Stock Market
A tool that helps connect the people who want to invest their money to gain returns.
What Is the Stock Market?
A stock market is a tool that helps connect the people who want to invest their money to gain returns and those businesses who want debt-free financing. It provides a medium of exchange for people with idle cash and those who need money.
It is an utterly powerful tool in the world of finance. Markets are a prime source of corporate finance and a great alternative investment option for retail investors.
A Stock Market ( or Capital Market or Equity Market ) is a free trade system where companies can issue fresh equities of their companies. Then people from all over a country and even from outside can trade in those equities.
No matter how big it is, a company or a corporate needs finance to run and do its chores and, most importantly, to grow. However, it cannot always take up debt as it carries business risks, and debt repayment strains a company's cash flow.
The stock market not only serves as a financing instrument for companies, but as it works on a free market mechanism, it also helps determine the actual value of a company by valuing its stock prices appropriately.
A company can list on the stock market through a stock exchange. A stock exchange is an institution that carries out the market's operations in a particular country.
One more advantage of listing on the market is that after doing the compliances, the company needs to make public all its required documents and operation details, promoting transparency and reducing the risk of corporate scams.
An essential thing to note is that markets work on public sentiments and are not always rational. Therefore, markets can be very unpredictable if irregularities occur in this space.
This is only seen in the short term. Markets in the long term can be very stable and predictable.
There are brokers and discount broking institutions that help ordinary people participate and put their savings and extra cash into the market.
This helps the economy grow as that extra cash that would have attracted a nominal interest less than the inflation rate is now being put into those big businesses, which helps increase the economy's GDP.
On the other end, it also represents the economic situation in a country and provides unmatched insights into the different sectors of an economy.
History of Stock Markets
The stock market is easy to understand but impossibly hard to master kind of tool. The first instances of a market were seen in the 1400s in modern-day Belgium.
The first company listed on a stock exchange was the Dutch East India Company. It was traded on the first exchange, which was located in Amsterdam, in 1611.
In early 1700, the Buttonwood Agreement was formed, eventually forming the world's largest stock exchange today, the New York Stock Exchange NYSE.
But only in the 1790s did the US get its first exchange in the Philadelphia Stock Exchange. Nevertheless, it played a crucial role in forming the base for today's well-known US financial system.
Since then, the free trade mechanism has come a long way, today, we have multiple exchanges in almost every big country, and every prominent city has an exchange.
The market is now closely linked with the economy more than ever, which drives today's economy.
NYSE is still the world's biggest exchange in terms of the value of trade but exchanges in countries like
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India
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Singapore
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Hong Kong
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South Korea and
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China
We are swiftly coming up to that. In this journey, analysts and economists worldwide have developed some theories and bendable rules and regulations concerning the market.
It is a general notion that the market works on trade cycles. Trade cycles are frequent cyclical shifts in the state of a country's economy or a region, which can last from 1-2 years to even 10-15 years. Cycles are known to be unavoidable and unpredictable.
Trade cycles are a complex phenomenon, impacting the economy drastically and significantly.
It is a physical or virtual marketplace where savers and investors invest their money in companies to get returns. It is a very effective tool for corporate financing. It makes money from existing money and grows the economy.
Terms relating to the stock market
The main reason why most people fear getting into the market is because of its horrifying-sounding nomenclature. People see long words with unusual spellings and assume it is complicated.
However, that is not false, and a stock market is a handy tool when thoroughly familiar with it.
As bank interest rates worldwide are declining steadily, even some are going into the negative, known as negative interest rates; people should try to educate themselves about the market. Not to forget that it contributes towards economic growth as well.
Also, these words form the basics of markets and global finance, and such terms are of utmost importance to a professional. These are used in daily conversations quite frequently. Therefore, one should have such weapons in their arsenal ready.
Let's get into some of the most widely used terms worldwide, which have a constant sense of meaning everywhere you go.
Here are some simpler terms in the stock market world that one should know to get that money growing-
Bulls and Bears
You may have heard analysts and TV anchors say these terms in news and public interviews. These sound pretty technical but are straightforward, simple, and essential common-sense words.
