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What is the purpose of the stock market?

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Quick Answer

Two of the main purposes of the stock market are to give investors the opportunity to share in the present and future value of companies by purchasing shares in the companies and to allow companies to expand their capital pools by making investors partial owners of their companies, says Investopedia. The stock market is crucial to the health of a free market system because of the capabilities it offers for growth.

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What is the purpose of the stock market?
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Full Answer

The more profitable a company becomes, the higher its value and the more valuable its stocks, explains Investopedia. The stock market lets investors profit from the success of companies in which they own shares through dividends paid by the company or through capital gains in selling stocks at higher prices than the amount they paid. Such profits, however, are not guaranteed, given that a stock's value may decrease.

A company may qualify to sell shares in the stock market through what is called the primary market, elaborates Investopedia. These initial public offerings commonly involve the trade of the company's stock from investment banks to institutional investors. After this, the stock moves to what is known as the secondary market in which the institutional investors are joined by individual investors in any subsequent trade of the stock. In the United States, the New York Stock Exchange and the Nasdaq are the two largest stock markets.

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