Stock Markets: An Introduction

The Stock market, also known as the equity market, represents a private or public market that enables the trading of company stock and its derivatives at an agreed price. To better understand its importance, imagine that entire world stock market is estimated at about $51 trillion, and the world derivatives market has been estimated at about $480 trillion. This is somewhere around 30 times the size of the US economy, and 12 times the size of the entire world economy. Impressive, isn’t it?

The world stock market is one of the major sources of funding for corporations, business enterprises and the government. Its performance can be held responsible for a significant amount of the world’s economic condition, its growth clearly indicating a flourishing economy. Some even say that they often predict what is going to happen with the economy of a certain country around six months later.

Ticker symbols are used to identify stocks of different business organizations that are included in the stock exchange of the world. Three characters are used for the companies listed in the New York Stock Exchange (for example, Abbot Labs are abbreviated ABT) and four letters symbolize the companies listed in the NASDAQ exchange (Apple Inc. is abbreviated AAPL).

In the past, market traders were individual investors. Nowadays the buyers and sellers are institutions like insurance companies, hedge funds, banks, investor groups or pension funds. Stock market operations can be virtual or real. Virtual stock exchanges take place through the internet or through closed computer networks Stocks can be sold or bought virtually. Open outcry is the process through which a stock exchange which has a physical location can execute stock trading. Verbal bids set the stock prices.

Companies issue securities which are transferred by financial markets, which serve as mediators, to prospective buyers. A timely transfer of money is guaranteed through this procedure. Stock prices go through intense fluctuations, unlike the government insured bank deposits which are stable. Share prices should be affected mostly by changes in dividends or profits, according to the EMH (efficient market hypothesis), but this is mostly a theoretic point of view. But the crash of the stock market in 1987 proved that prices can fall abruptly even without a clear cause.

The market sometimes reacts irrationally, even to economic news which does not have a real effect on the technical value of securities. Rumours, press releases and panic of the masses can make the market lean in any direction. The stock market is difficult to predict as securities may be damaged by a variety of events that change the market rapidly.