Stock market reports are now a part of our everyday life, but many people have only a hazy notion of how these markets function. Times Money explains how stock market investing works.

The marketplace

A stock exchange, such as the London Stock Exchange, brings together people who want to buy shares and those who want to sell them.

Stock exchanges are made up of different markets. In London, for instance, there is the main market, the Alternative Investment Market, professional securities and specialist fund markets. Companies are then divided into different indices. In many countries, such as the UK and the US, investors have to deal through an agent known as a stockbroker.

To smooth the wheels of the trading operation, stock markets usually have some sort of wholesale element that stands between the buyer and seller.

In the UK, these middlemen used to be known as jobbers but are now known as market-makers. They sell stock to those who want to buy, and buy from those wanting to sell.

Stock market trading in the UK used to take place on the Stock Exchange floor. Today, however, trading takes place electronically, with brokers and market-makers sitting in front of computer screens.

The back office

Each trade has to be recorded and settled, with stock transferred correctly from the seller to the buyer and with the right people getting the right amount of money within a given time. This is the responsibility of the back-office staff, a vital but often neglected part of large financial organisations.

The markets as a barometer

Stock markets can act as crude, but useful, indicators of the nation’s financial health. When times are good, company profits increase and investors tend to want to buy shares to participate in the rising tide of profits. This causes share prices to rise, increasing investors’ overall paper wealth. Every ten-point rise in the FTSE 100 index of leading shares boosts stock market wealth by £2.37 billion. The same applies in reverse, with every ten-point fall wiping off an equal amount of investors’ overall wealth.

Bull market

This is the term used to describe times when shares are rising steadily in value. For virtually all of the 1990s investors in the UK benefited from a bull market, which finally came to an end when the dot-com bubble burst in 2000.

More recently, investors enjoyed a strong bull run from March 2003 to summer 2007, during which the FTSE 100 index rose by 100 per cent. Opinion is now divided on whether the bull market has ended or is merely pausing for breath.

Bear market

This describes a stock market where shares are falling in value.

The most savage bear market of all time was the Wall Street Crash of 1929-1932, in which share prices fell by 89 per cent. The worst UK bear market was the one running from early 1973 to late 1974, during which shares fell by 73 per cent. For more information, take a look at the ten worst stock market crashes.

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