Equity Market Wiki Basics and Key Concepts

The equity market wiki is a vast and complex world, but don't worry, we'll break it down to the basics. An equity market is a platform where companies raise capital by issuing shares to the public, allowing individuals to own a portion of the company.

The primary goal of equity markets is to provide a mechanism for companies to raise funds for growth, expansion, and other business needs. Companies list their shares on stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ, to increase their visibility and attract potential investors.

Equity markets are driven by supply and demand, with the price of shares fluctuating based on market forces. The price of shares is influenced by various factors, including a company's financial performance, industry trends, and economic conditions.

In an equity market, investors can buy and sell shares, hoping to earn a profit from the appreciation in value or dividends paid by the company.

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The history of equity markets dates back to 12th-century France, where courtiers de change managed and regulated debts on behalf of banks.

These early brokers also traded with debts, making them the first brokers in recorded history. The concept of brokers evolved over time, and by the 14th century, Italian city-states like Venice, Pisa, Verona, Genoa, and Florence began trading in government securities.

In 1351, the Venetian government outlawed spreading rumors intended to lower the price of government funds, demonstrating the importance of regulation in the early days of equity markets. The Dutch East India Company, founded in 1602, was the first joint-stock company to get a fixed capital stock, leading to continuous trade in company stock on the Amsterdam Exchange.

Italian companies were the first to issue shares, paving the way for other European companies to follow suit in the 16th century. The Amsterdam Exchange soon became a hub for trading various derivatives, including options and repos.

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The stock market is a crucial indicator of a country's economic strength and development. A rising stock market is often associated with an up-and-coming economy.

A stock market allows companies to raise money by selling shares of ownership in a public market. This enables businesses to expand and grow.

The liquidity of the stock market makes it easy for investors to sell securities quickly and easily. This is an attractive feature of investing in stocks compared to other less liquid investments.

The stock market plays a significant role in influencing social mood and economic activity. A healthy stock market can contribute to increased prosperity and economic growth.

Exchanges act as the clearinghouse for each transaction, guaranteeing payment to the seller of a security and eliminating the risk of counterparty default. This promotes trust and stability in the financial system.

The smooth functioning of the stock market facilitates economic growth by promoting the production of goods and services and possibly employment.

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Stock market crashes are a real possibility, and understanding what they are can help you prepare for the unexpected. A stock market crash is a sharp dip in share prices of stocks listed on the stock exchanges.

Panic and loss of confidence among investors can contribute to a stock market crash. This can be devastating, especially for those who have invested heavily in the market.

The Wall Street Crash of 1929 is a prime example of a stock market crash. It started on Black Thursday, October 24, 1929, and the Dow Jones Industrial Average lost 50% during this crash. This was the beginning of the Great Depression.

Stock market crashes can end speculative economic bubbles, but the consequences can be severe.

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A stock market crash is often defined as a sharp dip in share prices of stocks listed on the stock exchanges. This can be triggered by various economic factors and panic among investors.

The loss of confidence among the investing public can lead to a stock market crash. It's a vicious cycle that can have devastating effects.

One of the most famous stock market crashes occurred on Black Thursday, October 24, 1929. The Dow Jones Industrial Average lost 50% during this crash.

The crash of 1929 marked the beginning of the Great Depression, a period of significant economic downturn. It's a stark reminder of the importance of prudent investment decisions.

Stock market crashes can have far-reaching consequences, including the loss of billions of dollars and wealth destruction on a massive scale. The increasing number of people involved in the stock market only adds to the risk.

The crash of 1987, known as Black Monday, was another significant event in stock market history. It began in Hong Kong and quickly spread around the world.

On Black Monday, the Dow Jones fell by 22.6% in a single day, making it the largest one-day percentage decline in stock market history. The crash raised many questions about the assumptions of modern economics.

The 1987 crash also highlighted the importance of having measures in place to control the spread of financial crises. The Federal Reserve System and central banks of other countries took swift action to mitigate the effects of the crash.

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The 2020 stock market crash was a major and sudden global stock market crash that began on 20 February 2020 and ended on 7 April.

This market crash was due to the sudden outbreak of the global pandemic, COVID-19.

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This marked the beginning of the Great Recession, a period of significant financial decline that lasted from 2007 to 2009. The financial markets experienced one of the sharpest declines in decades.

