The stock market (also known as the equities market), is a market whereby shares of companies are issued and traded. Also referred to as the share market, the stock market is a centralised and highly regulated market where stocks, bonds, mutual funds, derivatives and other securities are bought and sold and the transfer of funds is facilitated from a buyer to a seller. Market participants include stock brokers, traders and investors, dealers as well as market makers.show more
There are two kinds of stock markets – primary and secondary markets. A company participates in the primary market to raise capital whereby investors buy shares directly from the company through an Initial Public Offering (IPO). These primary market shares are then traded in the secondary market. Secondary market transactions are traded at market prices between investors with no participation from the issuing company.
With a global size of greater than $69 trillion across 60 major stock exchanges (2016), 87% of the world’s stock market capitalization is concentrated in just 16 exchanges. The largest stock market – the New York Stock Exchange (NYSE) – represents $18.5 trillion in market capitalization, or about 27% of the total market for global equities. And by most recent estimates, there are approx. 630,000 companies traded publicly on stock exchanges throughout the world.
The dealings of the Frankfurt Stock Exchanged (established in 1585), date back to the 11th century – is considered the birthplace of currency exchange rates while modern securities trading can be traced to 1602 when the Amsterdam Stock Exchange was established by the Dutch East India Company (VOC) to facilitate primary dealings in its printed stocks and bonds and later as a secondary market to trade its shares. Subsequently renamed, the Amsterdam Bourse (exchange) was the first recognised exchange to formally trade (including short selling) securities.
Later in 1698, a group of rowdy London stockbrokers – who were barred from the old commercial center known as the Royal Exchange, reportedly for their ill manners – moved their dealings (exchanging of shares) to Jonathan’s Coffee House creating and operating a quasi stock marketplace. It has been attributed to broker John Castaing, who started posting regular lists of stock and commodity prices – as the mark of the beginning of what is now the London Stock Exchange.
In 1790, the Philadelphia Stock Exchange introduced trading to America quickly followed by the New York Stock Exchange (NYSE) established by a group of twenty four enterprising supply stock brokers who signed the Buttonwood Agreement – a constitution document establishing trading rules. From its’ early beginnings, NYSE is titled as the world’s largest stock market.
Today stock markets are established in virtually every developed and most developing economies, with the world’s largest markets found in the United States, United Kingdom, Japan, Hong Kong, India, China, Canada, Germany (Frankfurt Stock Exchange), France, South Korea and the Netherlands.
A share, also known as a stock or equity, is a single unit of ownership or investment in a company. That single share entitles its holder (the shareholder) to an equal claim on the distribution of company profits (if any) in the form of dividends.
There are two major types of shares – (1) ordinary shares (or common stock); which entitles the shareholder to share in the earnings of the company (as and when they occur), and to vote at the company’s annual general and other official meetings, and (2) preference shares (or preferred stock); which entitles the shareholder to a fixed periodic income (interest) but generally do not provide voting rights.
A shareholder is any person, company or other institution that owns at least one share of a private or publicly traded company’s stock. Depending on the type of share held, shareholders are granted privileges including the right to vote on matters such as elections of the board of directors, the right to a share in distributions of the company’s income (through dividends), the right to purchase new shares issued by the company and the right to a company’s assets in the event of liquidation.
Shareholders are issued a share certificate to confirm their shareholding.
Determined by supply and demand, the share price (or stock price) is the price of a single share in a company.
That is, if demand is greater than the supply (buyers are more than the sellers), the share price will increase. Conversely, if demand is less than the supply (buyers are less than the sellers), the share price will decrease. There are many factors affecting demand and supply including market volatility, economic conditions, company earnings, dividend announcements, etc.
On the exchange, the share price is displayed as the bid and the ask price. The bid price the price a buyer is willing to pay for the stock while the ask price is the price the seller is willing to accept. The difference between the bid and the ask price is the bid-ask spread. The ‘last’ price represents the share price at which the last trade occurred and is considered the current market price of a share.