Bulls are known for their fierce speed and momentum, and they are popularly known for knocking their opponents in an upwards direction towards the sky with their horns.
Bears are known for their slow speed and consistent stance and are famous for knocking their opponents downwards with their claws.
This is the main logic behind this terminology. When the market rallies upwards, it is known as a bull market and the people driving those rallies are known as the Bulls. Similarly, when markets face a downward trend, the Bears are known to be behind it.
This ends here, but if someone is expecting a rise in markets in the future, he is known to have a Bullish stance. But, on the other hand, it is a Bearish stance when he is pessimistic about future market growth.
Circuit
After the high volatility in the US markets during the Great Depression of 1929, people were scared to put their money into the market as it took more than nine years to get the Dow Jones back to its previous highs in 1929.
Lawmakers and regulators then decided to introduce the market circuit to save small investors from losing all of their money in one go and reducing the volatility in the market.
A circuit can be of two kinds: the upper and lower circuits. A circuit is a limit or threshold. If a particular instrument reaches the circuit on an intraday basis, trading for that specific instrument is prohibited for that special day.
It is done to reduce the effects of panic buying and panic selling in the markets and curb manipulation by big investors.
However, a person cannot buy or sell if a stock hits a circuit. Therefore, trading in that stock is suspended fully for that day.
Index
An index is a benchmark against the top trading companies in a particular exchange. In simpler words, an index is a bunch of the most valuable stocks in an economy from diverse sectors representing the economy's general economic conditions.
An index is representative and may be traded in exchanges. It is relatively stable to individual stocks as it represents several individual stocks.
The most actively traded index in volume terms is the NIFTY 50 index of the National Stock Exchange of India. In terms of volume, the Dow Jones Industrial Average is based in the US.
There can also be sectoral indices containing stocks belonging to a particular economic sector, like the NASDAQ, the BANK NIFTY, etc.
An index is an excellent tool to determine the nation's economic conditions. It also directly represents the economic growth of the country.
Indicator Ratios
Many ratios are used by investors and brokers worldwide to understand and time the market better.
As no one in this world can perfectly predict the movements in the market, people have developed specific indicators to determine the trajectory of markets over time.
The most used ratio is the P-E ratio or the Price to Earnings ratio. It is determined by dividing the price of a stock by its EPS, which is the company's earnings divided by its total number of shares.
A higher PE ratio is when a stock is believed to be overpriced, and a lower PE is associated with an underpriced stock.
Some other prominent ratios are-
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Price to Book ratio
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EBITA ratio
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Return on Sales
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Current Ratio
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Inventory Turnover ratio, etc.
Market Capitalization
It means the total value of all stocks traded in a particular exchange at a specific time.
Market capitalization is calculated by valuing the company's outstanding and currently publicly traded shares in terms of the last traded price of the publicly traded stocks in the market.
It is a great indicator of a company's growth and shows how much people are willing to give the owners to purchase the whole company.
Market Capitalization also shows the risk involved in investment. Generally, companies with high M-cap are less volatile than those with lower M-cap.
The Tech giants of the US dominate this space by a huge gap. All the prominent companies with the highest market capitalization are of US origin.
Leading this list is Apple, the company with the world's highest market cap, followed by its rival Microsoft, followed by another set of rivals, Alphabet (parent company of Google) and Amazon. Finally, the fifth spot is secured by Tesla, a relatively newer entry to this list.
Fundamentals
Fundamental to a company is the basic parameters that show the performance of that company and the attractiveness of its stock.
Fundamentals include indicators like Earnings, Profits, Books Values, Shareholding patterns, Debt Payments Status, etc., which are all essential information about that company.
Fundamentals are the most important criteria for investing in the long term. The market is known to have never defied fundamentally good companies.
Companies with high earnings and higher profitability, good shareholding patterns, healthy book values, and all those indicators are likely to give stellar returns in the long run, given they are not already overpriced.
Data for a company's Fundamentals can be obtained through a tool known as a "stock screener." It is a readily available database for companies listed on the stock exchange and contains all basic fundamental details and analyses of particular stocks.
