What is the Stock Market? – Work, Risks, Important, and More
What is the Stock Market?
A stock market is a central place where the shares of publicly trade companies are bought and sold. Stock markets differ from other markets because tradable assets are limited to stocks, bonds, and exchange-traded products (ETPs).
The stock market is the physical or virtual space where private and public companies worldwide come to finance themselves, capturing the savings of investors, who are offering different benefits and returns depending on the nature of the company’s title.
When we say “securities”, we refer to different financial assets that companies issue and investors can buy in exchange for a return.
It knows that when we talk about the stock market in general, we are referring to the set of stock exchanges. Although it is true, however, that in stock market jargon, they are using as synonyms. For example, the US stock market comprises different stock exchanges. Among these, the NYSE stands out.
How does the Stock Market Work?
The stock market is a large wholesale market where companies go to obtain money from investors interested in earning a return on their savings.
Risks of Stock Market
All investments entail taking risks to obtain profitability, so knowing them before taking the step is convenient. Among them:
It consists of the possibility of incurring losses due to adverse movements in the listed price of the asset.
Liquidity risk: It is the hazard of not being able to quickly sell an asset that the investor wants to get rid of to earn money and, consequently, having to sell at a loss by being forced to accept a lower price than the asking price.
Credit risk: Affects fixed-income securities and consists of suffering losses derive from a failure to pay interest or principal on the debt to the bondholder.
Interest rate risk: Affects fixed-income securities and translates into losses derive from adverse movements in interest rates, which causes falls in the security price.
Exchange rate risk: Affects any security denominated in a currency other than that of the investor and leads to losses cause by adverse movements in the exchange rate. For example, my yen-denominator bond appreciates against my local currency, the dollar.
Importance of the Stock
The stock market allows and favours the economic development of countries to the extent that it channels part of the savings of economic agents -individuals and companies- towards investment in companies that need financing to carry out their projects. examples of stock markets
There are many stock markets approximately the world. Some of the largest are the New York Stock Exchange (NYSE), the NASDAQ, and the Tokyo Stock Exchange (JPX). Other well-known exchanges are the London Stock Exchange (LSE), the Shanghai Stock Exchange (SSE), and the Bombay Stock Exchange (BSE).
Advantages and Disadvantages of Stock Market
Stock markets have several advantages and disadvantages for both listed companies and investors who wish to trade in them
Advantages of Stock Market
Being listed on a stock market brings a certain level of prestige to a company. This is particularly true of older stock exchanges, such as Amsterdam, London, and New York. Going public also means investors can buy shares in the company, helping it expand by raising funds.
By trading in a stock market, investors risk default by the counterparty. This is due to high levels of regulation, which over-the-counter (OTC) trading methods lack.
In addition, companies that act as online brokers have made it even easier for investors to access the stock markets and have allowed them to profit from any short-term market movement.
Disadvantages of Stock Market
Listing on a stock market is a significant investment of time and capital for companies. In addition, once they list, they will have to answer the shareholders with shares.
Trading on a stock market does not guarantee stability. Stock markets are susceptible to market volatility, which means that there can be sharp swings in share prices, usually in response to political and economic events worldwide.
Stock markets can also crash. Although rare, it crashes can significantly reduce the value of stocks and lead to economic depressions acquiring debt
Utilizing loans that they will later have to pay back to their creditor. These loans can come from financial credit institutions or be issued by a company that funds them.
This second case is the one that we will take into account throughout the article since. It includes the capital market, it is said that the company issues debt securities.
That is, to share ownership of the company without the obligation to return the money to its investor. Shares belong to the equity market and, unlike fixed income. Its offer a return known in advance by their investor at the time of purchase.
In addition, companies issue shares for different purposes. For example, to carry out capital increases. Instead, they expose to the fluctuation list prices, which may go for or against the investor’s interests, generating profits or losses. As fixed income, shares are also bought on the stock exchanges.
When they make new issues, whether variable income fix income, companies must go to the so-called primary market, that is to say; the primary market welcomes the births of the emissions of the companies to finance themselves.