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.