Chapter 2.ppt of macroeconomics by mankiw 9th edition
1. Trading - Understanding the stock market
1.
2. What is the Stock Market?
The market in which shares are issued and
traded either through exchanges (NSE, BSE,
NASDAQ, Hang Seng etc.) or over-the-counter
markets.
3. Functions of the Stock Market
Stock market plays a pivotal role in the growth of the industry and
commerce of the country that eventually affects the economy of the
country to a great extent. That is reason that the government,
industry and even the central banks of the country keep a close watch
on the happenings of the stock market.
• Primary functions
– The stock market is the primary source for any company to raise funds
for business expansions. If a company wants to raise some capital for
the business it can issue shares of the company that is basically part
ownership of the company.
– The stock market is primarily the place where these companies get
listed to issue the shares and raise the fund. In case of an already
listed public company, they issue more shares to the market for
collecting more funds for business expansion.
4. Functions of the Stock Market (Contd.)
• Secondary functions (Secondary Market)
– The market plays the role of a common platform for the buyers
and sellers of these stocks that are listed at the stock market. It
is the secondary market of the stock exchange where retail
investors and institutional investors buy and sell the stocks. It is
these stock market traders who raise the fund for the
businesses by investing in the stocks.
– For investing in the stocks or to trade in the stock the investors
have to go through the brokers of the stock market. The brokers
act as a middle man between the buyers and sellers. Once the
buyer places a buy order in the stock market the brokers finds a
seller of the stock and thus the deal is closed.
– It is the demand and supply of the stock of a company that
determines the price of the stock of that particular company.
6. Cash Market
• It is also known as the “Equity Market” or the “Spot
Market”.
• It is the type of market in the stock exchange where
participants can buy and sell shares of a company,
assets and commodities based on immediate payment
that is equal to the market price.
• The seller, after receiving the payment, relinquishes all
claims to the property and hands over full ownership
to the buyer. In most cases, transactions take place
primarily on the internet.
• In India, the market session takes place between 0900
hours and 1530 hours.
7. Derivatives Market
• The derivatives market consists of financial instruments
such futures contracts or options. Their values are
derived from the other forms of assets.
• Futures exchanges trade in standardized derivative
contracts. These are “options” contracts and “futures”
contracts on a whole range of underlying products.
• Futures traders hold positions in these contracts with
the exchange, who act as the counterparty. If one goes
long (buy position), the other will go short (sell
position).
8. Derivatives Market (Contd.)
• Other types of derivatives products include
forward contracts and swaps. They are
considered to be Over-the-counter (OTC).
• The OTC market consists of traders making
exchanges between themselves separate from
the exchange. It is non-standardized and is
decentralized.
9. Players of the Stock Market
• Stock Market Exchanges (e.g. National Stock
Exchange, Bombay Stock Exchange)
• Governing Body (e.g. SEC, SEBI)
• Foreign Institutional Investors
• Depository Participants
• Merchant Banks
• Underwriters
• Brokers
• Traders/Investors
10. Common Terms
• Bear Market: A period during which security prices in a
particular market (such as the stock market) are generally falling.
• Bid or Sell Price: The price at which a mutual fund’s shares are
redeemed, or bought back, by the fund. The bid or redemption
price is usually the current net asset value per share.
• Broker-Dealer (or Dealer): A firm that buys and sells mutual
fund shares and other securities from and to investors.
• Bull Market: A period during which security prices in a particular
market (such as the stock market) are generally rising.
• Stock: A share of ownership or equity in a corporation.
• Shareholder: An investor who owns shares of a mutual fund or
other company.
11. Thanks!
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