What is the ‘Stock Market’?
Also known as the equities market, a stock market is
a place where shares of publicly owned companies can
be bought and sold. Publicly traded shares can be
traded either through centralised exchanges or OTC
(over-the-counter). The stock market is essentially
a free economy market where companies can access
capital by offering part ownership to interested
investors who are basically outsiders. This is
beneficial for both investors and the underlying
companies.
For investors, the stock market offers a unique
opportunity to be part of an established or already
running business and to reap any of their resulting
rewards without the high risk of investing in a new,
unproven business, that has to contend with the
associated start-up costs, overheads and other
running costs and management. For the underlying
companies, the stock market allows them to access a
convenient source of capital to fund their growth or
expansion activities. This creates a win-win
situation for both parties.
But like any investment activity, there are also
risks involved. The amount of risk a trader incurs
depends entirely on the price of the stock held. If
the price of a stock increases, a trader will earn
profits if they sell their shares. On the other
hand, losses will be realised if the stock is sold
at a lower price than it was bought at. The extent
of profits or losses realised will depend on the
amount of stock that was initially bought, and of
course, how much the price of the stock rises or
falls.
How is the Stock Market Broken Down?
There are various segments of the stock market to
consider when entering into a purchase or interest
in the shares of a particular public company. The
stock market is divided into the primary market and
the secondary market.
Primary Market
The primary market is when new securities are created
or issued, and they then become available for
trading by individuals and institutions. Here,
securities are directly issued by the company that
seeks to raise capital to fund its long-term goals
and ambitions. The most common way companies
interact in the primary market is through an
IPO (Initial Public Offering) where
stocks are listed for the first time to trade in the
market. Companies can also engage in the primary
market through a Rights Issue
(raising money through existing shareholders) or a
Preferential Allotment (issuing
shares to a few shareholders at a predetermined
price).
Secondary Market
After the initial offering in the primary market, all
subsequent trading of securities takes place in the
secondary market between investors, with the
underlying company not involved. Trades are
facilitated by stock exchanges or by brokers who act
as intermediaries.
OTC Market
Also known as trading off-exchange, trading OTC
(over-the-counter) is an option for investors to buy
and sell stocks in a decentralised market. Trades
are conducted between two parties via a dealer
network, with a centralised exchange not involved.
Typically, the OTC market is for stocks or stock
prices not listed on a stock exchange. Decentralised
is where a transaction of buying or selling will
take place between two parties, such as the trader
and the broker. There
are generally no rigid conditions in an OTC market,
with trading being very flexible with as few
limitations as possible.
There are many reasons a company would want to list
on an exchange. Raising capital is the primary
motivation, but companies that get listed attain
many more benefits. Going public gives a company
massive publicity that can open up even more
business opportunities. A company can gain the
attention of diversified pools of investors ranging
from institutional investors to foreign investors.
This naturally leads to increased brand equity as
well. There is also the prestige of being a company
listed on a top stock exchange, as well as the
ability to attract top talent by offering
sought-after perks, such as stock options.
Process of Stock Market Listing
The process of listing a company differs from
exchange to exchange. But it will typically start
with filing a registration with a relevant
regulatory agency, such as the Securities Exchange
Commission (SEC) in the US. A company will do this
if it meets the conditions of the underlying stock
exchange they wish to get listed on, such as the
NYSE or NASDAQ. The next step will be to employ an
underwriter, which is an investment bank or a major
financial services company, to manage the sale of
shares.
An underwriter serves as a bridge that connects the
underlying company to investors as well as a risk
assessor. It is the underwriter that will be
responsible for drafting a prospectus, a document
that will attempt to entice investors to invest in
the underlying company. Listing on a stock market
also comes with some downsides. To start with, the
process of stock market listing is costly,
time-consuming and labour intensive.
As well, going public literally means that a company
becomes public property. There is increased scrutiny
and demands for accountability both by the public
and the relevant capital markets regulatory agency.
For founders and other early investors, there is the
risk of undervaluation as well as share dilution. It
is the underwriter(s) that determines the IPO price
by taking into account factors such as demand for
the stock, growth prospects, the company business
model and past industry equivalents.
After a company goes public, the share price is
determined by market forces of demand and supply.
There are different and varied factors that
influence stock prices including fundamental
factors, such as revenue and earnings per share;
technical factors, such as inflation, industry
performance, liquidity and trends;
and sentimental factors such as investor speculation
activity as well as reaction to political and
economic news releases and events.
The Stock Exchange
Also known as the bourse, the stock exchange is a
place where securities, such as stocks are bought
and sold. It is also a place that provides
facilities for issuing and redeeming financial
instruments, including income and dividend
payments. In addition to stocks, stock exchanges
list other assets, such as bonds, unit trusts, derivatives,
as well as pooled investment products such as exchange-traded
funds and stock
market indices.
The main Stock Exchanges
In most cases, companies will use their local stock
exchanges as a platform to go public. Here are some
of the major stock exchanges around the world, whose
assets are also available for trading at Nexioval.
