Stock Market: what it is and how it works. Main stock markets around the world.

Stock Market: what it is and how it works. Main stock markets around the world.
The bear and the bull trends of the stock market

"Behind every stock is a company. Find out what it's doing". This quote belongs to Peter Lynch, a world-renowned investor and manager of Magellan Fund between 1977 and 1990. Lynch achieved to outperform the market growth consistently and created enormous wealth (14 billion $ of managing assets in 1990) for his company.

The stock market is a physical or a digital place where equity securities are being issued, bought and sold.  The stock market provides an organized, safe and transparent environment for traders and brokers that want to exchange these equities. Securities can be stocks or other derivatives connected to stocks and their price depends on the demand and the supply for them on the open market.

Every stock is a portion of ownership to a company and when it comes to the stock market, a public-traded company. A company issues shares in order to raise money to fund its operations and grow its business, while on the other hand, an investor buys shares when he believes that their price will increase in the future and sells when things go the other way round.

A little bit of history.

Stocks started to be exchanged in 1611 in the Netherlands. Specifically the Dutch East India Company based in Amsterdam was the first corporation in history that issued shares that were available to individuals. With that move the company, which owned hundreds of ships which traded gold, porcelain, spices and silks around the globe, aimed to receive big amounts of funds that it was unable to reach through bank borrowing. And the result of it was an absolute success. The Dutch East India Company used these additional money to support even grander voyages and furtherly increase its own and its investors' wealth. For many years to come the Dutch East India Company was the only publicly traded business.

The first stock market in the US was founded in Philadelphia. In 1790 the Board of Brokers of Philadelphia (later Philadelphia Stock Exchange, PHLX) provided the opportunity to individuals in USA to access a stock market, which was the springboard for further economic development in the region.

In 1792, twenty-four Merchants arranged a meeting in New York at Corre's Hotel in order to create an organized place where stocks could be traded. The result of the meeting came to life two months later and was one of the most iconic and important US documents, the Buttonwood Tree Agreement. According to the legend, the 24 Merchants signed the document under a buttonwood tree outside 68 Wall Street, the place where the organized stock transactions occurred. The Buttonwood Tree Agreement is the founding contract of the New York Stock Exchange (NYSE) which is now the biggest stock exchange in the world.

In 1986 the Dow Jones Industrial Average was founded, which was composed of 12 industrial companies. In 1941 after the merger of Poor's Publishing with Standard Statistics the S&P index was created. The National Association of Securities Dealers Automated Quotations (NASDAQ) was founded in 1971 and is currently the second biggest stock market by market capitalization after NYSE.

How does the stock market function ?

Stock markets around the world are in most cases regulated by competent autonomous government authorities that ensure their well-functioning and prevent fraud. The Securities and Exchange Commission (SEC) plays this role in the USA.

It is important to notice that in most cases individual investors are not taking part in the stock market directly. They can buy and sell stocks through a broker, which serves the role of the middle-man. The existence of verified brokers lowers the possibility of fraud for the investor and boosts the general stock market confidence.The biggest stock brokerage firms in the USA are Charles Schwab, Fidelity Investments and TD Ameritrade. In today's world though, many brokers also do business digitally. The most popular online brokers in the world are Interactive Brokers, Robinhood, Swissquote and DEGIRO.

Other members of the stock market apart from the stock exchange and the brokers are the dealers, the financial advisors and the mutual funds. All of the above are regulated by the competent authorities (f.e. the SEC) and play different roles. A dealer is someone (natural or legal person) that is willing to buy or sell for its own account. The financial advisors help investors create personalized strategies that achieve better results in the stock market. A mutual fund is a large pool of individual's money that is managed and invested by an investment fund.

Largest Stock Markets in the World.

Currently there are 17 stock exchanges that exceed the 1 trillion USD in market capitalization and combined account for more than 80% of the total world market cap. The first two largest stock markets are in the USA and were previously mentioned, the NYSE and NASDAQ with 22.77 T$ and 16.24 T$ respectively. The third one is the Shanghai Stock Exchange (SSE) in China with 6.74 T$ is market cap followed by EURONEXT in Europe with 6.06 T$. The fifth one is the Japan Stock Exchange (JPX) with 5.38 T$ market capitalization.

Out of the 10 largest stock exchanges: 2 are based in the USA, 5 in Asia, 2 in Europe and 1 in Saudi Arabia. It's quite impressive though, that the two largest stock exchanges that are based in the USA have a bigger combined market cap (39.01 T$) than the rest 8 (36.27 T$) of the top 10.

Stock market indexes represent the overall performance of the market by tracking a composition of stocks or other indexes. There are many different indexes in every market and every one of them is measured differently and tracks different stocks. The most known indexes are:

  1. Dow Jones Industrial Average (DJIA or simply Dow) which tracks the performance of the 30 leading companies that are listed in the USA.
  2. Standard and Poor's 500 Index (S&P 500) which tracks the performance of the 500 biggest corporations listed in US stock exchanges.
  3. Financial Times Stock Exchange 100 Index (FTSE 100 or simply Footsie) which follows the 100 biggest companies listed in UK.
  4. NASDAQ Composite Index, which includes almost every company listed in the NASDAQ stock exchange.
  5. Nikkei 250 Index (or simply Nikkei) tracks the performance of the 250 biggest corporations listed in the Tokyo Stock Exchange in Japan.
  6. Hang Seng Index (HSI) consists of the 73 largest companies listed in the Hong Kong Stock Exchange.

The most frequent terms that describe the trend of a stock market is the bull and the bear.The Bull refers to a market that's appreciating higher and took its name after the attack of the bull which heads higher. The Bear refers to a market that's falling and took its name after the attack of the bear that ends in the ground. Aside from the overall market these terms can describe the assumptions of investors about the future of single stocks or entire sectors.

IPO, OTC and ETFs.

The Initial Public Offering (IPO), the Over-The-Counter (OTC) and the Exchange-Traded Fund (ETF) are terms that are frequently used in the stock market world.

IPO occurs when a company decides to enter the stock market and sell its shares. For a corporation to do so and get publicly traded an investment bank should take care of the process. In addition these first transactions happen in a market called the IPO market or primary market, and most frequently (not always) large institutional investors have access to this type of markets. The reason someone might want to buy shares in the IPO is because usually at that time stock prices are lower than when the company gets in a bigger stock exchange such as NYSE.

OTC markets are places where companies sell their stocks when they cannot enter a major market such as NYSE or NASDAQ. That is so because big regulated stock markets have specific requirements and minimum stock prices that need to be met. For example no stock can remain in a major stock exchange if its price is under 1$ for over a month. In USA alone there are more than 12,000 securities currently trading in the OTC markets and many of them are the so-called penny stocks. Penny stocks is the term adopted by the SEC and refers to securities that have a value of under 5$.

ETF are very similar to mutual funds,because they are also a pool of money that is managed and invested by an investment fund. The difference between the two lies in the fact that ETFs can be sold and bought actively in the stock market. ETFs can hold different types of assets such as stocks, commodities, bonds etc. Most frequently though, ETFs track a stock market index, the so-called ETF index funds. Popular ETF issuers are the BlackRock Inc. (iShared ETFs) and The Vanguard Group.

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