Stock Markets

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Stock Markets

Also known as the equities market, a stock market is a place where shares of publicly owned companies can be bought and sold. Publicly traded shares can be traded either through centralised exchanges or OTC (over-the-counter).

The stock market is essentially a free economy market where companies can access capital by offering part ownership to interested investors who are basically outsiders. This is beneficial for both investors and the underlying companies.

For investors, the stock market offers a unique opportunity to be part of an established or already running business and to reap any of their resulting rewards without the high risk of investing in a new, unproven business, that has to contend with the associated start-up costs, overheads and other running costs and management.

For the underlying companies, the stock market allows them to access a convenient source of capital to fund their growth or expansion activities. This creates a win-win situation for both parties.

But like any investment activity, there are also risks involved. The amount of risk a trader incurs depends entirely on the price of the stock held.

If the price of a stock increases, a trader will earn profits if they sell their shares. On the other hand, losses will be realised if the stock is sold at a lower price than it was bought at.

The extent of profits or losses realised will depend on the amount of stock that was initially bought, and of course, how much the price of the stock rises or falls.

The most common way companies interact in the primary market is through an IPO (Initial Public Offering) where stocks are listed for the first time to trade in the market.

How is the Stock Market Broken Down?

The primary market is when new securities are created or issued, and they then become available for trading by individuals and institutions.

Here, securities are directly issued by the company that seeks to raise capital to fund its long-term goals and ambitions.

The most common way companies interact in the primary market is through an IPO (Initial Public Offering) where stocks are listed for the first time to trade in the market.

Companies can also engage in the primary market through a Rights Issue (raising money through existing shareholders) or a Preferential Allotment (issuing shares to a few shareholders at a predetermined price).

After the initial offering in the primary market, all subsequent trading of securities takes place in the secondary market between investors, with the underlying company not involved. Trades are facilitated by stock exchanges or by brokers who act as intermediaries.

Also known as trading off-exchange, trading OTC (over-the-counter) is an option for investors to buy and sell stocks in a decentralised market.

Trades are conducted between two parties via a dealer network, with a centralised exchange not involved. Typically, the OTC market is for stocks or stock prices not listed on a stock exchange.

Decentralised is where a transaction of buying or selling will take place between two parties, such as the trader and the broker. There are generally no rigid conditions in an OTC market, with trading being very flexible with as few limitations as possible.

There are many reasons a company would want to list on an exchange. Raising capital is the primary motivation, but companies that get listed attain many more benefits.

Going public gives a company massive publicity that can open up even more business opportunities. A company can gain the attention of diversified pools of investors ranging from institutional investors to foreign investors.

This naturally leads to increased brand equity as well. There is also the prestige of being a company listed on a top stock exchange, as well as the ability to attract top talent by offering sought-after perks, such as stock options.

Process of Stock Market Listing

The process of listing a company differs from exchange to exchange. But it will typically start with filing a registration with a relevant regulatory agency, such as the Securities Exchange Commission (SEC) in the US.

A company will do this if it meets the conditions of the underlying stock exchange they wish to get listed on, such as the NYSE or NASDAQ.

The next step will be to employ an underwriter, which is an investment bank or a major financial services company, to manage the sale of shares.

An underwriter serves as a bridge that connects the underlying company to investors as well as a risk assessor. It is the underwriter that will be responsible for drafting a prospectus, a document that will attempt to entice investors to invest in the underlying company.

Listing on a stock market also comes with some downsides. To start with, the process of stock market listing is costly, time-consuming and labour intensive.

As well, going public literally means that a company becomes public property. There is increased scrutiny and demands for accountability both by the public and the relevant capital markets regulatory agency. For founders and other early investors, there is the risk of undervaluation as well as share dilution.

It is the underwriter(s) that determines the IPO price by taking into account factors such as demand for the stock, growth prospects, the company business model and past industry equivalents.

After a company goes public, the share price is determined by market forces of demand and supply. There are different and varied factors that influence stock prices including fundamental factors, such as revenue and earnings per share; technical factors, such as inflation, industry performance, liquidity and trends; and sentimental factors such as investor speculation activity as well as reaction to political and economic news releases and events.

