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    Stock Market

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    Stock Market

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    hermaepajela03
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    STOCK-MARKET

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    Stock Market

    Uploaded by

    hermaepajela03

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    © All Rights Reserved
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    of 4

    STOCK MARKET

    What Is the Stock Market?


    The term stock market refers to several exchanges in which shares of
    publicly held companies are bought and sold. Such financial activities are
    conducted through formal exchanges and via over-the-counter (OTC)
    marketplaces that operate under a defined set of regulations.

    The stock market allows buyers and sellers of securities to meet,


    interact, and transact. The markets allow for price discovery for shares of
    corporations and serve as a barometer for the overall economy. Buyers and
    sellers are assured of a fair price, high degree of liquidity, and transparency
    as market participants compete in the open market.

    How the Stock Market Works


    Stock markets provide a secure and regulated environment where
    market participants can transact in shares and other eligible financial
    instruments with confidence, with zero to low operational risk. Operating
    under the defined rules as stated by the regulator, the stock markets act
    as primary markets and secondary markets.6

    As a primary market, the stock market allows companies to issue and


    sell their shares to the public for the first time through the process of
    an initial public offering (IPO). This activity helps companies raise necessary
    capital from investors.

    A company divides itself into several shares and sells some of those
    shares to the public at a price per share. To facilitate this process, a
    company needs a marketplace where these shares can be sold and this is
    achieved by the stock market. A listed company may also offer new,
    additional shares through other offerings at a later stage, such as
    through rights issues or follow-on offerings. They may even buy
    back or delist their shares.

    Investors will own company shares in the expectation that share value
    will rise or that they will receive dividend payments or both. The stock
    exchange acts as a facilitator for this capital-raising process and receives a
    fee for its services from the company and its financial partners. Using the
    stock exchanges, investors can also buy and sell securities they already own
    in what is called the secondary market.

    What Are the Functions of a Stock Market?


    The stock market ensures price transparency, liquidity, price
    discovery, and fair dealings in trading activities.

    The stock market guarantees all interested market participants have


    access to data for all buy and sell orders, thereby helping in the fair and
    transparent pricing of securities. The market also ensures efficient matching
    of appropriate buy and sell orders.7

    Stock markets need to support price discovery where the price of any
    stock is determined collectively by all of its buyers and sellers. Those
    qualified and willing to trade should get instant access to place orders and
    the market ensures that the orders are executed at a fair price.
    Traders on the stock market include market
    makers, investors, traders, speculators, and hedgers. An investor may buy
    stocks and hold them for the long term, while a trader may enter and exit a
    position within seconds. A market maker provides necessary liquidity in the
    market, while a hedger may trade in derivatives.

    How Stock Markets Are Regulated


    Most nations have a stock market, and each is regulated by a local
    financial regulator or monetary authority, or institute. The SEC is the
    regulatory body charged with overseeing the U.S. stock market.

    The SEC is a federal agency that works independently of the


    government and without political pressure. The mission of the SEC is stated
    as “protecting investors, maintaining fair, orderly, and efficient markets, and
    facilitating capital formation.”

    Companies listed on the stock market exchanges are regulated, and


    their dealings are monitored by the SEC. In addition, the exchanges set
    certain requirements such as mandating timely filing of quarterly financial
    reports and instant reporting of relevant corporate developments, to ensure
    that all market participants are equally informed.

    Failure to adhere to the regulations can lead to suspension of trading


    and other disciplinary measures.

    What Is the Significance of the Stock Market?


    The stock market is a component of a free-market economy. It allows
    companies to raise money by offering stock shares and corporate bonds and
    allows investors to participate in the financial achievements of the
    companies, make profits through capital gains, and earn income
    through dividends. The stock market works as a platform through which
    savings and investments of individuals are efficiently channeled into
    productive investment opportunities and add to the capital formation and
    economic growth of the country.

    What Is an Alternate Trading System?


    Alternative trading systems are venues for matching large buy and
    sell transactions and are not regulated like exchanges. Dark pools and many
    cryptocurrency exchanges are private exchanges or forums for securities
    and currency trading and operate within private groups.

    Who Helps an Investor Trade on the Stock Market?


