Stock Market: Definition, Characteristics and ImportanceTo understand what the stock market is, it is necessary to go much further than the definition itself. Therefore, in this post we will touch on various aspects and components that actively participate in it.
Then you will know more about all these aspects, but let's start at the beginning:
What are stock markets?The definition of the stock market corresponds to that of a type of capital market where equity and fixed income are traded, through the sale of negotiable securities. Something that allows channeling the capital of investors and users in the medium and long term.
The issuance, placement and distribution process depends on the participants that are the issuers, investors, intermediaries and other economic agents.
Negotiable securities issued by individuals or entities, whether public or private, are also affected in the process. They are for example negotiable securities: shares of companies and negotiable securities equivalent to shares, participative shares of savings banks, securitization bonds, mortgage participations, monetary marketing instruments, preferred shares, territorial cedulas, warrants, among others.
Likewise, options contracts, term interest rate agreements and other financial instrument contracts related to securities, financial instruments, raw materials, etc. are considered negotiable securities.
Characteristics of the stock marketAmong the most important characteristics of the stock market can be found the following:
ProfitabilityBy investing in the stock market you expect to obtain a return for this. Something that can occur in two ways:
- The collection of dividends
- The difference between the sale price and the purchase price of the titles. In other words, with the surplus value or disability obtained.
SecurityWe are talking about an equity market. This means that the values can change up or down, as the market oscillates. As is evident, this represents a risk, since it is not known with certainty whether the investment will result in a profit. Investments in long-term securities are more likely to be a profitable and secure investment. Another way to reduce risk when investing is diversification. In this way the probability of having losses decreases.
LiquidityThere is great ease in investing in securities, so buying and selling occurs quickly.
Importance of the stock marketThe main objective of the stock market is to help the movement of capital, thus contributing to monetary and financial stability. This is how the democratic use of securities markets promotes the development of more active and safer monetary policies.
In this way, securities markets become places where intermediary agents and developed instruments exchange assets with each other. What facilitates transparency and freedom of the process of purchases and sales of securities.
In them it is also possible to set the prices of the securities according to the order of the corresponding law of supply and demand. This can also be a very liquid investment for many investors, because regardless of the time, they can sell their shares.
Role of securities marketsIn summary, the stock market is of great importance in the national and international economic because it has the following functions:
- Contributes to economic development by channeling savings into investment.
- It provides liquidity to the investment, allowing the holders of securities to convert their shares into money.
- It puts in contact to the companies and the entities of the State that need resources of investment of savers.
- They favor the valuation of financial assets and the efficient allocation of resources.
How the stock market worksThe stock market is a set of financial institutions and agents that negotiate on the different types of assets, such as stocks, bonds, funds, etc. All this using as means the instruments created specifically for this purpose.
It works by capturing in part the personal and business savings, an extra point of financing for those companies that are in processes such as the issuance of new shares.
"Unfortunately, the stock market is also subject to speculation. They move a lot of actions every day, around the world, in order to achieve a surplus value for the sale of securities."
But trading on the stock market is subject to the risks of economic cycles , in addition to suffering the effects of psychological phenomena that are capable of raising or reducing the prices of securities and stocks. For what is considered an instrument to measure the impact of all those political, economic and social events that a society can go through.
This is how it becomes a barometer of the behavior of economies in countries around the world. There is its most representative importance.
What are the primary and secondary markets?The primary market and the secondary market are two types of contracting and trading that differ from each other to a large extent. Taking into account this, we have the following definitions and differences:
Primary marketThe primary market is the placement or exit to the market of new shares. This means that the shares are coming directly from the company, and that normally they are sold through an auction.
The sale is given either in a public bidding or direct negotiation. And in case it happens indirectly, when financial intermediaries interfere, it can be done in three ways, which are:
- Firm sale : Regardless of whether all the shares are sold or not is a closed deal, with a firm sale closes a number of shares for a certain amount.
- Stand-by agreement : This is the most common form among several financial intermediaries that manage securities simultaneously. A pre-agreement between the issuing company and the intermediary is closed. The intermediary makes sales in multiple batches and closes more share packages as needed to expand the number of the company.
- Best Effort : It is a direct commission sale between intermediaries. The commission earned by the companies issuing these shares is based on the sale price.
- Gray Market : Its name is due to the fact that it is about the use of certain parts of the market that companies do not use as usual. Although they are not illegal, it is an unexplored market, so the knowledge of their actual result is uncertain.
- Private Placement : They are issued shares that are located in the private market to one or several persons in a private but direct way.
Secondary marketThe secondary market is the market where the securities that have already been issued and sold in the primary market are handled in real time by sellers and buyers. Something that happens simultaneously and is executed by direct operations or corresponding financial intermediaries.
Therefore, the secondary market is the place where purchase and sale operations are carried out. These are the ones that transform the economic fabric and financial productivity from an investment and trust perspective.
