Today, we are going to dive right into the evolution of Stock Markets and the need for this.
Birth of the Stock Market
Stock Market was born to provide a common trading platform for the shareholders of registered Public Limited Companies. It was born to give a free market place for trading of shares. It provided a common entry and exit point for investors and shareholders. It took idle money from the public and put it to work in various businesses. Stock exchanges also stand as guarantor for all trades executed on a stock exchange.
What is the Stock Market
The stock market is a collection of share trading platforms and stock exchanges Here shares and securities are traded through formal stock exchanges. It is vital to the economy as it provides companies with access to capital. In exchange companies give investors a slice of ownership.
Price discovery started happening with the birth of the Share Market. Price Discovery is the process by which the price of a specific share or a security is determined through supply and demand. For example, investors want to invest their money in X Company as they foresee a good growth in X Company. This will drive up the share price of X Company. On the other hand, shares of Y Company are available but few investors are drawn to purchase these shares as growth prospects are dim for it. In this case, there will be less demand for Company Y resulting in a softening in the share price.
The Stock Markets were driven by:
a) need for capital
b) need to invest ones surplus money/ savings in productive liquid assets
Barometer of the economy
Stock Markets soon became the indicator of a country’s well being and prosperity. If a economy is doing well, there will be buoyant activity in stock market and vice versa.
Generally share prices tend to remain stable or rise when the economy is doing well or is under no threat. Share prices tend to fall sharply at the time of economic recession, stagnation, depression or financial crisis.
We all know that the USA is the world’s biggest economy. It acts as the engine for the rest of the world. It has a current GDP of approx. $ 18 trillion. GDP or Gross Domestic Product is the total monetary value of everything produced by all the people and companies of a country over a specified period of time. The USA is a consumption led economy.
On the other hand, India has a current GDP of approx. $ 2 trillion and that too with a population which is about 6 times more than that of the USA. India is a saving led economy.
Main Sections of the Stock Market
There are two main sections to the Stock Markets
: the primary market
: the secondary market.
The Primary Market
This is where new issues are sold through Initial Public Offering (IPO). Public Companies have to sell at least a portion of their shares to the public if they want to be traded on a stock exchange. This is called going public. A company uses money raised from its IPO to grow and expand. Facebook raised $16.01 billion in 2012 through its IPO.
An interesting point to note here is that once shares start trading, the company itself does not receive funds from the buying and selling of its shares.
The Secondary Market
It is the place where all subsequent trading goes on. Investors continue to trade in a companies stock after the IPO. The perception of a company’s value changes with time. Investors make or lose money depending on whether their perception is in agreement with the market sentiment. The investors personal wealth goes up or reduces. However this does not impact fund flow to the company.
So friend are you finding all this information helpful? Stay with me as we have a long way to go. Please give me your valuable suggestions and comments so that I can add to or improve the content.
My next post will have some very interesting information on stock exchanges. So do keep following my posts every Thursday.