 

The main Stock Exchanges

In most cases, companies will use their local stock exchanges as a platform to go public. Here are some of the major stock exchanges around the world, whose assets are also available for trading at AvaTrade.

Main Stock Exchanges
Local Stock Exchange Region Public Listing
New York Stock Exchange New York, United States of America
  • Dow Jones Industrial Average
  • S&P 500
NASDAQ New York, United States of America
  • Nasdaq 100
London Stock Exchange London, England
  • FTSE 250 Index
  • FTSE 350 Index
  • FTSE SmallCap Index
  • FTSE All-Share Index
  • FTSE 100 Index
Borsa Italiana Milan, Italy
  • FTSE Italia All-Share
  • FTSE Italia Mid Cap
  • FTSE Italia Small Cap
  • FTSE AIM Italia
  • FTSE MIB
Japan Exchange Group Tokyo, Japan
  • Nikkei 225
Hong Kong Central, Hong Kong
  • Hang Seng Index
Frankfurt Exchange Frankfurt, Hesse, Germany
  • DAXplus
  • EuroStoxx 50
  • MDAX
  • CDAX
  • DivDAX
  • LDAX
Shanghai stock exchange Shanghai, China
  • SSE 50 Index
  • SSE 180 Index
  • SSE 380 Index
  • SSE Composite Index
Euronext Amsterdam, Netherlands
  • PSI 20
  • CAC 40

Investing in Stocks

There are two fundamental strategies when investing in stocks: value investing and growth investing. The two strategies complement each other and applying them to individual stocks can help investors maintain a well-balanced portfolio.

Value Investing

This is a strategy that aims to identify stocks that are undervalued in the market. Value investors actively seek companies that they believe are underpriced in the market, with the hope that sooner or later they will be priced accordingly.

These can be stocks of companies priced below similar companies in the same industry or companies whose business models carry less risk in their operating markets. Value stocks are considered a bargain as well as relatively safe for investors over the long run.

Growth Investing

Growth investing involves identifying stocks of companies that have performed admirably in the recent past and they are expected to grow faster than other companies. Growth can be in terms of revenue, cash flow, or profit.

It is important to note that this growth is expected, but not guaranteed. Growth stocks have a higher ceiling in terms of price appreciation, but they are naturally riskier and more volatile.

Price-Earnings Ratio

Better known as the P/E Ratio, this ratio is used to value a company by measuring its current share price relative to its earnings per share.

Here is how the price-earnings ratio is calculated:

By taking the stock price of the company and dividing it by is earnings per share (EPS) = market value per share. The P/E ratio is a dollar amount that a trader can expect to invest in a company in order to receive one dollar of that company’s earnings.

Dividend-Paying Stock

Dividend stocks are companies that pay out regular dividends to shareholders. Dividends are a share of profits distributed directly to shareholders.

Companies that pay out dividends regularly to investors are typically more established with proven and sustainable business models. Dividends are usually paid out quarterly, which means that they can be a regular source of income for investors.

Shares Trading

 Swing Trading

Swing trading is a popular style for trading stocks. A swing trader attempts to earn a profit from a price movement that is expected to happen in the short to medium term.

Due to its short-term nature, swing traders typically utilise technical analysis methods to pick out ideal entry and exit price points in the market.

Day Trading

Day trading is a trading style where financial assets, such as stocks, commodities, indices or currencies, are bought and sold within the same day.

The difference between swing trading and day trading is simply the holding period. When day trading, all trade positions are liquidated strictly on the same day. No trade positions are left overnight.

Naturally, day trading carries a higher level of risk and can result in higher trading costs due to the amount of trading activity done within a short period.

how can we help you?

Contact us at the Today Markets office nearest to you or submit a business inquiry online.

Today Markets has been operating in the middle east and europe now, for over 10 years and are part of a reliable, global integrated network.

Louis Roche
Founder & CEO, Today Markets

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