How Does the Stock Market Work stock market articles
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How Does the Stock Market Work stock market articles
The number of publicly traded companies in the U.S. is also shrinking—from more than 8,000 in 1996 to around to between 4,100 and 4,400 in 2017.   Stock exchanges have been around for more than two centuries. The venerable NYSE traces its roots back to 1792 when two dozen brokers met in Lower Manhattan and signed an agreement to trade securities on commission ;   in 1817, New York stockbrokers operating under the agreement made some key changes and reorganized as the New York Stock and Exchange Board.   Invesco. " Bull and bear markets - historical trends and portfolio impact ." Page 1. Accessed Feb. 29, 2020. Some stock markets rely on professional traders to maintain continuous bids and offers since a motivated buyer or seller may not find each other at any given moment. These are known as specialists or market makers . A two-sided market consists of the bid and the offer, and the spread is the difference in price between the bid and the offer. The more narrow the price spread and the larger size of the bids and offers , the greater the liquidity of the stock. Moreover, if there are many buyers and sellers at sequentially higher and lower prices, the market is said to have good depth . Stock markets of high quality generally tend to have small bid-ask spreads, high liquidity, and good depth. Likewise, individual stocks of high quality, large companies tend to have the same characteristics. U.S. Securities and Exchange Commission. " National Securities Exchanges ." Accessed Feb. 29, 2020. MarketBeat. " 2020 Stock Buyback Announcements ." Accessed Feb. 29, 2020. U.S. Securities and Exchange Commission. " What are stocks? " Accessed Feb. 29, 2020. Harvard Law School Forum on Corporate Governance. " Looking Behind the Declining Number of Public Companies ." Accessed Feb. 29, 2020. Emory Corporate Governance and Accountability Review. " The Dual-Class Share Structure ." Pages 65-66. Accessed Feb. 29, 2020. MSCI. " The Global Industry Classification Standard ." Accessed Feb. 29, 2020. IPO Monitor. " Recent Filings - Secondary Offerings ." Accessed Feb. 29, 2020. McKinsey & Company. " Grow fast or die slow: Why unicorns are staying private ." Accessed Feb. 29, 2020. The overall market is made up of millions of investors and traders , who may have differing ideas about the value of a specific stock and thus the price at which they are willing to buy or sell it. The thousands of transactions that occur as these investors and traders convert their intentions to actions by buying and/or selling a stock cause minute-by-minute gyrations in it over the course of a trading day. A stock exchange provides a platform where such trading can be easily conducted by matching buyers and sellers of stocks. For the average person to get access to these exchanges, they would need a stockbroker. This stockbroker acts as the middleman between the buyer and the seller. Getting a stockbroker is most commonly accomplished by creating an account with a well established retail broker . This sector classification makes it easy for investors to tailor their portfolios according to their risk tolerance and investment preference. For example, conservative investors with income needs may weight their portfolios toward sectors whose constituent stocks have better price stability and offer attractive dividends – so-called " defensive " sectors such as consumer staples, health care, and utilities. Aggressive investors may prefer more volatile sectors such as information technology, financials, and energy. Many giant startups are choosing to get listed on an exchange at a much later stage than startups from a decade or two ago.   While this delayed listing may partly be attributable to the drawbacks listed above, the main reason could be that well-managed startups with a compelling business proposition have access to unprecedented amounts of capital from sovereign wealth funds , private equity, and venture capitalists. Such access to seemingly unlimited amounts of capital would make an IPO and exchange listing much less of a pressing issue for a startup. Common stock can be further classified in terms of their voting rights. While the basic premise of common shares is that they should have equal voting rights—one vote per share held—some companies have dual or multiple classes of stock with different voting rights attached to each class. In such a dual-class structure , Class A shares , for example, may have 10 votes per share, while the Class B "subordinate voting" shares may only have one vote per share. Dual- or multiple-class share structures are designed to enable the founders of a company to control its fortunes, strategic direction and ability to innovate.   