A stock market is a public market (a loose network of economic transactions not aphysical facility or discrete entity) for...
simultaneously. The other type of stock exchange is a virtual kind, composed of anetwork of computers where trades are mad...
CATS trading system was introduced, and the order matching process was fullyautomated.From time to time, active trading (e...
that in late 13th century Bruges commodity traders gathered inside the house of a mancalled Van der Beurze, and in 1309 th...
IMPORTANCE OF STOCK MARKETFunction and purposeThe stock market is one of the most important sources for companies to raise...
little or no perceived value to American society profit American bankers on Wall Street,as they reap large commissions fro...
The stock market, individual investors, and financial riskRiskier long-term saving requires that an individual possess the...
NASDAQ in Times Square, New York CityFrom experience we know that investors may temporarily move financial prices awayfrom...
time periods of weeks or longer. Various explanations for such large and apparently non-random price movements have been p...
prices and the notion that large sums of money could be quickly earned in the so-callednew economy stock market. (And late...
strong a belief that paying attention to the gyrations in their investments will somedaymake them rich, and so they do not...
Upcoming SlideShare
Loading in …5

A stock market is a public marke nem


Published on

Stock market

Published in: Business, Economy & Finance
1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

A stock market is a public marke nem

  1. 1. A stock market is a public market (a loose network of economic transactions not aphysical facility or discrete entity) for the trading of company stock and derivatives at anagreed price; these are securities listed on a stock exchange as well as those only tradedprivately.The size of the world stock market was estimated at about $36.6 trillion US at thebeginning of October 2008. [1] The total world derivatives market has been estimated atabout $791 trillion face or nominal value, [2] 11 times the size of the entire worldeconomy. [3] The value of the derivatives market, because it is stated in terms of notionalvalues, cannot be directly compared to a stock or a fixed income security, whichtraditionally refers to an actual value. Moreover, the vast majority of derivatives canceleach other out (i.e., a derivative bet on an event occurring is offset by a comparablederivative bet on the event not occurring.). Many such relatively illiquid securities arevalued as marked to model, rather than an actual market price.The stocks are listed and traded on stock exchanges which are entities of a corporation ormutual organization specialized in the business of bringing buyers and sellers of theorganizations to a listing of stocks and securities together. The stock market in the UnitedStates is NYSE while in Canada; it is the Toronto Stock Exchange. Major Europeanexamples of stock exchanges include the London Stock Exchange, Paris Bourse, and theDeutsche Börse. Asian examples include the Tokyo Stock Exchange, the Hong KongStock Exchange, and the Bombay Stock Exchange. In Latin America, there are suchexchanges as the BM&F Bovespa and the BMV.TradingThe London Stock ExchangeParticipants in the stock market range from small individual stock investors to largehedge fund traders, who can be based anywhere. Their orders usually end up with aprofessional at a stock exchange, who executes the order.Some exchanges are physical locations where transactions are carried out on a tradingfloor, by a method known as open outcry. This type of auction is used in stock exchangesand commodity exchanges where traders may enter "verbal" bids and offers
  2. 2. simultaneously. The other type of stock exchange is a virtual kind, composed of anetwork of computers where trades are made electronically via traders.Actual trades are based on an auction market model where a potential buyer bids aspecific price for a stock and a potential seller asks a specific price for the stock. (Buyingor selling at market means you will accept any ask price or bid price for the stock,respectively.) When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price.The purpose of a stock exchange is to facilitate the exchange of securities between buyersand sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.New York Stock ExchangeThe New York Stock Exchange is a physical exchange, also referred to as a listedexchange — only stocks listed with the exchange may be traded. Orders enter by way ofexchange members and flow down to a floor broker, who goes to the floor trading postspecialist for that stock to trade the order. The specialists job is to match buy and sellorders using open outcry. If a spread exists, no trade immediately takes place--in this casethe specialist should use his/her own resources (money or stock) to close the differenceafter