STOCK EXCHANGE PROCESS

 

Stock exchange is a venue where buyers and sellers gather to exchange stocks (ownership shares in firms) and other securities. It acts as the core location where financial dealings occur, assisted by brokers and overseen by regulatory bodies. Here’s an overview of how it operates:

 

1. Companies Issue Shares (Initial Public Offering - IPO):

When a firm offers shares for the first time to the public via an Initial Public Offering (IPO), it essentially provides ownership to investors in return for capital. The main goal of an IPO is to generate funds that the firm can utilize for various aims, including expanding operations, decreasing debt, or pursuing acquisitions. Here’s a summary of the IPO procedure and its essential elements:

 

Key Aspects of an IPO:

 

What is an IPO?

• An Initial Public Offering (IPO) is the procedure by which a privately owned firm makes its shares available to the public for the first time.Once the shares are sold, the firm becomes publicly traded, meaning its shares are listed on a stock exchange, and its financial status and operations become subject to public examination and regulations.

Reasons for Issuing Shares (Going Public):

• Raising Capital: One of the primary motivations for an IPO is to acquire funds for expansion, debt alleviation, or capital expenditure.
• Increased Credibility: Being traded on a stock exchange can boost the firm’s visibility and trustworthiness.
• Liquidity for Shareholders: IPOs present liquidity for current shareholders, including founders, employees, and venture capital investors, enabling them to liquidate shares in the public market.
• Mergers and Acquisitions: Publicly traded stock can serve as currency for purchasing other companies or establishing partnerships.

 

The IPO Process:

• Preparation: The firm prepares by making certain it possesses solid financials and governance frameworks in place, as publicly traded firms face stricter regulations.
• Choosing Underwriters: The firm recruits investment banks (underwriters) to assist them through the IPO procedure. These underwriters aid with pricing, promoting the IPO to prospective investors, and distributing the shares.
• Filing with Regulators: In the U. S. , firms must submit an S-1 registration statement to the Securities and Exchange Commission (SEC), detailing financial performance, business activities, risks, and other critical details.
• Pricing the IPO: The firm and its underwriters determine an offering price for the shares. This price is typically based on the firm’s valuation, market conditions, and demand from investors.
• The Offering: After the IPO is initiated, shares are sold to the public, generally starting with institutional investors (such as mutual funds, pension funds, and hedge funds). Then, individual investors can acquire shares on the open market after the stock begins trading on a stock exchange.
• Post-IPO: Following the IPO, the firm’s shares are publicly traded, and its stock price changes based on market demand and other variables.

 

Risks and Considerations:

• Volatility: After the IPO, a firm’s stock price may experience volatility as the market evaluates its worth.
• Regulatory Scrutiny: Publicly traded firms must disclose more information regarding their operations, which can elevate their susceptibility to regulations and compliance expenses.
• Dilution of Ownership: By creating new shares, the company reduces the ownership percentage of current shareholders, including founders.
• Short-Term Focus: Publicly traded companies may experience pressure from investors and analysts to produce immediate financial results, which could affect long-term plans.

 

Types of IPOs:

• Traditional IPO: The firm offers a set number of shares to investors via its underwriters.
• Direct Listing: Rather than creating new shares, a firm directly lists its existing shares on the exchange without an underwriting process, which may lower costs but usually leads to less capital raised.
• Follow-On Offerings (Secondary Offerings): After an IPO, a firm can issue additional shares to the public if it requires more capital.

 

Advantages and Disadvantages of IPOs

 Advantages:

• Access to Capital: Firms can generate substantial funds to support growth endeavors.
• Publicity and Brand Recognition: Being listed on a stock exchange can enhance a company’s visibility, attracting increased customers and partners.
• Liquidity for Shareholders: Investors can trade shares, providing liquidity for those who own equity.

Disadvantages:

• Costs: The IPO process can incur high expenses, including fees for investment banks, legal expenses, and costs for regulatory compliance.
• Loss of Control: Founders and executives might need to relinquish some control over the business, as they may have to respond to shareholders and the market.
• Market Pressure: Publicly listed companies face ongoing pressure to perform well in the stock market, which may distract from long-term objectives.

