When we think about stocks and shares one of the first things that comes to mind is the stock market. But not all companies’ shares are traded in a stock market.

Think of a small private company which simply raises equity capital among a group of private investors. The company will issue shares and the shares can be bought and sold; but if you wanted to buy some, how would you even find out about them?

This gets to the nub of what a stock market is for; it is a public arena in which equity capital is raised (the primary market) and stocks are then traded (the secondary market); and when you enter that arena, either as an issuer or an investor, you have to play by the rules of the market, which are usually enforced by a self-regulating body within the context of wider statutory regulation.

For issuers – the companies themselves – stock markets give them the opportunity to reach a far wider pool of buyers for their primary market issues, and so, of course, raise a lot more capital. For investors, a stock market provides established mechanisms and practices by which stocks can be bought and sold (the secondary market).

Traditionally stock markets were physical locations – with trading floors full of various kinds of market player. But a stock market (and indeed, any capital market) does not require a physical location. It is only necessary that the buyers and sellers can communicate efficiently within an agreed framework of regulation and practice.

The trend (increasingly the norm) - across all capital market products - is away from trading floors and to electronic markets.

Now at this point, a question may have crossed your mind; what is the difference between a stock market and a stock exchange?

Well, somewhat tautologically, if the market is made under the regulation of something called 'an exchange' it’s an exchange-traded market. If it isn’t though, it is still a market.

Stocks are traded off-exchange all over the world in what is called the OTC (or over-the-counter market) by telephone and computer. And to compete with the speed and efficiency of these markets, stock exchanges have had to become a lot more like OTC markets.

Efficient stock markets – whether they are called an exchange or not - have the following characteristics:

• Transparency: timely and accurate information on the price and volume of past transactions and on prevailing supply and demand.

• Liquidity: the time involved to complete a transaction (the ease of finding a buyer or seller) and the certainty of the price.

• Low transaction cost (internal efficiency): the lower the cost of the transaction the more efficient the market.

• Rapid adjustment of prices to new information (external efficiency): If supply and demand conditions change as a result of new information, participants want this information reflected in the price of the stock.

Any debate about the effectiveness of a stock market – or any financial market – is going to revolve around these issues.