A startup can raise such capital either by selling shares or borrowing money . Debt financing can be a problem for a startup because it may have few assets to pledge for a loan—especially in sectors such as technology or biotechnology , where a firm has few tangible assets —plus the interest on the loan would impose a financial burden in the early days, when the company may have no revenues or earnings . S&P Dow Jones Indices. " At a Glance" The Dow vs. the S&P 500 ." Accessed Feb. 29, 2020. A market index is a popular measure of stock market performance. Most market indices are market-cap weighted —which means that the weight of each index constituent is proportional to its market capitalization—although a few like the Dow Jones Industrial Average are price-weighted .   In addition to the DJIA, other widely watched indices in the U.S. and internationally include: If the thought of investing in the stock market scares you, you are not alone. Individuals with very limited experience in stock investing are either terrified by horror stories of the average investor losing 50% of their portfolio value—for example, in the two bear markets  that have already occurred in this millennium   —or are beguiled by "hot tips" that bear the promise of huge rewards but seldom pay off. It is not surprising, then, that the pendulum of investment sentiment is said to swing between fear and greed. In addition to individual stocks, many investors are concerned with stock indices . Indices represent aggregated prices of a number of different stocks, and the movement of an index is the net effect of the movements of each individual component. When people talk about the stock market, they often are actually referring to one of the major indices such as the Dow Jones Industrial Average or the S&P 500 . World Federation of Exchanges. " Statistics ." Registration required. Accessed Feb. 29, 2020. Stock ownership implies that the shareholder owns a slice of the company equal to the number of shares held as a proportion of the company's total outstanding shares . For instance, an individual or entity that owns 100,000 shares of a company with one million outstanding shares would have a 10% ownership stake in it. Most companies have outstanding shares that run into the millions or billions. U.S. Securities and Exchange Commission. " Microcap Stock: A Guide for Investors ." Accessed Feb. 29, 2020. But there are some drawbacks to being listed on a stock exchange, such as: U.S. Securities and Exchange Commission. " What kinds of stocks are there? " Accessed Feb. 29, 2020. Library of Congress. " History of the New York Stock Exchange ." Accessed Feb. 29, 2020. Equity financing, therefore, is the preferred route for most startups that need capital. The entrepreneur may initially source funds from personal savings, as well as friends and family, to get the business off the ground. As the business expands and capital requirements become more substantial, the entrepreneur may turn to angel investors and venture capital firms. While stocks can be classified in a number of ways, two of the most common are by market capitalization  and by sector . While the allure of buying a stock similar to one of the fabled FAANG quintet—Facebook, Apple Inc. , Amazon.com Inc. , Netflix Inc. , and Google parent Alphabet Inc. —at a very early stage is one of the more tantalizing prospects of stock investing, in reality, such home runs are few and far between. Investors who want to swing for the fences with the stocks in their portfolios should have a higher tolerance for risk ; such investors will be keen to generate most of their returns from capital gains rather than dividends. On the other hand, investors who are conservative and need the income from their portfolios may opt for stocks that have a long history of paying substantial dividends. W&S Finance Group Distributors. " Historical S&P 500 Index Performance ." Page 1. Accessed Feb. 29, 2020. Dorsey & Whitney LLP. " Comparative Overview: Key Listing Requirements in New York, London, and Hong Kong ." Pages 4-9. Accessed Feb. stock market articles 29, 2020. Visual Capitalist. " How the Composition of Wealth Differs, from the Middle Class to the Top 1% ." Accessed Feb. 29, 2020. When a company establishes itself, it may need access to much larger amounts of capital than it can get from ongoing operations or a traditional bank loan. It can do so by selling shares to the public through an initial public offering  . This changes the status of the company from a private firm whose shares are held by a few shareholders to a publicly traded company whose shares will be held by numerous members of the general public. The IPO also offers early investors in the company an opportunity to cash out part of their stake, often reaping very handsome rewards in the process. The reality is that investing in the stock market carries risk, but when approached in a disciplined manner, it is one of the most efficient ways to build up one's net worth .   While the value of one's home typically accounts for most of the net worth of the average individual, most of the affluent and very rich generally have the majority of their wealth invested in stocks.   