Why Do We Need a Stock Market?

by Neil Kokemuller; Updated September 26, 2017

The primary purpose of a stock market is to provide a structured and regulated exchange where investors can safely buy and sell shares of stock in a public corporation and where company owners can acquire equity investment.

Going Public

Company operators can seek new cash from debt, private investment or public investment. Taking a company public and listing shares of stock for trade on the open market enables a massive infusion of equity cash. The process of an initial public offering enables founders and existing shareholders to cash out some of their own shares of stock. The business itself benefits from the capital it raises through the issuance of shares to the public.

Open Exchange

Businesses and investors benefit from the much more liquid trading environment offered by a public stock market, according to the BusinessDictionary website. High liquidity makes it easier for investors to get in and out of stocks. The liquidity itself often strengthens the value of a stock, simply because a buyer knows he has a large pool of other potential buyers when he chooses to sell.

Because of the relatively high liquidity, companies listing shares to the public typically get much more per-share equity value than they likely would in the private market. Investors can purchase and sell shares at any point that the market is open, as long as they abide by U.S. Securities and Exchange Commission, or SEC, regulations. This open market forum allows for varying strategies, ranging from long-term investments to day-trading activity.

SEC Regulations

A primary role of the SEC is to protect the interests of investors and the integrity of stock exchanges. Rules on insider trading and trade settlements are among the SEC's oversight areas. The SEC is also in charge of enforcement when companies or investors violate regulations.

Warnings

  • Companies must follow procedures and listing rules prescribed by the SEC before shares are traded in the stock market.

About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.