 

2. Stock Exchange and Trading:

A stock exchange is a venue where securities, such as stocks, bonds, and derivatives, are traded. It is an essential part of a country's financial framework, enabling the trading of financial instruments and offering a platform for companies to obtain capital by providing shares to the public through initial public offerings (IPOs). Stock exchanges also play a role in the liquidity and price discovery of securities.

 

Key Aspects of Stock Exchanges and Trading:

 

1. What is a Stock Exchange?

A stock exchange is an organized and regulated market where securities are listed and traded by participants, including individual investors, institutional investors, and market makers. Stock exchanges promote transparency, fairness, and liquidity in trading.

Key Functions of a Stock Exchange:

• Facilitating Trading: Stock exchanges serve as a location for buyers and sellers to connect and execute trades.
• Price Discovery: The prices of securities are established through supply and demand dynamics, aiding in determining fair market values.
• Liquidity: Stock exchanges allow investors to easily buy and sell securities, ensuring market liquidity.
• Regulation and Oversight: Stock exchanges function under stringent regulatory guidelines to maintain fairness, transparency, and protection for investors.

 

2. Types of Stock Exchanges

Numerous stock exchanges exist globally, with some of the most well-known being:

• New YorkStock Exchange (NYSE): The largest stock exchange on the planet, located in the U. S.
• Nasdaq: Recognized for its technology-focused listings, also situated in the U. S.
• London StockExchange (LSE): Among the oldest and largest stock exchanges throughout Europe.
• Tokyo StockExchange (TSE): The principal stock exchange in Japan.
• Hong KongStock Exchange (HKEX): A significant stock exchange found in Asia.
• Euronext: A European exchange operating in various countries.

Stock exchanges can be physical, such as the NYSE, or electronic, like the Nasdaq and many other global exchanges today.

 

3. How Stock Trading Works

Stock trading involves the act of buying and selling shares (or stocks) of companies that are listed on stock exchanges. It is a process in which investors swap ownership in companies, aiming to gain from price fluctuations or dividends. Here is a step-by-step outline of how stock trading functions:

 

1. Opening a Brokerage Account

To begin trading stocks, it is necessary to establish a brokerage account. Brokerages serve as intermediaries that enable the buying and selling of stocks on your behalf. They operate as a facilitator between you (the investor) and the stock exchange.

Types of Brokers:

• Traditional Brokers: Full-service brokers provide customized advice, research, and additional services (e. g. , Merrill Lynch).
• Online Brokers: Discount brokers (e. g. , E*TRADE, Robinhood, Charles Schwab) offer lower-cost trading platforms with minimal fees, generally without personal guidance.

Once your account is created and funded, you can initiate placing orders to buy or sell stocks.

 

2. Placing an Order

After you have opened a brokerage account, you can submit an order to purchase or sell stocks. There are various types of orders you can execute:

• Market Order: A request to purchase or sell a stock instantly at the prevailing market price. Market orders tend to be executed rapidly but may not always guarantee the price at which the order is completed due to market volatility.
• Limit Order: An order to buy or sell a stock at a specific price or more favorable. For instance, if you wish to acquire a stock but are only prepared to pay $50 or less, you can establish a limit order at $50. This order will only be executed if the stock price reaches $50 or lower.
• Stop Order (Stop-Loss Order): A specific order created to minimize an investor’s loss. When a stock’s price drops to a defined level, the stop order automatically triggers a sale. For example, you might set a stop-loss order at $40 to sell a stock if its price falls below that point.
• Stop-Limit Order: This order combines a stop order and a limit order. Once the stop price is hit, the order transforms into a limit order. This provides greater control over the price at which the trade is executed but might not be executed at all if the price does not meet your limit.

 

3. Execution of Orders

Once the order is placed, it is forwarded to the stock exchange where the security is listed. The order will subsequently be matched with a counterparty (another investor interested in selling or buying the stock at the designated price).

• Market Makers and Specialists: In conventional stock exchanges, such as the New York Stock Exchange (NYSE), market makers or specialists are involved in providing liquidity by buying and selling securities at the quoted prices.
• Electronic Markets: In contemporary electronic exchanges (like Nasdaq), orders are carried out automatically by matching algorithms that align buy and sell orders according to price and timing.

Once a match is identified, the trade is executed, and the ownership of the stock is transferred from the seller to the buyer.