Stocks are often categorised according to the type of company, the company’s value and the rate of return expected from the company.
Growth stocks have earnings that are increasing at a faster rate than their industry’s average. These are usually in new or fast-growing industries and rather than pay a dividend, growth stock company’s prefer to retain earnings for reinvestment in capital projects. Growth stocks are chosen by investors based on the potential for capital gains, not dividend income.
Value stocks tend to trade at a lower price relative to their intrinsic value. That is, these are typically stocks whose price trades lower than its fundamentals (dividends, earnings and sales) are and is therefore considered undervalued. Common characteristics of value stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio.
Income stocks are typically not anticipated to appreciate greatly in share price but rather pay regular (and increasing) dividends. Income stocks offer a higher yield rather than capital gains.
Blue Chip Stocks
Blue-chip stocks tend to trade at a premium price. These are stocks of market leaders in their established industries that generate repetitive, solid earnings, increasing dividends and revenues. Blue-chip stock company’s are known to have financial strength, near impenetrable competitive advantages and lower levels of price volatility over long sustained periods as well as the ability to endure difficult and unstable market conditions.
Penny stocks trade at a relatively low price and market capitalization and typically are considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure.
A company with share capital must keep shareholder register to record the details of every current shareholder including each shareholders name, address and number of shares held as well as share type (or class).
A company may have many different types of shares that come with different conditions and rights. There are three main types of shares: ordinary shares, preference shares, or redeemable shares.
Ordinary shares – also known as Fully Paid Ordinary or FPO shares – are standard shares with no preferred rights or restrictions. Denoted by the abbreviation ‘ORD’ and defined in a company’s articles of association, ordinary shares have a low priority for company assets (in the event of a wind-up notice) and receive dividends at the discretion of the company’s management. Ordinary shares are entitled to one vote per share.
Preference shares (PRF)– or preferred stock – are shares which provide the shareholder priority or preference over ordinary share holders regarding the payment of dividends and should the company become insolvent, proceeds from the sale of company assets. Dividend payments paid to preferred shareholders are typically fixed at a predefined rate and may be cumulative (if not paid one period, then accumulates to the next dividend payment period) or non-cumulative. Preference shares hold no voting rights. Terms of the preferred stock are described in the articles of association.
Often regarded as a form of equity funding, redeemable shares are issued on the terms that they may be redeemed by the company at a future date, either by payment out of profits (which would otherwise be available for dividends) or from the proceeds of a new share issuing. The date for redemption may be fixed or at the discretion of the company’s management. The redemption price, listed in the articles of association, is often the same as the issue price.
A dividend is a payment made by a company, to its shareholders as a distribution of company earnings. Derived from the Latin word ‘dividendum’ (thing to be divided), a dividend can be issued as a cash payment, shares of stock or other property at the discretion of the company’s board of directors and according to the class of its shareholdings.
Allocated as a fixed amount per share, a shareholder will receive a dividend in proportion to their shareholding at a date which is either fixed (fixed schedule dividend) or special (a dividend payment made to shareholders outside the fixed dividend schedule).
When trading stocks and according to the dividend schedule, a share may be traded either cum dividend or ex-dividend.
Cum dividend means ‘with dividend’. A stock is classified cum dividend when the buyer of a stock is entitled to receive the dividend that has been declared (but not yet paid). A stock will trade cum dividend up until the ex-dividend date.
Ex-dividend (or without dividend) refers to the period of time between the announcement and the payment of the dividend. During this time, a stock classified ex-dividend status denotes the dividend belonging to the seller rather than the buyer. The ex-dividend date is the day in which any shares bought or sold are no longer entitled to the declared dividend. After a stock goes ex-dividend, the share price typically falls.
Dividends from companies are typically distributed to investors after companies have paid tax on their profits. Dividend imputation refers to a taxation system where by shareholders receive a tax credit on the dividend received to reduce the income tax payable amount (on the distribution). Taxation treatment of dividends is dependant on the regulatory framework of the resident country.