Main Stock Exchanges
| Local Stock
Exchange |
Region
|
Public
Listing |
| New York Stock Exchange
|
New York, United States of
America |
|
| NASDAQ |
New York, United States of
America |
|
| London Stock Exchange |
London, England |
- UK100
- FTSE 250 Index
- FTSE 350 Index
- FTSE SmallCap Index
- FTSE All-Share Index
|
| Borsa Italiana |
Milan, Italy |
- ITALY_40
- FTSE Italia All-Share
- FTSE Italia Mid Cap
- FTSE Italia Small Cap
- FTSE AIM Italia
|
| Japan Exchange Group |
Tokyo, Japan |
|
| Hong Kong |
Central, Hong Kong |
|
| Frankfurt Exchange |
Frankfurt, Hesse, Germany
|
|
| Shanghai stock exchange
|
Shanghai, China |
- SSE 50 Index
- SSE 180 Index
- SSE 380 Index
- SSE Composite Index
|
| Euronext |
Amsterdam, Netherlands |
|
Investing in Stocks
There are two fundamental strategies when investing
in stocks: value investing and growth investing. The
two strategies complement each other and applying
them to individual stocks can help investors
maintain a well-balanced portfolio.
Value Investing
This is a strategy that aims to identify stocks that
are undervalued in the market. Value investors
actively seek companies that they believe are
underpriced in the market, with the hope that sooner
or later they will be priced accordingly. These can
be stocks of companies priced below similar
companies in the same industry or companies whose
business models carry less risk in their operating
markets. Value stocks are considered a bargain as
well as relatively safe for investors over the long
run.
Growth Investing
Growth investing involves identifying stocks of
companies that have performed admirably in the
recent past and they are expected to grow faster
than other companies. Growth can be in terms of
revenue, cash flow, or profit. It is important to
note that this growth is expected, but not
guaranteed. Growth stocks have a higher ceiling in
terms of price appreciation, but they are naturally
riskier and more volatile.
Price-Earnings Ratio
Better known as the P/E Ratio, this ratio is used to
value a company by measuring its current share price
relative to its earnings per share.
Here is how the price-earnings ratio is calculated:
By taking the stock price of the company and dividing
it by is earnings per share (EPS) = market value per
share. The P/E ratio is a dollar amount that a
trader can expect to invest in a company in order to
receive one dollar of that company’s earnings.
Dividend-Paying Stock
Dividend stocks are companies that pay out regular
dividends to shareholders. Dividends are a share of
profits distributed directly to shareholders.
Companies that pay out dividends regularly to
investors are typically more established with proven
and sustainable business models. Dividends are
usually paid out quarterly, which means that they
can be a regular source of income for investors.
Shares Trading
Swing Trading
Swing trading is a popular style for trading stocks.
A swing trader attempts to earn a profit from a
price movement that is expected to happen in the
short to medium term. Due to its short-term nature,
swing traders typically utilise technical
analysis methods to pick out ideal entry and
exit price points in the market.
Day Trading
Day
trading is a trading style where financial
assets, such as stocks, commodities, indices or
currencies, are bought and sold within the same
day. The difference between swing trading and day
trading is simply the holding period. When day
trading, all trade positions are liquidated strictly
on the same day. No trade positions are left
overnight. Naturally, day trading carries a higher
level of risk and can result in higher trading costs
due to the amount of trading activity done within a
short period.
Trading Stocks CFDs with Nexioval
Nexioval has simplified stock trading for investors.
There are numerous stocks drawn from several global
exchanges available for trading. When trading stock CFDs
with Nexioval, you are trading contracts for
differences, which means that you get the
chance to trade the price movement of underlying
stocks without necessarily owning them.
Nexioval offers leveraged
trading of up to on stocks
and traders can enhance their trading activity by
utilising handy trading tools and resources such as
the Economic
Calendar, Trading
Central, Nexioval™,
and AvaSocial. Nexioval
is also a globally
regulated broker that provides top trading
services through multiple advanced trading
platforms.
Additionally, Nexioval offers multilingual support to
ensure that traders have the necessary support and
assistance for their trading activities.
Stock Market Main FAQs
-
What
is stock market
volatility?
All investing forms come with
risks. Volatility is one of
the risks of trading stocks.
Volatility is characterised
by choppy price swings and
can particularly be
witnessed in individual
stocks during news or events
such as an earnings release.
Volatility can increase the
risk of losses but it
typically evens out over
time. This means that a cure
for volatility is to hold
stocks over a longer period
and to ride both the ups and
downs in the market.
-
Where
is the stock market
located?
Different markets are located
in different places, and in
some instances, there is no
physical location for the
market or index. For
example, the NYSE is
physically located in New
York City at 11 Wall Street,
and you can actually go
there and see the floor
traders. By contrast, the
Nasdaq is fully electronic,
and while it has its
headquarters in New York
City, there is no trading
floor where you can go to
see the open outcry form of
trading. Nearly every
country in the world has one
or more stock markets, and
most have physical locations
but have been increasingly
migrating towards electronic
trade.
-
How
are prices set at the stock
market?
Most stock markets work
through an auction process,
with buyers placing bids for
the price they are willing
to pay for a stock, and
sellers setting an ask price
for how much they are
willing to sell for. When
the two prices meet, a trade
is conducted, and shares can
exchange hands. In the past
all of these trades were
made on stock market floors
or pits, using an open
outcry system where the
market makers would yell, or
cry out the prices at which
shares could be bought or
sold. That has evolved into
an electronic auction
system, which is good since
stock markets today consist
of millions of individuals,
all of whom have their own
ideas of what a stock is
worth.
Join thousands of
clients that enjoy the benefits of being part of
the Nexioval family and start trading with
confidence.