 

4. Settlement

After the trade has been executed, there is a settlement process. Settlement denotes the actual exchange of money for stocks. In the U. S. , the typical settlement period is T+2, which indicates that the transaction is completed (money exchanged for the stock) within two business days following the trade.

During settlement:

• The seller receives the payment for the stock they have sold.
• The buyer obtains the shares that they purchased.
• For instance, if you bought 100 shares of a company on Monday, the settlement would generally occur by Wednesday (T+2), at which time you officially possess the shares.

 

5. Holding and Monitoring Stocks

Once you acquire a stock, you become a shareholder, which means you now possess a portion of the company. Investors might retain their stocks for varying durations, based on their investment strategy:

• Short-Term Traders: Some traders concentrate on short-term price fluctuations and may buy and sell stocks within minutes, hours, or days. This is referred to as day trading or swing trading.
• Long-Term Investors: Long-term investors might hold stocks for months or years, anticipating an increase in the stock's value over time. They might also receive dividends if the company distributes them.

While holding the stock, investors keep an eye on the stock’s performance and market news to make well-informed decisions about whether to retain, sell, or acquire more shares.

 

6. Selling Stocks

When you are prepared to sell your shares, you submit a sell order with your broker. The same types of orders (market, limit, stop-loss) can be utilized when selling stocks.

• Capital Gain (or Loss): The profit (or loss) from selling a stock is assessed based on the difference between the sale price and the purchase price. If you sell the stock for more than you paid for it, you realize a capital gain; if you sell it for less, you face a capital loss.
• Taxes: In numerous countries, capital gains are liable for taxation. Short-term capital gains (on stocks held for under a year) are often taxed at a higher rate compared to long-term capital gains.

 

7. Stock Price Fluctuations

Stock prices are regularly influenced by various factors, including:

• Market Demand and Supply: If there are more buyers than sellers for a stock, the price rises. Conversely, if more investors are selling than buying, the price falls.
• Company Performance: A company's profitability, financial stability, management, and growth potential can impact its stock price. Stronger earnings reports generally push stock prices up, while weaker earnings can cause them to drop.
• Economic Factors: Wider economic elements, such as inflation, interest rates, and market perception, can affect stock prices. Events in politics, natural disasters, and market announcements also significantly influence prices.

 

8. Stock Market Orders Flow

• Placing the Order: Investors enter orders using their brokerage account (either online or with a broker).
• Order Routing: The broker sends the order to the stock exchange.
• Order Matching: The stock exchange pairs buy and sell orders according to price and timing.
• Trade Execution: Upon matching orders, the trade is carried out.
• Settlement: The deal is finalized, with the stock being transferred to the buyer and payment made to the seller.

 

9. Types of Traders and Investors

• Retail Investors: Individual investors who engage in buying and selling stocks for their personal benefit.
• Institutional Investors: Large entities such as hedge funds, mutual funds, and pension funds that trade stocks in large volumes.
• Day Traders: Traders who conduct buying and selling of stocks throughout the same trading day to capitalize on short-term price changes.
• Swing Traders: Traders who maintain positions in stocks for a few days to weeks to take advantage of medium-term price swings.
• Long-Term Investors: Investors who purchase and keep stocks for several months or years, generally aiming to profit from the long-term growth of the business.

 

10. Risks in Stock Trading

While trading stocks can yield profits, it also carries certain risks:

• Market Risk: The danger that the broad market may decline, impacting your stock holdings.
• Volatility Risk: Prices can change dramatically over short durations, resulting in potential losses.
• Liquidity Risk: Certain stocks may lack sufficient buyers or sellers, complicating the execution of trades at desirable prices.
• Company-Specific Risk: Adverse news or subpar performance from the company in which you hold shares can lead to a drop in stock value.

 

4. Types of Markets Within Stock Exchanges

Within a stock exchange, various market types exist to support the buying and selling of securities. These markets cater to different trading requirements, participants, and financial instruments. The primary markets within a stock exchange can typically be classified as follows:

 

1. Primary Market

The primary market is where new securities are made available for the first time. When a company wants to raise funds by selling shares to the public, it conducts this in the primary market via an Initial Public Offering (IPO) or a Follow-On Public Offering (FPO).