The housing market was particularly affected, with the bursting of the housing bubble due to sub-prime lending. This led to widespread financial failures and required major government intervention.

From October 2007 to March 2009, the S&P 500 fell 57%. It wouldn't recover to its 2007 levels until April 2013, showing the magnitude of the decline.

Major financial institutions failed in many cases, resulting in a significant loss of trust in the financial system.

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The stock market can be a wild ride, and one of the reasons is the irrational behavior of investors. Sometimes, the market reacts irrationally to economic or financial news, even if that news is likely to have no real effect on the fundamental value of securities itself.

Emotions can drive prices up and down, making it difficult to predict the stock market behavior. Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events.

The Dow Jones Industrial Average's biggest gain in one day was 936.42 points or 11 percent, this occurred on October 13, 2008. This kind of volatility can be unsettling, but it's also an opportunity for smart investors to make money.

Behaviorists argue that investors often behave irrationally when making investment decisions, thereby incorrectly pricing securities, which causes market inefficiencies. These inefficiencies can be opportunities for savvy investors to take advantage of.

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Circuit breakers are a crucial mechanism in place to prevent market crashes. They were introduced by the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange.

The NYSE circuit breakers are triggered when the S&P 500 Index drops by a certain percentage. For example, if the S&P 500 Index drops 7% before 3:25 p.m., trading will halt for 15 minutes.

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The specific thresholds for the NYSE circuit breakers are as follows:

This means that if the market experiences a significant decline, trading will be halted to give investors time to reassess and prevent further losses.

The electronic trading market has made it easier for individual investors to participate in trading without the need for traditional brokers or substantial capital. Platforms like eToro, Plus500, and Robinhood serve as a digital medium for trading financial instruments, providing features such as real-time market data and stock price analysis.

Fundamental analysis is a strategy that involves analyzing companies by their financial statements, business trends, and general economic conditions. Technical analysis, on the other hand, studies price actions in markets through charts and quantitative techniques to forecast price trends.

Investing via passive index funds is a popular strategy, where one holds a portfolio of the entire stock market or a segment of it, aiming to maximize diversification and minimize taxes. This approach also allows for riding the general trend of the stock market to rise.

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Indirect investment involves owning shares indirectly, such as via a mutual fund or an exchange traded fund. Direct investment involves direct ownership of shares.

Direct ownership of stock by individuals rose slightly from 17.8% in 1992 to 17.9% in 2007. The median value of these holdings rose from $14,778 to $17,000 during this time.

Indirect participation in the form of retirement accounts rose from 39.3% in 1992 to 52.6% in 2007. This growth outpaced direct ownership.

The median value of retirement accounts more than doubled from $22,000 to $45,000 between 1992 and 2007. This significant increase shows the popularity of indirect investment.

The current tax code incentivizes individuals to invest indirectly, according to Rydqvist, Spizman, and Strebulaev. This is because investments in pension funds and 401ks are taxed only when funds are withdrawn.

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Fundamental analysis is a method of analyzing companies by their financial statements, business trends, and general economic conditions. This approach helps investors make informed decisions about which stocks to buy or sell.

Technical analysis, on the other hand, studies price actions in markets through charts and quantitative techniques to forecast price trends. This method is often used by traders who want to make quick profits.

One popular technical strategy is trend following, used by successful traders like John W. Henry and Ed Seykota. This method involves identifying price patterns and using strict money management to minimize risks.

Passive index funds are another popular investment strategy, where investors hold a portfolio of the entire stock market or a segment of it. This approach aims to maximize diversification, minimize taxes, and ride the general trend of the stock market.

The S&P 500 Index is a well-known example of a passive index fund, which has averaged nearly 10% per year in returns since World War II.

Investors who want to take on more risk can use leveraged strategies, such as short selling, margin buying, or derivatives. However, these methods require careful management and can lead to significant losses if not done properly.

For example, in the United States, the margin requirements are typically 50% of the total investment, meaning that investors need to put up half the amount to buy a stock.

Regulations like these are in place to prevent investors from taking on too much risk and to protect the financial system.

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Trade involves buying and selling financial instruments through online platforms, such as eToro, Plus500, Robinhood, and AvaTrade, which make financial markets more accessible to individual investors.

These platforms provide real-time market data, stock price analysis, research reports, and news updates to support decision-making in trading activities.

