The stock market is the market for the trading of
company stock, both those securities listed on a stock exchange
as well as those only traded privately.
Although common, the term 'the stock market' is a somewhat abstract
concept for the mechanism that enables the trading of company stocks.
It is also used to describe the totality of all stocks, especially
within one country, for example in the phrase "the stock market
was up today", or in the term stock market bubble.
It is distinct from a stock exchange, which is a
corporation in the business of bringing buyers and sellers of stocks
together. For example, 'the stock market' in the United States includes
the trading of stocks listed on the NYSE, NASDAQ, and Amex, and
also on the OTCBB and Pink Sheets.
Participants in the stock market range from small private investors
to large hedge fund traders, who can be based anywhere. Their orders
end up with a professional at the stock exchange, who executes the
Many years ago, worldwide, buyers and sellers were individual investors,
such as wealthy businessmen. Over time, markets have become more
"institutionalized"; buyers and sellers are largely institutions
(e.g., pension funds, insurance companies, mutual funds, investor
groups, and banks). The rise of the institutional investor has brought
with it an increase of professional diligence which has tended to
regulate the market.
The ownership of stocks in markets around the world
varies, for example the majority of the shares in the Japanese market
are held by financial companies and industrial corporations, whereas
stock in the USA or the UK are broadly owned, also by individual
History of the Stock Market
In 12th century France the courratier de change were concerned with
managing and regulating the debts of agricultural communities on
behalf of the banks. Because these men also traded with debts, they
could be called the first brokers.
In late 13th century Bruges commodity traders gathered
inside the house of a man called Van der Bourse, and in 1309 they
institutionalized this until now informal meeting and became the
"Bruges Bourse". The idea quickly spread around Flanders
and neighbouring counties and "Bourses" soon opened in
Ghent and Amsterdam.
In the middle of the 13th century Venetian bankers
began to trade in government securities. In 1351 the Venetian government
outlawed spreading rumors intended to lower the price of government
funds. Bankers in Pisa, Verona, Genoa and Florence also began trading
in government securities during the 14th century. This was only
possible because these were independent city states not ruled by
a duke but a council of influential citizens.
The Dutch later started joint stock companies, which
let shareholders invest in business ventures and get a share of
their profits - or losses. In 1602, the Dutch East India Company
issued the first shares on the Amsterdam Stock Exchange. It was
the first company to issue stocks and bonds.
International Stock Markets
The Bombay Stock Exchange in India.The first stock exchange to trade
continuously was Amsterdam's Beurs, in the early 17th century. The
Dutch "pioneered short selling, option trading, debt-equity
swaps, merchant banking, unit trusts and other speculative instruments,
much as we know them" (Murray Sayle, "Japan Goes Dutch,"
London Review of Books XXIII.7, April 5, 2001).
There are now stock markets in most developed and
developing economies, with the world's biggest markets being in
the United States, Canada, Europe, Japan, India and the People's
Republic of China.
Stock market index
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 S&P, the FTSE and the Euronext indices.
Such indices are usually market-capitalisation weighted.
Financial innovation has brought many new financial instruments
of which the pay-offs depend on the prices of stocks. Examples are
stock options, equity swaps, single-stock futures, etc. These are
traded on futures exchanges such as Euronext.liffe (which are distinct
from stock exchanges), or traded over-the-counter. As these products
are only derived from stocks, and are not securities, they are usually
considered to be traded on the derivatives markets, rather than
the stock market.
Stock that a trader does not actually own may be traded using short
selling and Margin buying.
In short selling, the trader borrows stock (usually from his brokerage
which holds its clients' shares or its own shares on account to
lend to short sellers) then sells it on the market, hoping for the
price to fall. The trader eventually buys back the stock, making
money if the price fell in the meantime or losing money if it rose.
Exiting a short position by buying back the stock is called "covering
a short position".
In margin buying, the trader borrows money (at interest) to buy
a 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 the trader owns outright, it can be
a maximum of a certain percentage of those other stocks' value.
Other rules may include the prohibition of free-riding: 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.
Main article: Thomson Financial league tables
Global issuance of equity and equity-related instruments totaled
$505 billion in 2004, a 29.8% increase over the $389 billion raised
in 2003. Initial public offerings (IPOs) by US issuers increased
221% with 233 offerings that raised $45 billion, and IPOs in Europe,
Middle East and Africa (EMEA) increased by 333%, from $ 9 billion
to $39 billion.
Investment strategies - Stock valuation
One of the many things people always want to know about the stock
market is, "How do I make money investing?" There are
many different approaches, two basic methods are classified as either
fundamental analysis or technical analysis. Fundamental analysis
refers to analyzing companies by their financial statements. One
example of a fundamental strategy is the CANSLIM method, which aims
at choosing small start-up companies in hopes of a financial explosion.
Technical analysis studies price actions in markets through the
use of charts and quantitative techniques to attempt to forecast
price trends regardless of the company's financial prospects.
Additionally, many choose to invest via the index
method. In this method, one holds a market capitalization-weighted
portfolio consisting of the entire stock market or some large index
within the stock market (such as the S&P 500 or Wilshire 5000).
The aim of this strategy is not to try to guess which stocks will
appreciate faster than others, but rather to maximize diversification,
minimize taxes from trading, and ride the general trend of the stock
market (which has averaged nearly 12%/year nominally since World
War II in the United States).
Finally, one may trade based on inside information.
However, this is illegal in most jurisdictions.