Key Features of the Primary Market:

• New Securities: This is the market where companies first offer new stocks or bonds to investors.
• Raising Capital: The firm issuing the securities acquires capital directly from investors. This capital may be allocated for business growth, repaying debt, or financing other initiatives.
• Underwriting: Investment banks or financial institutions (underwriters) frequently support the firm in determining the pricing of the offering, promoting it, and distributing the securities.
• Examples of Primary Market Transactions:
• Initial Public Offering (IPO): A firm becomes public and presents its shares to the public for the initial time.
• Follow-On Offering (FPO): A firm that is already publicly traded issues further shares to generate additional capital.
• Private Placements: Shares or bonds are sold straight to a limited number of institutional investors instead of via a public offering.

In the primary market, the firm obtains the revenue from the sale of securities, and the investor attains ownership of those securities.

 

2. Secondary Market

The secondary market is where securities are exchanged after their issuance in the primary market. This is the marketplace where investors trade existing securities, with the company that initially issued the securities being uninvolved in the transaction.

Key Features of the Secondary Market:

• Trading of Existing Securities: Once securities are issued in the primary market, they are exchanged among investors in the secondary market. For instance, post-IPO, shares of the firm can be traded on the exchange by other investors.
• Liquidity: The secondary market offers liquidity to investors, enabling them to buy or sell securities at market prices. Absent a secondary market, investors might struggle to sell securities and would be confined to holding them until maturity.
• Price Discovery: The prices of securities in the secondary market are ascertained by supply and demand. The prices vary based on elements like company performance, market conditions, and economic trends.
• Examples of Secondary Market Transactions:
• Stock Exchanges: Investors buy and sell shares of publicly traded firms on stock exchanges like the New York Stock Exchange (NYSE), Nasdaq, or London Stock Exchange (LSE).
• Over-the-Counter (OTC) Markets: Securities are exchanged directly between two parties without a centralized exchange, usually in the form of bonds, derivatives, or smaller shares not listed on major exchanges.

In the secondary market, the ownership of the securities transfers, but the firm that issued the shares does not gain directly from these transactions.

 

3. Tertiary Market

Although the tertiary market is not formally defined as a distinct market category, it is commonly mentioned in discussions regarding less liquid or non-traditional trading environments. It may involve trading in securities that are challenging to trade on established secondary markets. This encompasses lesser-known or unlisted stocks, frequently traded in pink sheets or over-the-counter (OTC) markets.

Key Features of the Tertiary Market:

• Lower Liquidity: The securities traded in this market generally do not possess the same level of liquidity as those traded on primary and secondary markets.
• Smaller Companies: The market often includes shares of smaller or less-established firms that are not listed on major exchanges.

Example: Small-cap stocks, unlisted firms, or stocks that are not actively traded.

 

4. Auction Market

In an auction market, participants who wish to buy or sell securities place their bids, and transactions take place when bids align with offers. This market format is primarily linked with stock exchanges like the New York Stock Exchange (NYSE), where a centralized exchange organizes trades between buyers and sellers via an auction mechanism.

Key Features of the Auction Market:

• Price Discovery: Buyers place bids at the prices they are willing to pay, while sellers promote stocks at the prices they are ready to accept. The transaction price is established when these two parties converge.
• Centralized Trading: The exchange functions as a centralized location for trading, with brokers serving as intermediaries for both buyers and sellers.
• Order Book: An order book documents all buy and sell requests, and the matching occurs according to price precedence and time precedence.

Examples:

• NYSE: The NYSE functions as an auction market where brokers and specialists synchronize buy and sell requests in real-time.

 

5. Dealer Market

A dealer market is characterized by a dealer or market maker who enables trades by maintaining a stock of securities. Instead of directly pairing buyers and sellers, dealers purchase and sell from their own holdings. This is prevalent in over-the-counter (OTC) markets and electronic marketplaces like Nasdaq.

Key Features of the Dealer Market:

• Market Makers: In a dealer market, market makers are individuals or companies that trade securities for their own benefit and earn profits from the spread (the difference between the bid and ask prices).
• OTC Trading: Dealer markets are frequently utilized for trading securities not listed on centralized exchanges or those that are less liquid.
• Continuous Trading: Dealers furnish continuous pricing for securities, which guarantees that trades can happen at any time during market hours, without needing to wait for corresponding buy and sell orders.