his/her judged time. Once a trade has been made the details are reported on the"tape" and sent back to the brokerage firm, which then notifies the investor who placedthe order. Although there is a significant amount of human contact in this process,computers play an important role, especially for so-called "program trading".The NASDAQ is a virtual listed exchange, where all of the trading is done over acomputer network. The process is similar to the New York Stock Exchange. However,buyers and sellers are electronically matched. One or more NASDAQ market makers willalways provide a bid and ask price at which they will always purchase or sell their stock.The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. Itwas automated in the late 1980s. Prior to the 1980s, it consisted of an open outcryexchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the
  3. 3. CATS trading system was introduced, and the order matching process was fullyautomated.From time to time, active trading (especially in large blocks of securities) have movedaway from the active exchanges. Securities firms, led by UBS AG, Goldman SachsGroup Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades awayfrom the exchanges to their internal systems. That share probably will increase to 18percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pairbuyers and sellers of securities themselves, according to data compiled by Boston-basedAite Group LLC, a brokerage-industry consultant.Now that computers have eliminated the need for trading floors like the Big Boards, thebalance of power in equity markets is shifting. By bringing more orders in-house, whereclients can move big blocks of stock anonymously, brokers pay the exchanges less in feesand capture a bigger share of the $11 billion a year that institutional investors pay intrading commissions as well as the surplus of the century had taken place.Market participantsA few decades ago, worldwide, buyers and sellers were individual investors, such aswealthy businessmen, with long family histories (and emotional ties) to particularcorporations. Over time, markets have become more "institutionalized"; buyers andsellers are largely institutions (e.g., pension funds, insurance companies, mutual funds,index funds, exchange-traded funds, hedge funds, investor groups, banks and variousother financial institutions). The rise of the institutional investor has brought with it someimprovements in market operations. Thus, the government was responsible for "fixed"(and exorbitant) fees being markedly reduced for the small investor, but only after thelarge institutions had managed to break the brokers solid front on fees. (They then wentto negotiated fees, but only for large institutions. However, corporate governance (atleast in the West) has been very much adversely affected by the rise of (largely absentee)institutional owners.[citation needed]HistoryIn 12th century France the courratiers de change were concerned with managing andregulating the debts of agricultural communities on behalf of the banks. Because thesemen also traded with debts, they could be called the first brokers. A common misbelief is
  4. 4. that in late 13th century Bruges commodity traders gathered inside the house of a mancalled Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizingwhat had been, until then, an informal meeting, but actually, the family Van der Beurzehad a building in Antwerp where those gatherings occurred ; the Van der Beurze hadAntwerp, as most of the merchants of that period, as their primary place for trading. Theidea quickly spread around Flanders and neighboring counties and "Beurzen" soonopened in Ghent and Amsterdam.In the middle of the 13th century, Venetian bankers began to trade in governmentsecurities. In 1351 the Venetian government outlawed spreading rumors intended tolower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence alsobegan trading in government securities during the 14th century. This was only possiblebecause these were independent city states not ruled by a duke but a council of influentialcitizens. The Dutch later started joint stock companies, which let shareholders invest inbusiness ventures and get a share of their profits - or losses. In 1602, the Dutch East IndiaCompany issued the first share on the Amsterdam Stock Exchange. It was the firstcompany to issue stocks and bonds.The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the firststock exchange to introduce continuous trade in the early 17th century. The Dutch"pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trustsand other speculative instruments, much as we know them". There are now stock marketsin virtually every developed and most developing economies, with the worlds biggestmarkets being in the United States, United Kingdom, Japan, India, China, Canada,Germany, France and the Netherlands.The main trading room of the Tokyo Stock Exchange, where trading is currentlycompleted through computers.
