How Stock Markets Works

Here is, in details how the stock market works: New issuance of common stocks, preferential stocks and bonds are sold in primary markets. In other words the primary market is the market in which new valuables are sold in the market. Secondary markets are the markets in which existing valuables are negotiated among investors through a broker. In this section we include a discussion about how does a stock market work. This discussion will be limited to stocks, but same procedures are applied to the issuance of new bonds.

Primary markets and initial public offerings (IPOs) for common stocks: New stock issues that are sold for the first time are called Initial public offerings (IPOs). If a company that has issued stocks before wants to issue more it is called new issue. E-bay, Yahoo and Google were extremely successful in the IPOs market in the late 90s and early 2000.

The majority of IPOs and new stock issues and bonds are negotiated through underwriters (brokerage firms). The majority of common stocks underwriters take one of three forms: negotiated arrangements, competitive bids or best efforts arrangements. These differentiated arrangements are due to different terms and conditions agreed between the issuing company and the brokerage firm and have no direct effect to the individual buyer of these values.

What one should know about buying new issues or IPOs is that you should not pay commissions  when buying valuables from underwriters. These commissions are paid by the issuing company. Companies that issue stocks for the primary market are required to provide the buyer with a legal document called prospectus so that they can make prudent investing decisions. The prospectus is a formal document related to the new issues offered. This gives you – the interested buyer- all the required information over the said value.