Electronic trading platforms enable the trading of financial products over a network, typically through a financial intermediary, and often incorporate systems like the Martingale Trading System used in forex trading.

Mobile trading apps allow transactions to be conducted remotely via smartphones, further increasing accessibility and convenience.

Leveraged strategies, such as short selling, margin buying, and derivatives, can be used to control large blocks of stocks for a smaller amount of money than would be required by outright purchase or sales.

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Short selling is a trading strategy where a trader borrows stock, sells it on the market, and then buys it back later to make a profit.

The trader borrows the stock from their brokerage, which holds shares for its clients or its own shares to lend to short sellers.

This strategy can be used to make money if the price of the stock falls, but the trader will lose money if the price rises.

Exiting a short position is called "covering", and it involves buying back the stock to close the trade.

Most markets either prevent short selling or place restrictions on when and how a short sale can occur, likely to prevent artificially lowering the price of a stock.

The practice of naked shorting, which involves selling stock without actually borrowing it, is illegal in most stock markets.

New issuance was a significant trend in 2004, with global issuance of equity and equity-related instruments totaling $505 billion, a 29.8% increase from the $389 billion raised in 2003.

This surge in new issuance was driven in part by a substantial increase in initial public offerings (IPOs) by US issuers, which rose 221% to 233 offerings that raised $45 billion.

IPOs in Europe, Middle East and Africa (EMEA) also saw a significant increase, rising by 333% to $39 billion.

The US S&P stock market returns have been impressive over the years, with a 15.5% average annual return in the first year.

For investors who hold onto their stocks for the long haul, the compounded annual return is a key metric to consider. A 15.5% average compounded annual return in the first year is a great starting point.

The average annual return for the US S&P stock market starts to decline as the holding period increases. After 3 years, the average annual return drops to 10.9%.

Here's a breakdown of the average annual returns for different holding periods:

As you can see, the average annual return can fluctuate significantly depending on the holding period. It's essential to consider these returns when making investment decisions.

Derivative instruments are financial products whose pay-offs or values depend on the prices of stocks. Examples include exchange-traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures.

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These financial instruments can be traded on futures exchanges, which have a history dating back to commodity futures exchanges, or traded over-the-counter. They are considered to be traded in a derivatives market rather than the stock market because they are derived from stocks.

Stock index futures can be traded on futures exchanges, giving investors a way to bet on the overall direction of the market.

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Stock exchanges originated as mutual organizations, owned by its member stockbrokers. However, the major stock exchanges have demutualized, where the members sell their shares in an initial public offering.

In the United States, there were 15 licensed stock exchanges in 2018, of which 13 actively traded securities. All of these exchanges were owned by three publicly traded multinational companies, Intercontinental Exchange, Nasdaq, Inc., and Cboe Global Markets, except one, IEX.

The Shenzhen Stock Exchange and Shanghai Stock Exchange can be characterized as quasi-state institutions insofar as they were created by government bodies in China and their leading personnel are directly appointed by the China Securities Regulatory Commission.

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Equity capital market practitioners advise on a full range of equity, debt equity-linked, hybrid, asset-backed, credit-linked and derivative products. This includes helping companies raise funds for growth and development through initial public offerings (IPO), convertible bonds, and other services involving equity.

Companies have also raised significant amounts of capital through R&D limited partnerships, which were made more attractive to investors after tax law changes in 1987 in the United States.

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Public companies that are listed on stock exchanges tend to have better management records than privately held companies. This is because they are subject to greater transparency and scrutiny from investors and regulators.

The price mechanism of the stock market can also exert pressure on management to improve performance, as a falling stock price can make a company vulnerable to a takeover by new management. Conversely, a rising stock price can make a company less vulnerable to a takeover.

Many well-documented cases, however, have shown that even public companies can suffer from poor corporate governance and mismanagement. The dot-com bubble and the subprime mortgage crisis are examples of corporate mismanagement that led to significant financial losses.

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Corporate governance is a crucial aspect of a company's operations, and stock exchanges play a significant role in regulating it. By having a wide and varied scope of owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government.

Publicly listed companies are subject to greater transparency, allowing investors to make informed decisions about a purchase. This transparency helps to prevent mismanagement and ensures that companies are accountable for their actions.

