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Have you ever wondered what the stock market really is? Simply put, it’s a marketplace where people buy and sell ‘pieces’ of companies. The ‘pieces’ in which a company is divided are called stocks or shares. When you buy a share, you own a small portion of the firm.
The stock market is the main financial venue where investing happens or an assemblage of marketplaces where securities like stocks and bonds are bought and sold. The stock market includes stock exchanges where the shares of public companies are listed for sale and markets where other types of securities are traded. The biggest stock exchange is the New York Stock Exchange (NYSE) and its listed companies have a market capitalization of $23 trillion.
Check out a breakdown of the stock market in this video here
Investors become aware of the price changes of the stocks through market indexes. Investors or mutual funds use price movements as benchmarks for performance comparisons and making investment-related decisions. It is important for diversification purposes as investing in index is better than holding individual stocks. Lastly, it can help to boost emerging markets with growth potential like the FTSE 100, in the UK. Some of the most important market indexes are S&P 500 (USA), Dow Jones Industrial Average (USA), Nasdaq Composite (USA) or NIFTY 50 (India).
Stock markets need refined systems to operate efficiently and at the lowest cost possible. There are stockbrokers who act like middlemen and facilitate investment dealings for their clients. The term broker is commonly used for stock traders, investment brokers, commodities brokers, and bond brokers. A broker can act as a financial advisor to help clients build their financial portfolios . It is possible to operate as an independent broker; however, usually, they pool in brokerages.
Even though it is not possible to predict accurately how the prices of the stocks will fluctuate, brokers use their expertise and past information to try to anticipate the movement of the stocks. Then, they decide whether to sell or buy and how to balance their clients’ portfolios.
Almost all of the trading is done electronically, so the share “certificate”, which is a legal proof of ownership, will appear as an entry in said account with the stockbroker or online investment platform.
Some of the factors influencing the stock market are:
Industrial production. The relationship between the equity market and industrial activity is primarily observed over the long term. This is because stock market prices reflect the assessment of future cash flows over extended periods.
Inflation. Inflation, or rising prices, can hurt the stock market. When prices go up, it’s harder for companies to make profits, and people may spend less. This can lead to lower stock prices because investors worry about the impact on companies’ earnings and consumer spending.
Risk Premia. It is the extra return investors demand for taking on higher risk. In the stock market, investors expect higher returns for investing in riskier assets like stocks compared to safer options like bonds. Changes in risk premia can influence stock prices: if investors become more risk-averse, they may demand higher premia, leading to lower stock prices. Conversely, decreased risk aversion may lead to lower premia and higher stock prices.
The Term Structure. Term structure refers to the relationship between the interest rate of bonds with different maturities. Changes in the term structure, particularly in the long-term interest rates, can affect investor sentiment and borrowing costs for companies, influencing stock prices and investment decisions.
Oil prices. An increase in oil prices means that transportation costs will increase, which will also increase the costs that the companies have to bear. This implies a reduced profit margin and a slower rate of economic growth, which will increase inflation.
Every stock market is tightly regulated by financial watchdogs that have been delegated the powers by governments. As an example let’s look at the London Stock Exchange. It is regulated by the Financial Conduct Authority (FCA) to prevent market abuse, short selling, and misleading statements. This regulatory framework and the famous motto of “Dictum Meum Pactum” (my word is my bond), ensure that everyone can invest safely and be treated fairly . In the case of the U.S., the Securities and Exchange Commission (SEC) is the one in charge of regulating the stock market. Again, it ensures that companies that publicly trade on the stock market tell the truth and investors are treated fairly and honestly.
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