  5. 5. IMPORTANCE OF STOCK MARKETFunction and purposeThe stock market is one of the most important sources for companies to raise money.This allows businesses to be publicly traded, or raise additional capital for expansion byselling shares of ownership of the company in a public market. The liquidity that anexchange provides affords investors the ability to quickly and easily sell securities. Thisis an attractive feature of investing in stocks, compared to other less liquid investmentssuch as real estate.History has shown that the price of shares and other assets is an important part of thedynamics of economic activity, and can influence or be an indicator of social mood. Aneconomy where the stock market is on the rise is considered to be an up and comingeconomy. In fact, the stock market is often considered the primary indicator of acountrys economic strength and development. Rising share prices, for instance, tend tobe associated with increased business investment and vice versa. Share prices also affectthe wealth of households and their consumption. Therefore, central banks tend to keep aneye on the control and behavior of the stock market and, in general, on the smoothoperation of financial system functions. Financial stability is the raison dêtre of centralbanks.Exchanges also act as the clearinghouse for each transaction, meaning that they collectand deliver the shares, and guarantee payment to the seller of a security. This eliminatesthe risk to an individual buyer or seller that the counterparty could default on thetransaction.The smooth functioning of all these activities facilitates economic growth in that lowercosts and enterprise risks promote the production of goods and services as well asemployment. In this way the financial system contributes to increased prosperity. Animportant aspect of modern financial markets, however, including the stock markets, isabsolute discretion. For example, American stock markets see more unrestrainedacceptance of any firm than in smaller markets. For example, Chinese firms that possess
  6. 6. little or no perceived value to American society profit American bankers on Wall Street,as they reap large commissions from the placement, as well as the Chinese companywhich yields funds to invest in China. However, these companies accrue no intrinsicvalue to the long-term stability of the American economy, but rather only short-termprofits to American business men and the Chinese; although, when the foreign companyhas a presence in the new market, this can benefit the markets citizens. Conversely, thereare very few large foreign corporations listed on the Toronto Stock Exchange TSX,Canadas largest stock exchange. This discretion has insulated Canada to some degree toworldwide financial conditions. In order for the stock markets to truly facilitate economicgrowth via lower costs and better employment, great attention must be given to theforeign participants being allowed in.Relation of the stock market to the modern financial systemThe financial systems in most western countries has undergone a remarkabletransformation. One feature of this development is disintermediation. A portion of thefunds involved in saving and financing flows directly to the financial markets instead ofbeing routed via the traditional bank lending and deposit operations. The general publicsheightened interest in investing in the stock market, either directly or through mutualfunds, has been an important component of this process. Statistics show that in recentdecades shares have made up an increasingly large proportion of households financialassets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquidassets with little risk made up almost 60 percent of households financial wealth,compared to less than 20 percent in the 2000s. The major part of this adjustment infinancial portfolios has gone directly to shares but a good deal now takes the form ofvarious kinds of institutional investment for groups of individuals, e.g., pension funds,mutual funds, hedge funds, insurance investment of premiums, etc. The trend towardsforms of saving with a higher risk has been accentuated by new rules for most funds andinsurance, permitting a higher proportion of shares to bonds. Similar tendencies are to befound in other industrialized countries. In all developed economic systems, such as theEuropean Union, the United States, Japan and other developed nations, the trend has beenthe same: saving has moved away from traditional (government insured) bank deposits tomore risky securities of one sort or another.