Examples:

• Nasdaq: The Nasdaq operates as a dealer market, where various market makers vie to provide liquidity by quoting prices for stocks.

 

6. Electronic Market (ECNs)

An electronic communication network (ECN) is an automated platform that pairs buy and sell orders for securities, negating the need for a conventional broker or exchange. ECNs enable investors to trade directly with one another, employing advanced algorithms to aid in price discovery and execution.

Key Features of Electronic Markets:

• Direct Access: Investors can trade directly with one another, removing the necessity for intermediaries such as brokers.
• Faster Execution: Trades can be completed swiftly due to the automated structure of the system, enhancing market efficiency.
• Lower Costs: As brokers are not required to facilitate trades, the associated fees and commissions may be reduced.

Examples:

• ARCA (NYSE Arca): A fully electronic exchange that enables the fast execution of trades.
• Instinet: A significant ECN offering direct market access for institutional investors.

 

5. Market Participants:

Market participants consist of the various individuals, institutions, and entities that engage in the buying, selling, and trading of securities within the stock market. These participants hold specific roles that facilitate market functioning, ensuring liquidity, price discovery, and smooth operations. Below are the primary market participants:

 

1. Retail Investors (Individual Investors)

Retail investors refer to individual traders who invest their own personal capital in the stock market. These investors generally buy and sell stocks via brokerage accounts, aiming to increase their wealth or generate income.

Key Features:

• Investment Goals: Retail investors might participate in short-term trading, long-term investment, or dividend collection.
• Trading Platforms: They commonly utilize online brokerage platforms such as Robinhood, E*TRADE, or Charles Schwab to carry out trades.
• Decision-Making: Retail investors base their decisions on their own research or advice from financial advisors, and they frequently invest in stocks, mutual funds, ETFs, or bonds.
• Trade Size: The capital invested by retail investors is generally lesser when compared to institutional investors.

 

2. Institutional Investors

Institutional investors are large organizations that invest significant amounts of capital in the stock market. These entities usually manage portfolios on behalf of individuals, companies, or funds.

Key Features:

• Mutual Funds: These investment vehicles pool capital managed by firms like Vanguard or Fidelity, investing in stocks, bonds, and various assets.
• Pension Funds: These funds handle retirement savings for employees of private companies or governmental agencies (e. g. , California Public Employees' Retirement System, CalPERS).
• Hedge Funds: These funds often use complex strategies such as leverage, short selling, and derivatives trading to yield returns for their investors.
• Insurance Companies: These entities invest large sums in stocks, bonds, and other securities to manage liabilities and provide returns for policyholders.
• Endowments and Foundations: Universities and non-profit organizations also maintain investment portfolios overseen by professional managers.

Characteristics:

• Large Trade Size: Institutional investors typically conduct large trades, which can greatly affect stock prices.
• Professional Management: These investors hire professional fund managers, analysts, and other specialists to make investment choices.
• Diversification: Institutions often spread their investments across different asset classes to minimize risk.

 

3. Market Makers

Market makers are firms or individuals tasked with ensuring liquidity in the stock market by handling buy and sell orders. They play a vital role in ensuring that stocks can be bought or sold quickly at transparent prices.

Key Features:

• Provide Liquidity: Market makers keep an inventory of stocks and pledge to buy and sell them at indicated prices, minimizing the likelihood of trade execution failure.
• Profit from Spreads: They earn revenue from the difference between the buying price (bid) and the selling price (ask), referred to as the spread.

Examples: Major market-making firms include Citadel Securities, Virtu Financial, and Jane Street.

• Role in Exchanges: On exchanges like the NYSE, market makers guarantee that securities are traded consistently by buying or selling stocks when there is inadequate interest from buyers or sellers.

 

4. Brokers

Brokers are agents that assist in the purchasing and selling of stocks for both individual and institutional investors. They may either be employed by a brokerage firm or work independently, executing trades on behalf of their clients.

Key Features:

• Execution of Orders: Brokers accept orders from investors and carry them out on the stock exchange.