The listing requirements imposed by stock exchanges, such as the New York Stock Exchange and NASDAQ, help to ensure that companies meet certain standards before being listed. These requirements include minimum market capitalization, minimum annual income, and minimum number of shares outstanding.

For example, the New York Stock Exchange requires a company to have issued at least 1.1 million shares of stock worth $40 million and must have earned more than $10 million over the last three years. Similarly, NASDAQ requires a company to have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years.

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Some stock exchanges, like the London Stock Exchange, require a minimum market capitalization, audited financial statements, and sufficient working capital for at least 12 months from the date of listing. This helps to ensure that companies have a solid financial foundation before being listed.

Companies that fail to meet these standards or engage in poor corporate governance practices can face significant consequences, including a decline in stock price and loss of investor confidence.

Government funding for development projects can take many forms, but one common method is for governments to borrow money through the sale of bonds on the stock exchange.

These bonds are essentially loans to the government, allowing citizens to invest in development projects such as sewage and water treatment works or housing estates.

By issuing bonds, governments can avoid direct taxation in the short term, but they must eventually raise funds to make regular coupon payments and refund the principal when the bonds mature.

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This means that governments will need to tax citizens or find other ways to raise additional funds to meet their obligations.

Governments at various levels may decide to borrow money to finance infrastructure projects, using the full faith and credit of the government to secure the bonds rather than collateral.

Market participation rates vary widely across states in the United States, with regional factors potentially influencing these disparities.

Households headed by whites are nearly four and six times as likely to directly own stocks than households headed by blacks and Hispanics respectively, with direct participation rates of 24.5%, 6.4%, and 4.3% respectively.

The racial composition of stock market ownership shows a significant gap, with white households participating at much higher rates than black and Hispanic households.

A fixed cost of $200 per year has been identified as a sufficient reason for nearly half of all U.S. households not participating in the market, highlighting the importance of costs associated with investing.

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Education levels have a strong correlation with stock market participation, with more educated households better able to absorb information and transaction costs.

Sociability and participation rates of communities also have a statistically significant impact on an individual's decision to participate in the market, with social individuals 5% more likely to participate than individuals that do not share those characteristics.

Households headed by whites are nearly four and six times as likely to directly own stocks than households headed by blacks and Hispanics respectively. The national rate of direct participation was 19.6% as of 2011.

Households headed by married couples participated at rates above the national averages with 25.6% participating directly. Female-headed households had lower participation rates, with only 12.6% directly owning stock.

Market participants include individual retail investors and institutional investors, such as pension funds, insurance companies, and mutual funds. The rise of institutional investors has brought improvements in market operations, including reduced fees for all investors.

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The world's largest stock markets are in the United States, United Kingdom, Japan, India, China, Canada, Germany, France, South Korea, and the Netherlands. These countries have well-established stock markets with high trading volumes.

Individual participation costs alone cannot explain large differences in participation rates from state to state in the United States. Regional factors, such as geography and political stability, also play a role in determining participation rates.

Behavioral factors, such as sociability and participation rates of communities, have a statistically significant impact on an individual's decision to participate in the market. Social individuals living in states with higher than average participation rates are 5% more likely to participate than individuals that do not share those characteristics.

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In 2021, the value of world stock markets experienced a significant increase of 26.5%, amounting to US$22.3 trillion.

Developing economies contributed a substantial US$9.9 trillion to this growth, while developed economies added US$12.4 trillion.

The global market is not equally distributed, with Asia and Oceania accounting for 45% of the market, followed closely by Europe at 37%. America had a smaller share, at 16%, while Africa had the smallest share, at 2%.

The global stock market has experienced tremendous growth over the years, with its total market capitalization rising from $2.5 trillion in 1980 to a staggering $111 trillion by the end of 2023.

There are now 60 stock exchanges worldwide, with 16 of them accounting for 87% of global market capitalization. These 16 exchanges are mostly located in North America, Europe, or Asia, with the Australian Securities Exchange being the only exception.

The largest stock markets are concentrated in the United States, Japan, and the United Kingdom, with the US market holding about 59.9% of the global market share as of January 2022.

The size of the market has grown exponentially over the years. As of 2023, the total market capitalization of all publicly traded stocks worldwide rose to a staggering $111 trillion.

This is a far cry from the $2.5 trillion seen in 1980. The growth is a testament to the increasing global economy and the rise of international trade.

