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Stock Market

Stock Market
A stock market is a market for the trading of publicly held company stock and associated financial instruments (including stock options, convertibles and stock index futures). Traditionally such markets were open-outcry where trading occurred on the floor of an exchange. These days increasingly the markets are cyber-markets with buying and selling occurring via online real-time matching of orders placed by buyers and sellers.

Many years ago, worldwide, buyers and sellers were individual investors and businessmen. These days markets have generally become "institutionalized"; that is, buyers and sellers are largely institutions whether pension funds, insurance companies, mutual funds or banks. This rise of the institutional investor has brought growing professionalism to all aspects of the markets.

The movements of the prices in a market or section of a market are captured in price indices called Stock Market Indices, of which there are many, e.g., the Standard and Poors Indices and the Financial Times Indices. Such indices are usually market-capitalisation weighted.

There are stock markets in most developed economies, with the world's biggest markets being in the USA, Hong Kong, Japan, and Europe. There are global stock-market indices that, because they delineate the global universe of stock opportunities, shape the choices and distribution of funds of institutional investors. The character of markets around the world varies, for example with the majority of the shares in the Japanese market being closely held (by financial companies and industrial corporations) compared with the structures of ownership in the USA or the UK.

Derivative instruments

An option is a contract that gives an investor the right to buy or sell a security such as a stock or index at an agreed-upon price during a specified period with no obligation.

A future is a contract that gives an investor the obligation to buy or sell a security at an agreed-upon price during a specified period.

An option buyer who believes that the price of a stock will rise can enter a contract known as a "call" which gives him the right to buy another's stock at a date three to nine months in the future. He pays a fee to the owner of the stock and will forfeit it if he does not exercise the option. But if the stock price rises enough, he can exercise the option and buy the stock at the fixed price, and then resell it for a higher price to recover his premium and make a profit.

Someone who thinks that the price of a stock is about to fall can buy a "put" contract with someone else who agrees to buy the stock at a fixed price. He does not have to own the stock at the time the contract is made. Again, he pays a premium. But if the stock price does fall, he can buy the stock at a low price on the market and then sell it for an agreed-upon higher price.

Option contracts are traded like stocks, often by people who have no intention of exercising them. Although there is a guaranteed loss of the premium when an option is not exercised, there is enormous potential profit from trading the option itself--its price rises or falls with the price of the underlying stock. Someone who has a guaranteed buyer for 10,000 shares of stock at $35 has a contract of enormous value if the price of the stock falls to $10. He may not want to invest $100,000 to fulfill the contract and earn $350,000. But someone will want to buy the contract from him for more than he paid for it.

There are also two sorts of trades involving cash or stock not actually owned, short selling and margin buying. In short selling, someone sells stock that they don't actually own, hoping for the price to fall. They must eventually buy back the stock. In margin buying, someone borrows money to buy the stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks, it can be at only a certain percentage of those other stocks' value. Other rules include a prohibition of freeriding; that is, putting in an order to buy stocks without paying initially, and then selling them and using part of the proceeds to make the original payment.

Stock Market Regulation

Before 1929, there were few regulations governing trades. In the 1920s there were many abuses in the sale and trading of securities. State Blue Sky laws were easy to evade by making security sales across state lines. After holding hearings on the abuses Congress passed The Securities Act of 1933. It regulates the interstate sales of securities and made it illegal to sell securities into a state without complying with the state law. It requires companies which want to sell securities publicly to file a registration statement with the Securities & Exchange Commission. The registration statement provides a lot of information about the company and is a matter of public record. The SEC does not approve or disapprove the issue, but lets the statement "become effective" if it provides sufficient required detail, including risk factors. Then the company can begin selling the issue, usually through investment bankers.

The next year Congress passed the Securities Exchange Act of 1934 which regulates the secondary market trading of securities. Initially it applied only to stock exchanges and listed companies as its name implies. In the late 1930s it was amended to provide regulation of the over-the-counter market also. In 1964 it was amended to apply also to companies traded in the over-the-counter market.