Types of Brokers:

• Full-Service Brokers: These brokers provide research, investment advice, and tailored services, often charging higher fees (e. g. , Merrill Lynch, Morgan Stanley).
• Discount Brokers: These brokers have lower fees and offer fewer advisory services, primarily concentrating on executing trades (e. g. , Robinhood, E*TRADE, Charles Schwab).
• Revenue: Brokers typically receive a commission or fee for executing trades for clients, although some discount brokers charge less or provide commission-free trading.

 

5. Dealers

Dealers are individuals or entities that buy and sell securities for their own benefit. In contrast to market makers, who facilitate trades by matching buyers and sellers, dealers are directly involved in transactions, taking ownership of the securities.

Key Features:

• Provide Liquidity: Dealers hold inventories of securities and provide bid and ask prices to aid in market transactions.
• Profit from Spreads: Dealers earn profits from the difference between the price they are willing to pay for a security (the bid price) and the price they are willing to sell it for (the ask price).

Examples: Dealers can function in specific asset classes like bonds or participate in less-liquid markets such as over-the-counter (OTC) markets for stocks or derivatives.

 

6. Specialists (or Designated Market Makers)

A specialist or designated market maker (DMM) is a type of market maker found on certain stock exchanges, such as the New York Stock Exchange (NYSE). They are responsible for managing specific securities and ensuring a continuous and orderly market for those securities.

Key Features:

• Maintain Orderly Markets: Specialists oversee the trading of specific stocks, particularly those with low trading volumes, ensuring efficient matching of buy and sell orders and adequate liquidity.
• Act as Arbitrators: In case of inconsistencies between the buy and sell orders for a security, specialists intervene and utilize their own inventory to stabilize the market.

 

7. Investment Advisors and Fund Managers

Investment advisors or fund managers are professionals who handle investment portfolios for clients, which may include individuals, corporations, or institutional investors. They offer expertise in selecting stocks and other assets in line with clients’ financial objectives and risk tolerance.

Key Features:

• Portfolio Management: Investment advisors and fund managers develop diversified portfolios designed to maximize returns for clients based on their risk appetite and investment timelines.
• Fiduciary Responsibility: Investment advisors often hold fiduciary status, meaning they are legally obligated to act in their clients’ best interests.

Examples: Prominent asset management firms, such as BlackRock, Vanguard, or Fidelity, employ investment advisors to manage mutual funds, exchange-traded funds (ETFs), and other financial instruments.

 

8. Regulators

Regulators are governmental or independent entities tasked with overseeing and regulating the operations of stock exchanges and financial markets. They work to guarantee that the market functions fairly, transparently, and without any form of manipulation or deceit.

Key Features:

• Monitor Market Activities: Regulators impose rules and regulations that deter insider trading, market manipulation, and fraud.

Examples:

• Securities and Exchange Commission (SEC): In the United States, the SEC is tasked with regulating the securities industry and ensuring equitable trading practices.
• Financial Conduct Authority (FCA): In the UK, the FCA supervises the financial markets and safeguards investors.
• Commodity Futures Trading Commission (CFTC): In the U. S. , the CFTC oversees futures markets and derivatives trading.
• Functions: Regulators formulate rules for market participants, oversee compliance, and take enforcement measures when breaches occur.

 

9. Hedgers

Hedgers are individuals in the market who utilize an array of financial instruments, such as options, futures, and other derivatives, to lessen or control risk. These individuals generally possess an underlying exposure to the asset they are hedging.

Key Features:

• Risk Management: Hedgers employ instruments like futures contracts to safeguard against negative price fluctuations in assets they possess or are exposed to.

Examples:

• Agricultural Producers: A farmer might utilize futures contracts to secure a price for their crops.
• Businesses: A firm handling foreign currency might adopt hedging techniques to alleviate currency exchange risks.

 

10. Arbitrageurs

Arbitrageurs are market participants who aim to profit from price differences between various markets or asset classes. They take advantage of minor inefficiencies in pricing that arise from variations in supply, demand, or timing across markets.

Key Features:

• Profit from Price Differences: Arbitrageurs acquire a security in one market at a reduced price and sell it in a different market at a higher price.
• Market Efficiency: Their activities aid in aligning prices more closely to their actual value, enhancing market efficiency.

Examples: A trader may capitalize on price variations between stocks listed on different exchanges or engage in currency arbitrage across various foreign exchange markets.