Sixty stock exchanges operate worldwide, with 16 of them boasting a market capitalization of $1 trillion or more. These exchanges account for a whopping 87% of global market capitalization.

The largest stock markets are found in the United States, Japan, and the United Kingdom. As of January 2022, the US holds the top spot with about 59.9% of the market share.

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The average annual growth rate of the stock market is around 10%, which is a long-term average return often used as a benchmark.

This figure is based on the S&P 500 index, which has historically provided a reliable measure of the stock market's performance. The S&P 500 index had an average annual return of 14.8% from 2012 to 2021.

Individual annual returns can vary widely, with some years experiencing negative growth and others seeing substantial gains. The market's results from one year to the next can be quite different from the long-term average.

Investors also need to consider the impact of inflation, which can reduce the real rate of return on investments.

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Taxation is a crucial consideration for investors, with most profit from stock investing taxed via a capital gains tax.

In many countries, corporations pay taxes to the government and shareholders pay taxes again when they profit from owning the stock, resulting in "double taxation".

This can be a significant burden for investors, making it essential to understand the tax implications of their investments.

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Taxation is a crucial consideration for any investment strategy, including stock investing. Most profit from stock investing is taxed via a capital gains tax.

In many countries, corporations pay taxes to the government and shareholders pay taxes again when they profit from owning the stock, a phenomenon known as "double taxation". This can significantly reduce the actual profit from stock investing.

Taxes are charged by the state over transactions, dividends, and capital gains on the stock market, particularly in stock exchanges.

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Scams can be a major concern for investors, especially in the stock market. The Indian stock exchanges, such as the Bombay Stock Exchange and National Stock Exchange of India, have been rocked by several high-profile corruption scandals.

These scandals often involve stock manipulation, particularly in illiquid small-cap and penny stocks. SEBI, the Securities and Exchange Board of India, has barred various individuals and entities from trading on the exchanges for their involvement in these scams.

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In the modern financial system, a significant transformation has taken place, particularly in Western countries. Disintermediation has become a notable feature, where funds flow directly to financial markets instead of being routed through traditional bank lending and deposit operations.

The general public's interest in investing in the stock market, either directly or through mutual funds, has played a crucial role in this process. Statistics show that shares have made up an increasingly large proportion of households' financial assets in many countries.

In Sweden, for instance, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial wealth in the 1970s, compared to less than 20 percent in the 2000s. The major part of this adjustment has been towards shares, but a significant portion now takes the form of institutional investment for groups of individuals.

New rules permitting a higher proportion of shares to bonds have accentuated the trend towards forms of saving with a higher risk. This shift is not unique to Sweden, as similar tendencies are found in other industrialized countries, such as the European Union, the United States, Japan, and other developed nations.

Saving has moved away from traditional bank deposits to more risky securities, such as shares and bonds, in all developed economic systems. This has resulted in a significant change in the way people save and invest their money.

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1. Trade: This is where buying and selling of stocks takes place, with market participants engaging in transactions to exchange securities for cash or other assets.

2. Market participants: These are the individuals and organizations that take part in the equity market, including investors, brokers, and exchanges.

3. History: The equity market has a rich and varied history, with roots dating back to ancient civilizations and evolving over time to include modern trading systems.

4. Importance of stock market: The stock market plays a crucial role in the economy, providing a platform for companies to raise capital and for investors to participate in the growth of businesses.

5. Stock market index: A stock market index, such as the S&P 500, is a statistical measure that represents the performance of a particular segment of the equity market.

6. Derivative instruments: Derivative instruments, such as options and futures, are financial contracts that derive their value from an underlying asset, such as a stock or commodity.

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7. Leveraged strategies: Leveraged strategies involve using borrowed money to amplify investment returns, but can also increase risk and losses.

8. New issuance: New issuance refers to the process of bringing new securities to the market, such as initial public offerings (IPOs).

9. Investment strategies: There are many different investment strategies available to investors, including value investing, growth investing, and dividend investing.

10. Taxation: Taxation policies can have a significant impact on the equity market, with different tax regimes affecting the cost of investing and the returns on investment.

11. See also: For further information on the equity market, you may also want to explore related topics, such as the bond market or the foreign exchange market.

12. References: A list of references to credible sources of information on the equity market can be found below.

References: