An equity market, also known as the stock market, is a platform where shares of publicly-held companies are issued and traded. These shares can be exchanged either through formal exchanges or over-the-counter (OTC) markets.
Components of the Equity Market
Stock Exchanges
Stock exchanges are centralized platforms where securities are bought and sold. Major stock exchanges include:
- New York Stock Exchange (NYSE): One of the largest stock exchanges globally.
- NASDAQ: Known for its electronic trading and listings primarily in the tech sector.
- London Stock Exchange (LSE): One of the oldest stock exchanges in the world.
Over-the-Counter Markets
OTC markets are decentralized and involve trading directly between parties. Example:
- OTC Bulletin Board (OTCBB): A quotation medium for subscribing members.
How Does the Equity Market Work?
Listing of Shares
Initial Public Offerings (IPOs): A company issues shares to the public for the first time to raise capital.
Secondary Market Transactions: Post-IPO, shares are traded between investors on stock exchanges or OTC markets.
Price Determination
Stock prices are determined through supply and demand dynamics. Factors influencing this include:
- Company performance
- Economic indicators
- Market sentiment
Trading Mechanisms
Order Types
- Market Orders: Immediate execution at current market price.
- Limit Orders: Execution only at a specified price or better.
- Stop Orders: Triggered when a stock reaches a specified price.
Settlement
The process of agreements and payment by the involved parties, typically finalized within T+2 days (trade date plus two days).
Types of Equity Markets
Primary Market
Where new shares are issued and sold to investors directly by the company (e.g., through IPOs).
Secondary Market
Where existing shares are traded among investors. Examples include the NYSE and NASDAQ.
Examples of Equity Market Transactions
Real-World Examples
- Apple Inc. IPO (1980): Initial public offering price was $22.00 per share.
- Alibaba Group IPO (2014): Raised $25 billion, the largest IPO in history at that time.
Historical Context
The concept of equity markets dates back to the early 17th century with the establishment of the Amsterdam Stock Exchange, widely considered the world’s first stock exchange.
Applicability of Equity Markets
Investors
- Retail Investors: Individuals who buy and sell securities for personal account.
- Institutional Investors: Organizations that trade large volumes of securities (e.g., pension funds, mutual funds).
Corporations
Utilize equity markets to raise capital for expansion, R&D, and other corporate activities.
Comparisons with Related Terms
Debt Market
- Debt Market: Platforms where bonds and other debt instruments are traded.
- Equity vs. Debt: Equity represents ownership in a company, while debt represents a loan to the company.
FAQs
Q1: What are the main differences between a primary and secondary equity market?
Q2: How are stock prices determined?
References
- Investopedia: For in-depth definitions and tutorials on financial terms.
- SEC (Securities Exchange Commission): Regulation and guidance on securities markets.
- NYSE: Information on stock exchanges and trading.
Summary
Equity markets are critical components of the financial ecosystem, enabling companies to raise capital and investors to buy and sell shares. Understanding the fundamental aspects of these markets, from their types to their operation, is essential for both investors and companies.