What is traded in the stock market?In the stock market not only proceed to hire shares but also to negotiate other financial assets such as bonds, bonds and subscription rights. That is, all these financial assets that companies have decided to sell or negotiate for financing needs they have.
Differences between fixed income and variable incomeThese negotiated products are divided into two large groups, which are those denominated as fixed income or variable income. The type of income will depend on whether the return received by the investor is predetermined or not, respectively.
In the fixed income you can find the debt, and the shares correspond to the second group, to the variable income . This last modality is preferred by companies when it is necessary to obtain financing through the stock exchange.
There are also hybrid products that are a mixture of the above, as is the case of bonds convertible into shares. They first generate a fixed interest and then transform into equity securities. Another type is obligations with warrants, with which the investor obtains the right to a premium or the conversion into another financial asset as well.
"Therefore, when a person buys a variable income security , an action in a certain company, for example, does not have specific knowledge of the benefits that it will obtain. This situation occurs because he is not lending money to be returned, but with the purchase he becomes the owner of a part of said company. It happens to be, therefore, a risk investment."
A situation opposite to that which occurs when an investor buys a fixed-income security with a fixed interest rate. Doing so knows the kind of performance you will get with a predetermined time period.
It is important to highlight that in the financial market not all the equity securities listed have the same prestige . This is because they do not share the same results accounts and the same expectations. This is how some values will have more prestige than others if they are compared.
And it should also be noted that there are
Ordinary shares and preferred sharesOrdinary shares are securities that do not possess any type of special right that is further from those provided for in the law and equally in the company's bylaws. It is the ordinary shares that are in the capacity to confer the same rights to all their owners without there being any kind of distinction.
On the other hand, preferred shares are those that grant their holders or owners some kind of special right. As an example, it can be cited that if a corporation goes bankrupt it will be the shareholders and owners who will charge last. This is because in front of them are the creditors and within the shareholders, the preferred securities are free to collect before the rest.
Participants of the stock marketIn the stock markets a quite extensive participatory system is developed that includes multiple factors. This is how the main participants in this market are:
The issuers of securitiesThe issuers of securities represent those companies or trusts that offer securities issues for sale with the purpose of attracting savings from the investing public. This to finance your investments or also to obtain working capital.
The issuers can be fixed income or variable income. Fixed income issuers are securities issued by public companies or public institutions and represent loans that they receive through investors. They confer nothing more than economic rights.
This type of values determines their interests based on various indicators; other interest rates such as TBP, Prime, Libor, etc .; stock indexes such as S & P, DOW, IBEX, CAC, etc .; coupons; zero coupon; among others.
The issuers of variable income are those that are identified as being assets of the aliquot part of a capital. Your performance is determined according to the benefits that you obtain from the fund or the company. Examples of this are the holdings and shares of investment funds.
Investment fund management companiesThese are the companies that serve to manage investment funds. They have specialized people in this field.
Stock ExchangeThey are entities that provide means for the purchase and sale of securities, exercising positions of authorization, regulation, inspection and on the positions of the stock exchange. Among its functions are:
- establish purchase and sale procedures
- conduct remote reviews of stock market taxes
- offer the public information about the values
- ensure the transparency of price formation
Stock positionsThe stock exchange positions are entities that are authorized to perform intermediation activities in the stock market. Other functions include buying and selling securities on behalf of their clients, managing individual investment portfolios and advising the investor in the purchase and sale of securities on the stock market.
InvestorsInvestors or investors are the people who have resources for the acquisition of shares, bonds or other securities, and who are in the search to obtain profits from their investments.
Custody entitiesCustody entities are responsible for providing services for the conservation of securities and cash in relation to them. It is also your mission to register your ownership. As well as the return to the owner, securities of the same issuer and the same characteristics that have been delivered for safekeeping.
Risk rating agenciesThe risk rating companies are the entities that are authorized to issue risk ratings of the securities. These ratings are merely technical and objective opinions about the payment capacity of an issuer. They are expressed through a scale of letters and numbers.
Price providersWhen talking about price providers, we talk about corporations that are authorized to professionally provide calculation services, as well as provision of valuation prices for financial instruments.
Trust companiesThey are entities that have been created for the administration of trusts, in turn they are subject to the inspection of the financial superintendence.
Entitlement companiesThese entities are in charge of managing special purpose vehicles such as universals, securitization funds and trusts. By means of which the corresponding securitization processes are structured.
Where to consult the real-time global stock exchangeNowadays, it is convenient to know and follow live what happens in the main stock exchanges around the world. Being able to observe the ups and downs of the stock market in real time is a method to locate in the economic reality of the world.
There are many platforms available to follow stock market quotes in real time . Also the need for this kind of information has made more and more sites offer these indexes. There is also the option of applications for devices with Android or iOS operating system.