the public.
The secondary market is where the majority of the true stock trading occurs. It is called the secondary market because this is where investor’s trade previously owned securities from other traders, not the company itself and therefore the company receives no money from these transactions. The secondary market is just as important as the primary market for a number of reasons. You may be wondering at this stage – If I am trading in the secondary market and the company is not receiving any money, why would a company have an interest in me?? – and it is a very valid question.
The reason the secondary market is so imperative is because as the share price fluctuates up and down, it affects shareholders wealth – which is their investment and money. Managers are employed to run the company on behalf of the shareholders because they have either provided the initial capital in the primary market, or now hold shares in the secondary market and have rights) which the company cannot ignore. The current share price reflects the company’s performance and future prospects as gauged by investors.
This means that if a company is performing poorly – the share price decreases because shareholders no longer want to hold the stock. The upper management can expect criticism from investors whom still own shares and this can lead to changes at the Executive Board and CEO as shareholders have rights to vote for change in the current upper management team. Poor company performance in the secondary market also may mean that another company who is performing very well, can acquire the company in a takeover bid (another entity attempts to purchase the company).
Thus, the importance of a stock market cannot be under estimated as a fantastic tool for future investment for both companies and the individual investor whom wishes to gain for the future.
(See more) What is a Bull Market and Bear Market?
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