The stock markets are markets that were created to facilitate the purchasing and sales of stocks.
They can also be referred to as equities and they can be acquired physically through an exchange or over-the-counter. Owning a stock means that you own a portion of a certain business. The ability of the equity market to functions with minimum delays is very crucial to the health of the economy because they are responsible for transferring capital from investors to the company. The firms are then able to invest the money they acquired to finance projects that will increase the value of the firm.
The issuance of equity is the favourable action that can be taken, instead of issuing debt in the credit market. Stock offerings allow the "user of funds" which is the business, to avoid costs that are paid for by borrowed capital. Equity owners will be able to share the profits generated by the firm. Investors can also generate profits by selling their stock after it has been appreciated. Around the 15th century, companies in Britain and European countries, use to purchase goods from the eastern countries. During the transportation,
there was a risk that the goods might be stolen or might be exposed to the harsh conditions that are present at the sea. This resulted in shipping companies seeking some kind of insurance for the ship and goods, and that was the birth of investing.
Investors saw this as an opportunity to make profits. They provided the capital and by so doing decreased the risks of shipping firms in return.
They would get compensation if the ship had a safe trip and share the losses if there was an incident.
Due to this, many firms were created to offer this kind of service.
Initially, the investors provided the capital for a single trip and eventually started doing it on a longer-term contract basis. This meant companies were now able to ask for more capital from the lenders, thus increasing the profits of investors. During the 20th century, there was an influx of participants in the equity markets.
The introduction of technology removed the need for investors to physically go to an exchange house but gave them the ability to efficiently execute trades electronically. The government agencies provided regulations to ensure the safety of funds and protect investors against illegal activities that can arise. The purchasing of stocks on the over the counter markets require participants to pay a bigger spread for the services provided. With the exchange houses, spreads are typically smaller. For companies that are looking to offer new stock to the public, they must do it through the investment bank. These banks take the role of valuing the shares and selling them to the appropriate investor.
The equity markets have different types of stocks. They consist of preferred and common stock. The preferred stock is owned by investors that are first in line, in terms of claiming on the profits earned. They are divided into "prior preferred" and " convertible". The former is self-explanatory, it has more value and gives the holder the right to be involved in the business decisions. Convertible stocks give the owner a right to change it to common stock when they wish unless stated otherwise on the contract. Common equity can be obtained easily on the market and they don't give the owner any voting rights or the ability to interfere with business decisions. These stockholders are the last to be paid amongst equity holders.
Large institutional investors hire stock analysts to perform an analysis on the value or health of equity. They also take on the task of forming speculation on the future path of a stock. Fund managers are significant players in the market because they are known to purchase large amounts of equity. Their positions are so big that they move the price of the stock higher. In the equity market, we have indices. Indices are a combination of single stocks and the performance of an index reflects the prices of stocks that are present in the indices. Most countries have an index that is looked at by investors to gauge the health of the economy.
In the United States, thy have the Nasdaq, which comprises tech/growth stocks. They also have the Dow Jones industrial average, which gives us an insight into the businesses that are on the ground, mostly retailers. An investor is in the equity markets can take part in both the bull and bear markets. Bull markets are characterized by an uptrend in prices, whereas, bear markets are characterized by a downtrend in prices. When a participant buys a stock, they are anticipating making a profit when they sell it at a higher price. An investor who is shorting a stock is borrowing a stock they down own with a plan to buy it at a lower price.
Equity investors look at various factors to determine the future performance of a particular firm.
One of the factors is the market cap.
This is the value of all the shares that are available for that particular stock. When it is higher, it means that the business that issued the stock is more likely to have more value and has a less risk premium.
A risk premium is an indicator of the size of risk an investor will be exposed to when holding the equity.
When it is high it means the risk is high and when it's low the risk is low. Companies that are publicly traded provide quarterly and yearly reports of their revenues to the public.
This will able investors to make well-informed decisions. Analysts also take into consideration the " price to the ratio" of a company. This PE is different for different firms. Firms with lower PE indicate a higher risk of holding the stock. In contrast, those with are higher PE are perceived as having a lesser risk. This article will only cover these two but there are many ways to value a stock. Investing in equities has its own risk because if the company performs well, the compensation will be great, but if it has a poor run, the losses will also be shared by the investors.
In the past, we have had times where the equity market was experiencing a broader decline in prices and this caused an erosion in the portfolios of those who were holding positions in the market. The declines were either caused by a credit crunch, a pandemic or a failure of a systematically important financial institution. The highlights are a great depression, the financial crisis and recently the covid-19 pandemic.
This crisis resulted in the creation of policies and regulations that would ensure market normalisation occurs before the damage became severe. The monetary policy committee introduced the decrease of the interest rate during the declines. A lower interest rate provides capital for companies at a lower cost of borrowing, thus an increase in the stock market prices. When the economy is overheating and the stock market is pricing at very high levels (boom). The committee will hike rates to increase the cost of borrowing. Thanks for reading.
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