Stock Market Notes

Stock Market

Introduction

  • The stock market is a collection of markets and exchanges where activities like buying, selling, and issuance of shares of publicly held companies occur.

  • The term "stock market" often refers to major stock market indexes like the Dow Jones Industrial Average or the S&P 500.

Functions of a Stock Market

  1. Fair Dealing in Securities Transactions:

    • Stock exchanges ensure all market participants have instant access to data for buy and sell orders based on demand and supply.

    • This promotes fair and transparent pricing of securities.

  2. Efficient Price Discovery:

    • Stock markets support a mechanism for price discovery, which involves determining the proper price of a security.

    • This is usually performed by assessing market supply and demand, as well as other factors related to the transactions.

  3. Liquidity Maintenance:

    • While the number of buyers and sellers is outside the stock market's control, it ensures that qualified and willing traders have instant access to place orders.

    • Orders should be executed at a fair price.

  4. Security and Validity of Transactions:

    • The market must verify participants and ensure compliance with rules and regulations.

    • This reduces the potential for default by any parties.

  5. Support All Eligible Types of Participants:

    • A marketplace includes various participants such as market makers, investors, traders, speculators, and hedgers.

  6. Investor Protection:

    • The stock market serves a large number of small investors along with wealthy and institutional investors.

  7. Balanced Regulation:

    • Listed companies are regulated, and their dealings are monitored by market regulators such as the Securities and Exchange Commission (SEC) in the U.S.

Regulating the Stock Market

  • A local financial regulator or monetary authority is assigned the task of regulating the stock market of a country.

Stock Market Participants

  • Along with long-term investors and short-term traders, there are various types of players associated with the stock market:

    1. Stockbrokers:

      • Act as intermediaries between stock exchanges and investors.

      • Buy and sell stocks on behalf of investors.

    2. Portfolio Managers:

      • Professionals who invest portfolios or collections of securities for clients.

    3. Investment Bankers:

      • Represent companies in different capacities.

      • Assist private companies going public via an IPO or companies involved in mergers and acquisitions.

    4. Custodian and Depot Service Providers:

      • Institutions holding customers’ securities for safekeeping to minimize the risk of theft or loss.

    5. Market Maker:

      • A broker-dealer who facilitates the trading of shares.

      • Posts bid and ask prices and maintains an inventory of shares.

Competition for Stock Markets

  • Individual stock exchanges compete against each other to maximize transaction volume. They face threats from:

    1. Dark Pools:

      • Private exchanges or forums for securities trading.

      • Operate within private groups and pose a challenge to public stock markets.

    2. Blockchain Ventures:

      • Amid rising popularity of blockchains, many crypto exchanges have emerged.

Significance of the Stock Market

  • The stock market is a vital component of a free-market economy.

  • It allows companies to raise money by offering stock shares and corporate bonds.

  • It serves as a platform through which savings and investments of individuals are channelized into productive investment proposals.

Why Invest in the Stock Market?

  • Stock market investing offers the best way to achieve returns that beat inflation over time.

    1. Stock ownership benefits from a growing economy.

    2. Stocks are easy to buy and sell, unlike real estate.

    3. Investors aim to let their stock appreciate over time.

    4. Stocks may pay dividends, providing a steady income stream.

Investing Risks

  • Stock Market Correction:

    • When stock market prices decline less than 10%.

  • Market Crash:

    • When prices fall significantly in one day.

  • Bear Market:

    • When prices fall 20% or more.

Major World Stock Markets

  1. New York Stock Exchange - NYSE

  2. Nasdaq - (National Association of Securities Dealers Automated
    Quotations) Has an index by the same name.

  3. Tokyo Stock Exchange - Nikkei 225

  4. London Stock Exchange - FTSE 100

  5. Euronext - Euronext 100. Other European indices: AEX (Amsterdam), BEL (Brussels), CAC (Germany), PSI (Lisbon).

  6. Shanghai Stock Exchange - Shanghai Stock Exchange

  7. Hong Kong Stock Exchange - Hang Seng

  8. Toronto Stock Exchange - SPTSX

  9. Bombay Stock Exchange - SENSEX

  10. National Stock Exchange of India - NSE Nifty

  11. BM&F Bovespa (Brazil) - The index is also called BOVESPA.

Private vs. Public Equity

  • Private Equity:

    • Composed of funds and investors that directly invest in private companies, or engage in buyouts of public companies.

  • Public Equity:

    • Stock that is bought and sold through a public market.

Primary vs. Secondary Markets

  • Primary Market:

    • Facilitated by underwriting groups, which consist of investment banks.

  • Secondary Market:

    • Where investors buy and sell their own securities.