  7. 7. The stock market, individual investors, and financial riskRiskier long-term saving requires that an individual possess the ability to manage theassociated increased risks. Stock prices fluctuate widely, in marked contrast to thestability of (government insured) bank deposits or bonds. This is something that couldaffect not only the individual investor or household, but also the economy on a largescale. The following deals with some of the risks of the financial sector in general and thestock market in particular. This is certainly more important now that so many newcomershave entered the stock market, or have acquired other risky investments (such asinvestment property, i.e., real estate and collectables).With each passing year, the noise level in the stock market rises. Televisioncommentators, financial writers, analysts, and market strategists are all overtaking eachother to get investors attention. At the same time, individual investors, immersed in chatrooms and message boards, are exchanging questionable and often misleading tips. Yet,despite all this available information, investors find it increasingly difficult to profit.Stock prices skyrocket with little reason, then plummet just as quickly, and people whohave turned to investing for their childrens education and their own retirement becomefrightened. Sometimes there appears to be no rhyme or reason to the market, only folly.This is a quote from the preface to a published biography about the long-term value-oriented stock investor Warren Buffett.[7] Buffett began his career with $100, and$100,000 from seven limited partners consisting of Buffetts family and friends. Over theyears he has built himself a multi-billion-dollar fortune. The quote illustrates some ofwhat has been happening in the stock market during the end of the 20th century and thebeginning of the 21st century.United States Stock Market ReturnsOver a sixty-year period, for year ended 2009, on a Total Return Basis, the S&P 500Index year-to-year grew at an average annualized rate of 9.2%; on a compounded basisan average annualized rate of 5.6%.The behavior of the stock market
  8. 8. NASDAQ in Times Square, New York CityFrom experience we know that investors may temporarily move financial prices awayfrom their long term aggregate price trends. (Positive or up trends are referred to as bullmarkets; negative or down trends are referred to as bear markets.) Over-reactions mayoccur—so that excessive optimism (euphoria) may drive prices unduly high or excessivepessimism may drive prices unduly low. New theoretical and empirical arguments havesince been put forward against the notion that financial markets are generally efficient(i.e., in the sense that stock prices in the aggregate tend to follow a Gaussiandistribution).According to the efficient market hypothesis (EMH), only changes in fundamentalfactors, such as the outlook for margins, profits or dividends, ought to affect share pricesbeyond the short term, where random noise in the system may prevail. (But this largelytheoretic academic viewpoint—known as hard EMH—also predicts that little or notrading should take place, contrary to fact, since prices are already at or near equilibrium,having priced in all public knowledge.) The hard efficient-market hypothesis is sorelytested by such events as the stock market crash in 1987, when the Dow Jones indexplummeted 22.6 percent—the largest-ever one-day fall in the United States. This eventdemonstrated that share prices can fall dramatically even though, to this day, it isimpossible to fix a generally agreed upon definite cause: a thorough search failed todetect any reasonable development that might have accounted for the crash. (But notethat such events are predicted to occur strictly by chance , although very rarely.) It seemsalso to be the case more generally that many price movements (beyond that which arepredicted to occur randomly) are not occasioned by new information; a study of the fiftylargest one-day share price movements in the United States in the post-war period seemsto confirm this.However, a soft EMH has emerged which does not require that prices remain at or nearequilibrium, but only that market participants not be able to systematically profit fromany momentary market inefficiencies. Moreover, while EMH predicts that all pricemovement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over
  9. 9. time periods of weeks or longer. Various explanations for such large and apparently non-random price movements have been promulgated. For instance, some research has shownthat changes in estimated risk, and the use of certain strategies, such as stop-loss limitsand Value at Risk limits, theoretically could cause financial markets to overreact. But thebest explanation seems to be that the distribution of stock market prices is non-Gaussian(in which case EMH, in any of its current forms, would not be strictly applicable).Other research has shown that psychological factors may result in exaggerated(statistically anomalous) stock price movements (contrary to EMH which assumes suchbehaviors cancel out). Psychological research has demonstrated that people arepredisposed to seeing patterns, and often will perceive a pattern in what is, in fact, justnoise. (Something like seeing familiar shapes in clouds or ink blots.) In the presentcontext this means that a succession of good news items about a company may leadinvestors to overreact positively (unjustifiably driving the price up). A period of goodreturns also boosts the investors self-confidence, reducing his (psychological) riskthreshold.Another