There is a debate among investors all over the globe regarding which analysis is better, fundamental analysis or the technical analysis of stocks; the consensus here is that fundamentals show long-term prospects whereas technical show short-time changes.
However, this is highly debatable.
Correction
A market correction generally occurs after a bull run, a small rally, or, most prominently, during a Market Crash. A correction is a fancy term for a sudden downtrend in a market.
A correction happens because of overpricing of particular stocks or the whole index in times of a market rally.
Corrections are essential in a market and happen cyclically because they do not let the stock prices inflate to unsustainable levels.
Timely corrections in the market promote healthy growth and reduce the chances of manipulation in particular stocks.
Corrections can range from small levels like 0.5% to more extensive corrections like 6-7% daily! Such massive corrections are prerequisites to a market crash and happen in unstable economies.
A correction can also cause a crash. It is characterized by a
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Period of high uncertainty and
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Low public sentiment
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It can also trigger panic selling in a market.
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A crash is generally followed by a bubble, geopolitical instability, or negative news.
It can increase liquidity in the economy as cash is withdrawn from the market. It can also benefit other instrument classes like Bonds and commodities like Gold and Silver.
The most notable characteristic of a crash is that it comes at an unanticipated time and it comes suddenly.
A crash can last from days to weeks to years to even decades!
A crash follows a widespread drop in stock prices, falling benchmarks, low market confidence, decreasing liquidity, low sentiments, and volatile market disruptions.
Hedging and Portfolio
A portfolio is a collection of all investments made by a single person or a group of individuals known as investment houses.
A portfolio is made of investment choices by individuals who can give different returns depending upon the type of the portfolio.
Some portfolios are more volatile than others, and this is because of the selection of stocks in that particular group of stocks.
Some investors do not want to take up vast amounts of risk and want a steady source of income. For them, Hedging is appropriate.
Hedging is a process where investors decrease risk in investments by diversifying their portfolios using stocks of different sources of investment.
Gold, Silver, Cryptocurrencies, Bonds, ETFs, Baskets, etc. are used to hedge a portfolio.
Generally, hedging against risk reduces return, which is unnecessary in every case.
Analysts and professionals make a lot of money in this sector by taking commissions on gains made by their clients. First, they create a portfolio for multiple clients according to their risk-taking aspirations, then charge a nominal commission on all of those portfolios.
This sector is unpenetrated outside the US and has an excellent scope for making huge cash!
Derivatives and Futures Trading
Derivatives trading is an obligatory trade wherein a trader places his business upon the uptrend or downtrend of any particular instrument within a stipulated time frame.
When that investment moves with time, the trader is obliged by the law to either take profits if his trade goes according to his plans or he has to lose money if the momentum goes against his business.
Futures trading is also linked to these instruments and is concerned with the future movement of a stock price way ahead of present market conditions.
Put and Call options are used in these types of trade.
A put option or short sell is when the trader sells the stock at the current prices and accordingly buys the stock in the future. If he sells at a higher price and purchases at a lower price, he makes a profit from the difference in the two prices.
People generally use the put option when pessimistic about something and want to leverage that sentiment.
A call option or a long position works the opposite way.
These tools have expiration dates and automatically take place during the trade when the time runs out.
This involves a margin wherein the trader can trade more options than he has money to gain more profits. Because of this, options trading is risky as it involves risk, which is multiple times the reward.
Conclusion
Overall, markets are a powerful tool that should not be taken lightly. People can benefit a lot from markets, both businesses and investors. After all, it connects the two and keeps the economy healthy.
Markets work on a cyclical basis, and there are phases of cycles of economic activity in every economy to which markets react accordingly. Although they may not always be rational, markets can be predicted to a certain extent.
Market crashes or corrections in the leman language are not extraordinary anymore. However, in these times of uncertainty, one should always be on the toes of a bad situation.
Market crashes are devastating, but markets have always bounced back better on the positive outlook in strong economies with high growth prospects. Markets will continue to perform this way until a significant change happens, which isn't happening anytime soon.
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