In order to understand the mechanics of the stock market, let's begin by delving into the definition of a stock and its different types. 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Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners Federal Reserve Bank of Philadelphia. " The Evolution of the Philadelphia Stock Exchange ." Page 1. Accessed Feb. 29, 2020. Market capitalization refers to the total market value of a company's outstanding shares and is calculated by multiplying these shares by the current market price of one share. While the exact definition may vary depending on the market, large-cap companies are generally regarded as those with a market capitalization of $10 billion or more, while mid-cap companies are those with a market capitalization of between $2 billion and $10 billion, and small-cap companies fall between $300 million and $2 billion. Until recently, the ultimate goal for an entrepreneur was to get his or her company listed on a reputed stock exchange such as the New York Stock Exchange or Nasdaq , because of the obvious benefits, which include: Source: World Federation of Exchanges  
Numerous studies have shown that, over long periods of time, stocks generate investment returns that are superior to those from every other asset class. Stock returns arise from capital gains and dividends. A capital gain occurs when you sell a stock at a higher price than the price at which you purchased it. A dividend is the share of profit that a company distributes to its shareholders. Dividends are an important component of stock returns—since 1956, dividends have contributed nearly one-third of total equity return, while capital gains have contributed two-thirds.   The main distinction between the two is that common shares usually carry voting rights  that enable the common shareholder to have a say in corporate meetings —where matters such as election to the board of directors or appointment of auditors are voted upon—while preferred shares generally do not have voting rights. Preferred shares are so named because they have preference over the common shares in a company to receive dividends  as well as assets in the event of a liquidation .   There also exists a number of loosely regulated over-the-counter exchanges , sometimes known as bulletin boards , that go by the acronym OTCBB. OTCBB shares tend to be more risky since they list companies that fail to meet the more strict listing criteria of bigger exchanges.   For example, larger exchanges may require that a company has been in operation for a certain amount of time before being listed, and that it meets certain conditions regarding company value and profitability.   In most developed countries, stock exchanges are self-regulatory organizations , non-governmental organizations that have the power to create and enforce industry regulations and standards.   The priority for stock exchanges is to protect investors through the establishment of rules that promote ethics and equality. Examples of such SRO’s in the U.S. include individual stock exchanges, as well as the National Association of Securities Dealers and the Financial Industry Regulatory Authority . The advent of modern stock markets ushered in an age of regulation and professionalization that now ensures buyers and sellers of shares can trust that their transactions will go through at fair prices and within a reasonable period of time. Today, there are many stock exchanges in the U.S. and throughout the world, many of which are linked together electronically. This in turn means markets are more efficient and more liquid . The NYSE and Nasdaq are the two largest exchanges in the world, based on the total market capitalization of all the companies listed on the exchange. The number of U.S. stock exchanges registered with the Securities and Exchange Commission has reached nearly two dozen, though most of these are owned by either CBOE , Nasdaq or NYSE.   The table below displays the 20 biggest exchanges globally, ranked by total market capitalization of their listed companies. These benefits mean that most large companies are public rather than private; very large private companies such as food and agriculture giant Cargill, industrial conglomerate Koch Industries, and DIY furniture retailer Ikea are among the world's most valuable private companies , and they are the exception rather than the norm. How Does the Stock Market Work stock market articles
How Does the Stock Market Work stock market articles