phenomenon—also from psychology—that works against an objectiveassessment is group thinking. As social animals, it is not easy to stick to an opinion thatdiffers markedly from that of a majority of the group. An example with which one maybe familiar is the reluctance to enter a restaurant that is empty; people generally prefer tohave their opinion validated by those of others in the group.In one paper the authors draw an analogy with gambling.In normal times the marketbehaves like a game of roulette; the probabilities are known and largely independent ofthe investment decisions of the different players. In times of market stress, however, thegame becomes more like poker (herding behavior takes over). The players now must giveheavy weight to the psychology of other investors and how they are likely to reactpsychologically.The stock market, as any other business, is quite unforgiving of amateurs. Inexperiencedinvestors rarely get the assistance and support they need. In the period running up to the1987 crash, less than 1 percent of the analysts recommendations had been to sell (andeven during the 2000 - 2002 bear market, the average did not rise above 5%). In the runup to 2000, the media amplified the general euphoria, with reports of rapidly rising share
  10. 10. prices and the notion that large sums of money could be quickly earned in the so-callednew economy stock market. (And later amplified the gloom which descended during the2000 - 2002 bear market, so that by summer of 2002, predictions of a DOW averagebelow 5000 were quite common.)Irrational behaviorSometimes the market seems to react irrationally to economic or financial news, even ifthat news is likely to have no real effect on the technical value of securities itself. But thismay be more apparent than real, since often such news has been anticipated, and acounterreaction may occur if the news is better (or worse) than expected. Therefore, thestock market may be swayed in either direction by press releases, rumors, euphoria andmass panic; but generally only briefly, as more experienced investors (especially thehedge funds) quickly rally to take advantage of even the slightest, momentary hysteria.Over the short-term, stocks and other securities can be battered or buoyed by any numberof fast market-changing events, making the stock market behavior difficult to predict.Emotions can drive prices up and down, people are generally not as rational as they think,and the reasons for buying and selling are generally obscure. Behaviorists argue thatinvestors often behave irrationally when making investment decisions therebyincorrectly pricing securities, which causes market inefficiencies, which, in turn, areopportunities to make money. However, the whole notion of EMH is that these non-rational reactions to information cancel out, leaving the prices of stocks rationallydetermined.The Dow Jones Industrial Average biggest gain in one day was 936.42 points or 11percent, this occurred on October 13, 2008CrashesRobert Shillers plot of the S&P Composite Real Price Index, Earnings, Dividends, andInterest Rates, from Irrational Exuberance, 2d ed. In the preface to this edition, Shillerwarns, "The stock market has not come down to historical levels: the price-earnings ratioas I define it in this book is still, at this writing [2005], in the mid-20s, far higher than thehistorical average. . . . People still place too much confidence in the markets and have too
  11. 11. strong a belief that paying attention to the gyrations in their investments will somedaymake them rich, and so they do not make conservative preparations for possible badoutcomes."Price-Earnings ratios as a predictor of twenty-year returns based upon the plot by RobertShiller (Figure 10.1,[16] source). The horizontal axis shows the real price-earnings ratio ofthe S&P Composite Stock Price Index as computed in Irrational Exuberance (inflationadjusted price divided by the prior ten-year mean of inflation-adjusted earnings). Thevertical axis shows the geometric average real annual return on investing in the S&PComposite Stock Price Index, reinvesting dividends, and selling twenty years later. Datafrom different twenty year periods is color-coded as shown in the key. See also ten-yearreturns. Shiller states that this plot "confirms that long-term investors—investors whocommit their money to an investment for ten full years—did do well when prices werelow relative to earnings at the beginning of the ten years. Long-term investors would bewell advised, individually, to lower their exposure to the stock market when it is high, asit has been recently, and get into the market when it is low."[16]Main article: Stock market crashA stock market crash is often defined as a sharp dip in share prices of equities listed onthe stock exchanges. In parallel with various economic factors, a reason for stock marketcrashes is also due to panic and investing publics loss of confidence. Often, stock marketcrashes end speculative economic bubbles.There have been famous stock market crashes that have ended in the loss of billions ofdollars and wealth destruction on a massive scale. An increasing number of people areinvolved in the stock market, especially since the social security and retirement plans arebeing increasingly privatized and linked to stocks and bonds and other elements of themarket. There have been a number of famous stock market crashes like the Wall StreetCrash of 1929, the stock market crash of 1973–4, the Black Monday of 1987, the Dot-com bubble of 2000, and the Stock Market Crash of 2008.