Performance

National stock market index price performance during 2004

Americas

- Mexico (Bolsa index) +44 percent
- Brazil (Bovespa) +16 percent
- New York (S&P 500) +8 percent
- New York (Nasdaq composite) +7 percent
- New York (Dow Jones Industrial Average) +3 percent
- Toronto (TSX)

Asia

- Indonesia (Jakarta Composite) +42 percent
- Philippines (PHS Composite) +24 percent
- Malaysia (KLSE Composite) +14 percent
- Hong Kong, China (Hang Seng) +13 percent
- India (Bombay Sensex 30) +10 percent
- Tokyo, Japan (Nikkei 225) +5 percent
- Taiwan (TAIEX) +2 percent
- Shanghai, China (SSE Composite) -13 percent

Europe

- Ukraine (KAC-20) +251 percent
- Romania (BET-10) +100 percent
- Budapest, Hungary (BUX) +54 percent
- Czech Republic (PX 50) +54 percent
- Reykjavik, Iceland (ICEX Main) +53 percent
- Oslo, Norway (OSE All Share) +39 percent
- Warsaw, Poland (WIG) +26 percent
- Denmark (KAX All Share) +21 percent
- Stockholm, Sweden (SAX All Share) +17 percent
- Madrid, Spain (IBEX-35) +16 percent
- Milan, Spain (MIB30) +16 percent
- London, UK (FTSE) +7 percent
- Frankfurt, Germany (DAX 30) +7 percent
- Paris, France (CAC 40) +7 percent
- Russia (RTS index) +5 percent
- Helsinki, Finland (HEX All Share) +4 percent
- Zürich, Switzerland (Swiss Market Index) +3 percent
- Amsterdam, Netherlands (Exchanges Index) +3 percent

Finding related topics

- Stock exchange
- Stock index

Lists

- List of accounting topics
- List of economics topics
- List of economists
- List of finance topics
- List of management topics
- List of marketing topics
- List of stock market indices

External links

- Oldest share - the oldest share in the world (VOC 1606, traded in Amsterdam)
- Stock market investment blog - a blog about investing in the stock market
- Compare commissions of online discount stock brokerages

[[Category:Stock market|*]]
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This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Stock Market".  

Possible variations of this topic:

Stock
:See stock (disambiguation) for other meanings of the term stock

A stock, also referred to as a share, is commonly a share of ownership in a joint stock company.

History

The first company that issued shares is considered to be the Dutch East India Company, in 1602.

Ownership

The owners and financial backers of a company may want additional capital to invest in new projects within the company. If they were to sell the company it would represent a loss of control over the company.

Alternatively, by selling shares, they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally a share in the ownership of the company, including the right to a fraction of the assets of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends. However, the original owners of the company often still have control of the company, and can use the money paid for the shares to grow the company.

In the common case, where there are thousands of shareholders, it is impractical to have all of them making the daily decisions required in the running of a company. Thus, the shareholders will use their shares as votes in the election of members of the board of directors of the company. However, the choices are usually nominated by insiders or the board of the directors themselves, which over time has led to most of the top executives being on each other's boards. Each share constitutes one vote (except in a co-operative society where every member gets one vote regardless of the number of shares they hold). Thus, if one shareholder owns more than half the shares, they can out-vote everyone else, and thus have control of the company.

Voting rights

However it should be noted that although owning 51% of shares does mean that you own 51% of the company and that you have 51% of the votes, the company is considered a legal person, thus it owns all its assets, (buildings, equipment, materials etc) itself. A shareholder has no right to these without the company's permission, even if they own almost all the shares. This is important in areas such as insurance, which must be in the name of the company not the main shareholder.

Means of financing

Financing a company through the sale of stock in a company is known as equity financing. Alternatively debt financing can be done to avoid giving up shares of ownership of the company.

Trading

Shares of stock are usually traded on a stock exchange, where people and organisations may buy and sell shares in a wide range of companies. A given company will usually only trade its shares in one market, and it is said to be quoted, or listed, on that stock exchange. However, some large, multinational corporations are listed on more than one exchange. They are referred to as inter-listed shares.

Types

There are several types of shares, including common stock, preferred stock, treasury stock, and dual class shares. Preferred stock, sometimes called preference shares, have priority over common stock in the distribution of dividends and assets, and sometime have enhanced voting rights such as the ability to veto mergers or aquistions. A dual class equity structure has several classes of shares (for example Class A, Class B, and Class C) each with its own advantages and disadvantages. Treasury stock are shares that have been bought back from the public.

Derivatives

A stock option is the right (or obligation) to buy or sell stock in the future at a fixed price. Stock options are often part of the package of executive compensation offered to key executives. Some companies extend stock options to all (or nearly all) of their employees. This was especially true during the dot-com boom of the mid- to late- 1990s, in which the major compensation of many employees was in the increase in value of the stock options they held, rather than their wages or salary. This is still a major method of compensation for CEO's.

The theory behind granting stock options to executives and employees of a corporation is that, since their financial fortunes are tied to the stock price of the company, they will be motivated to increase the value of the stock over time.

See also

Equity investment, American Depositary Receipt, Stock valuation, Share prices''

External links

- oldest share - the oldest share in the world (Voc 1606)


Category:Stock market

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This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Stock".  

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