Businesses may be organized in a number of different ways, including sole proprietorships, partnerships or corporations. A business may offer to sell a portion of its ownership by issuing stock.
2. What is a stock market?
A stock market or equity market is a market for
the trading of company stock (shares) and
derivatives at an agreed price.
The size of the world stock market was
estimated at about $36.6 trillion USD at the
beginning of October 2008.
3. What is a
share/stock/equity?
Shares represent a fraction of ownership in a
business. The common feature of all these is
equity participation. Different classes of shares
have different voting rights.
Ownership of shares is documented by a legal
document that specifies the amount of shares
owned by the shareholder, and other specifics of
the shares, such as the par value or the class of
the shares (if any).
These days these stock certificates have been
dematerialized.(No physical document!)
4. Who is a shareholder?
A shareholder (or stockholder) is an individual or
company (including a corporation) that legally
owns one or more shares of a company.
Shareholders are granted privileges depending on
the class of stock, including the right to vote on
matters such as elections to the board of
directors, the right to share in distributions of the
company's income, the right to purchase new
shares issued by the company, and the right to a
company's assets during a liquidation of the
company.
Shareholders vary from individual stock investors
to large hedge fund traders.
5. Why does a company issue shares to the
public?
A company may want additional capital to
invest in new projects.
The promoters may simply wish to reduce their
holding, freeing up capital for their own private
use.
Once a company is listed, it will be able to
issue further shares via a rights issue, thereby
again providing itself with capital for
expansion without incurring any debt.
Financing a company through the sale of stock
in a company is known as equity financing.
6. Trading
The shares of a company are in general be
transferrable from one shareholder to another .
This leads to buying and selling of shares termed
as trading.
Investors usually buy and sell shares on the
exchanges through a stock brokers registered
with the exchange.
A company may list its shares on an exchange by
meeting and maintaining the listing requirements
of a particular stock exchange.
7. Share price
determination
At any given moment, the price is strictly a result
of supply and demand. The supply is the number
of shares offered for sale at any one moment. The
demand is the number of shares investors wish to
buy at exactly that same time.
Actual trades are based on an auction market
model where a potential buyer bids a specific
price for a stock and a potential seller asks a
specific price for the stock. (Buying or 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.
8. Listing requirements
The set of conditions imposed by a given stock
exchange upon companies that want to be listed on
that exchange.
Examples include minimum number of shares
outstanding, minimum market capitalization, and
minimum annual income.
These requirements vary from exchange to
exchange. Example: Bombay Stock Exchange
(BSE) has requirements for a minimum market
capitalization of Rs.25 Cr and minimum public float
equivalent to Rs.10 Cr whereas the London Stock
Exchange has requirements for a minimum market
capitalization (£700,000) .
9. Ways of buying and selling
shares
Through a stock broker: They arrange the
transfer of stock from a seller to a buyer. Both the
buyer and the seller of the share pay commission
known as brokerage to the broker.
Directly from the company:
1. If at least one share is owned, most companies
will allow the purchase of shares directly from
the company through their investor relations
departments.
2. A direct public offering is an initial public
offering(IPO) in which the stock is purchased
directly from the company, usually without the
aid of brokers.
10. Leveraged Strategies
Margin Buying
Buying stock on margin means buying stock with
money borrowed against the stocks in the same
account. These stocks, or collateral, guarantee that
the buyer can repay the loan; otherwise, the
stockbroker has the right to sell the stock to repay the
borrowed money. The broker usually charges 8-10%
interest on margin borrowing.
Short selling
In short selling, the trader borrows stock (usually from
his brokerage) then sells it on the market, hoping for
the price to fall. The trader eventually buys back the
stock, making money if the price fell in the meantime
and losing money if it rose.
11. When to invest in a particular
stock?
Fundamental analysis refers to analyzing
companies by their financial statements found in
SEC Filings, business trends, general economic
conditions and the growth prospects of company's
market segment. A few parameters which are
looked upon include Price to Earnings (PE) Ratio,
Price to Book Value ratio, Equity to Debt ratio.
Technical analysis studies price actions in
markets through the use of charts and quantitative
techniques to attempt to forecast price trends
regardless of the company's financial prospects. A
few examples include Trend lines, Bollinger
Bands, Oscillators etc.
16. Stock Market Index
The movements of the prices in a market or
section of a market are captured in price
indices called stock market indices. Such
indices are usually market capitalization
weighted, with the weights reflecting the
contribution of the stock to the index.
Examples of index include Sensex, Nifty, DJIA,
S&P500, Nikkei etc.
The constituents of the index are reviewed
frequently to include/exclude stocks in order to
reflect the changing business environment.
17. Importance and role of the stock
markets
Raising capital for businesses
Government capital-raising for
development projects
Mobilizing savings for investment
Facilitating company growth through
acquisitions
Creating investment opportunities for small
investors
Barometer of the economy
18. Stock markets and the financial
risk
Sometimes the market seems to react
irrationally to economic or financial news. This
may 'temporarily' move financial prices away
from their long term aggregate price 'trends'.
(Positive or up trends are referred to as bull
markets; negative or down trends are referred
to as bear markets). Over-reactions may
occur—so that excessive optimism (euphoria)
may drive prices unduly high or excessive
pessimism may drive prices unduly low.
19. Stock Market Crashes
A stock market crash is often defined as a
sharp dip in share prices of equities listed on
the stock exchanges. In parallel with various
economic factors, a reason for stock market
crashes is also due to panic and investing
public's loss of confidence. Often, stock
market crashes burst speculative economic
bubbles.
Famous stock market crashes have lead to the
loss of billions of dollars and wealth
destruction on a massive scale.