Forbes. " The World’s Largest Public Companies ." Accessed Feb. 29, 2020. Walter Werner and Steven T. Smith. " Wall Street ." Page 28. Columbia University Press, 1991, The first stock markets appeared in Europe in the 16th and 17th centuries, mainly in port cities or trading hubs such as Antwerp, Amsterdam, and London.   These early stock exchanges, however, were more akin to bond exchanges as the small number of companies did not issue equity. In fact, most early corporations were considered semi-public organizations since they had to be chartered by their government in order to conduct business. Matching buyers and sellers of stocks on an exchange was initially done manually, but it is now increasingly carried out through computerized trading systems. The manual method of trading was based on a system known as " open outcry ," in which traders used verbal and hand signal communications to buy and sell large blocks of stocks in the " trading pit " or the floor of an exchange. While there are two main types of stock— common and  preferred —the term "equities" is synonymous with common shares, as their combined market value and trading volumes are many magnitudes larger than that of preferred shares.   However, growing at such a frenetic pace requires access to a massive amount of capital . In order to make the transition from an idea germinating in an entrepreneur's brain to an operating company, they need to lease an office or factory, hire employees, buy equipment and raw materials , and put in place a sales and distribution network , among other things. These resources require significant amounts of capital, depending on the scale and scope of the business startup . Once the company's shares are listed on a stock exchange and trading in it commences, the price of these shares will fluctuate as investors and traders assess and reassess their intrinsic value. There are many different ratios and metrics that can be used to value stocks, of which the single-most popular measure is probably the Price/Earnings ratio. The stock analysis also tends to fall into one of two camps— fundamental analysis , or technical analysis . Forex Capital Markets Limited. " Evolution Of The Marketplace: From Open Outcry To Electronic Trading ." Accessed Feb. 29, 2020. National Stock Exchange of India Limited The stock market also offers a fascinating example of the  laws of supply and demand at work in real time. For every stock transaction, there must be a buyer and a seller. Because of the immutable laws of supply and demand, if there are more buyers for a specific stock than there are sellers of it, the stock price will trend up. Conversely, if there are more sellers of the stock than buyers, the price will trend down. The bid-ask or bid-offer spread—the difference between the bid price for a stock and its ask  or offer price—represents the difference between the highest price that a buyer is willing to pay or bid for a stock and the lowest price at which a seller is offering the stock. A trade transaction occurs either when a buyer accepts the ask price or a seller takes the bid price. If buyers outnumber sellers, they may be willing to raise their bids in order to acquire the stock; sellers will, therefore, ask higher prices for it, ratcheting the price up. If sellers outnumber buyers, they may be willing to accept lower offers for the stock, while buyers will also lower their bids, effectively forcing the price down. B. Mark Smith. " A History of the Global Stock Market: From Ancient Rome to Silicon Valley ." Pages 13-17. University of Chicago Press, 2004. World Bank. " Self-Regulation in Securities Markets ." Page 2. Accessed Feb. 29, 2020. Today's corporate giant likely had its start as a small private entity launched by a visionary founder a few decades ago. Think of Jack Ma incubating Alibaba Group Holding Limited  from his apartment in Hangzhou, China, in 1999, or Mark Zuckerberg founding the earliest version of Facebook, Inc.  from his Harvard University dorm room in 2004. Technology giants like these have become among the biggest companies in the world within a couple of decades.   S&P Dow Jones Indices. " The Importance of Dividends ." Page 1. Accessed Feb. 29, 2020. The prices of shares on a stock market can be set in a number of ways, but most the most common way is through an auction process where buyers and sellers place bids and offers to buy or sell. A bid is the price at which somebody wishes to buy, and an offer is the price at which somebody wishes to sell. When the bid and ask coincide, a trade is made. Stock exchanges are secondary markets , where existing owners of shares can transact with potential buyers. It is important to understand that the corporations listed on stock markets do not buy and sell their own shares on a regular basis . So when you buy a share of stock on the stock market, you are not buying it from the company, you are buying it from some other existing shareholder. Likewise, when you sell your shares, you do not sell them back to the company—rather you sell them to some other investor. A stock  or share is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets and earnings .   In the late 18th century, stock markets began appearing in America, notably the New York Stock Exchange , which allowed for equity shares to trade. The honor of the first stock exchange in America goes to the Philadelphia Stock Exchange , how to read the stock market for beginners