    Stockbrokers act as intermediaries between the stock exchanges and the
    investors by buying and selling stocks and portfolio managers are
    professionals who invest portfolios, or collections of securities, for
    clients. Investment bankers represent companies in various capacities, such
    as private companies that want to go public via an IPO or companies that
    are involved in pending mergers and acquisitions.

    Stock Analysis
    What is Stock Analysis?

    A method that an investor or trader uses to evaluate and investigate


    an investment or the stock market. Stock analysis refers to the method that
    an investor or trader uses to evaluate and investigate a particular trading
    instrument, investment sector, or the stock market as a whole. Stock
    analysis is also called equity analysis or market analysis. Investors or traders
    make buying or selling decisions based on stock analysis information.

    Stock analysis helps traders to gain an insight into the economy, stock
    market, or securities. It involves studying the past and present market data
    and creating a methodology to choose appropriate stocks for trading. Stock
    analysis also includes the identification of ways of entry into and exit from
    the investments.

    Types of Stock Analysis

    Stock analysis can be grouped into two broad categories:

    1. Fundamental Analysis

    The fundamental stock analysis method involves the evaluation of a business


    at a basic financial level. Investors use fundamental analysis to determine
    whether the current price of a company’s stock reflects the future value of
    the company.

    Fundamental analysis uses different factors such as the current economic


    environment and finances of the company to estimate its stock value.
    Different key ratios are also used to determine the financial health and
    understand the true value of a company’s stock.

     Earnings per share (EPS) – The EPS is useful when companies


    operating in the same industry need to be compared. A company’s EPS
    indicates its profitability; hence, traders consider an increasing EPS a
    good sign. The higher the value of EPS, the more the company shares
    are worth buying.

     Price to Earnings ratio (P/E) – The P/E ratio indicates how much
    investors are willing to pay for the earnings of a company. A higher P/E
    value could mean an overvalued stock. Or, it could imply that the
    market is expecting the company to perform extremely well over time.
    On the other hand, a low P/E value is seen as unfavorable by the
    market.

     Price to Earnings to Growth ratio (PEG) – The PEG ratio helps to


    determine the value of a company’s stock while considering the
    earnings growth of the company. The PEG ratio, along with the P/E
    ratio, can help obtain a clearer picture of a company’s stock than the
    P/E value alone.

     Price to Book ratio (P/B) – The P/B ratio is used to compare the
    market value of a company with its book value. It seeks the value that
    the stock market places on a company’s stock relative to the book
    value of the company. A company with sound financial health will trade
    for more than its book value since investors will consider the
    company’s future growth while pricing the stocks.
     Return on Equity (ROE) – It measures how effectively a company
    uses its assets for producing earnings. A high ROE implies that a
    company squeezes out greater profits with available assets. Hence,
    with all other things equal, it will be better to invest in high ROE
    companies in the long run.

     Dividend Payout Ratio – It measures the percentage of the


    company’s earnings paid to shareholders or owners. The earnings of
    the company, which are not passed on to the shareholders, are used to
    pay off debts, reinvest in business operations, or are retained for future
    use
    2. Technical Analysis

    The technical analysis method involves examining data generated through


    market activities, such as volume and prices. Analysts following such a type
    of stock analysis use technical indicators and tools like charts and oscillators
    to identify patterns that can indicate future price trends or direction.

    Technical analysts examine the historical trading data of a security and


    estimate the future move of the security. It is frequently used for forex and
    commodities. The technical analysis is based on the following assumptions:

     The market knows it all. Technical analysis assumes that the


    market price of a stock reflects all that has or can affect a company.
    Technical analysts consider that all the factors affecting the company
    are priced into the security.

     Price follows a trend. It implies that once a trend is established,


    future prices tend to follow the direction of the trend. Such an
    assumption is the basis of many strategies for technical trading.

     History is likely to be repeated. History repeats itself mainly


    concerning price movement. Market psychology causes price
    movements to repeat. Technical analysis involves using chart patterns
    to analyze the movements in the market and study trends. Charts that
    have been used for over 100 years are still relevant since price
    movement patterns are often repetitive.

    References:
    https://corporatefinanceinstitute.com/resources/capital-markets/stock-
    analysis/
    https://www.investopedia.com/terms/s/stockmarket.asp

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