 

6. Stock Indexes

A stock index serves as a benchmark that monitors the performance of a designated group of stocks. Stock indexes are employed to illustrate the overall performance of the stock market or a specific sector. Some notable stock indexes comprise:

• Dow Jones Industrial Average (DJIA): Monitors 30 substantial publicly traded companies in the U. S.
• S&P 500: Encompasses 500 of the largest companies listed on U. S. exchanges, offering a wide representation of the U. S. stock market.
• Nasdaq Composite: Covers all the companies registered on the Nasdaq Stock Market, which is heavily focused on tech.
• FTSE 100: A benchmark index for the 100 largest companies on the London Stock Exchange.

 

7. Trading Hours and Market Sessions

Stock exchanges feature designated trading hours, generally occurring on business days:

• U. S. Stock Market Hours:
• NYSE and Nasdaq: From 9:30 AM to 4:00 PM (Eastern Time) during weekdays.
• European and Asian Markets: Each area has its own hours, typically aligned with the local time zone.

Moreover, after-hours trading permits investors to purchase and dispose of stocks outside of standard trading hours, though liquidity could be lower, and prices may be more unstable.

 

8. Trading Strategies

There exist multiple strategies employed by traders and investors in the stock market, including:

• Day Trading: The method of buying and selling stocks within the same trading day to capitalize on short-term price shifts.
• Swing Trading: Traders maintain positions for several days or weeks, aiming to profit from short-term trends.
• Long-Term Investing: Acquiring stocks intending to retain them for numerous years, concentrating on the company's fundamentals.
• Momentum Trading: Investors purchase stocks that are on the rise and sell those that are decreasing, relying on momentum indicators.

 

9. Risks in Stock Trading

• Market Risk: The chance that the general market declines, influencing the price of individual stocks.
• Volatility Risk: The possibility of substantial price variations in the stock, especially in reaction to market news or events.
• Liquidity Risk: The risk that an investor might be unable to buy or sell a stock at the preferred price due to insufficient trading volume.
• Company-Specific Risk: The danger tied to individual companies, such as ineffective management or financial performance, impacting stock prices.

Complete process cycle of the Stock Market

Market Participants:

• Investors: These consist of individuals, institutions, or mutual funds who buy and sell stocks to either earn a profit or invest for long-term financial objectives.
• Brokers: Investors generally do not engage directly with the stock exchange. Instead, they utilize brokers—financial professionals or firms—that serve as intermediaries to carry out buy and sell orders for investors.
• Market Makers: In certain exchanges, market makers are firms that assist in ensuring constant liquidity by buying and selling specific stocks, maintaining the smooth operation of the market.

 

Orders and Transactions:

• Buy and Sell Orders: Investors submit buy orders (specifying how many shares they wish to purchase and at what price) and sell orders (indicating how many shares they aim to sell and at what price).
• Matching Orders: The exchange’s electronic system aligns buy and sell orders based on price and timing. When a match occurs, the trade is carried out.
• Stock Price: The value of a stock is set by the interplay between supply and demand. If more individuals wish to buy than sell, the price is likely to increase. Conversely, if more people aim to sell than buy, the price is likely to decrease.
• Market Orders: A market order happens when an investor desires to buy or sell a stock immediately at the best available price.
• Limit Orders: A limit order occurs when an investor indicates the price at which they wish to buy or sell a stock. The order will be executed only if the price hits that specified limit.

 

Secondary Market:

Following the IPO, the shares are traded in the secondary market, which is where the majority of stock trading takes place. Investors can purchase and sell shares of a company without directly impacting the company’s finances, as no new shares are issued. The share price reflects the overall valuation of the company by the investors based on several factors such as earnings, growth potential, and market conditions.

 

Price Fluctuations:

Stock prices vary throughout the day due to various factors such as:

• Company performance: Earnings reports, product launches, or changes in management can influence stock prices.
• Economic factors: Interest rates, inflation, and geopolitical events can shape investor sentiment and stock prices.
• Market Sentiment: News, rumours, and general market trends can impact the demand for stocks.

 

Regulation:

• Stock exchanges are overseen by government agencies (like the Securities and Exchange Commission (SEC) in the U. S. ) to guarantee fair trading and transparency.
• Regulations exist to prevent fraud, insider trading, and manipulation of stock prices, ensuring that all investors receive the same information.
• Exchanges also have guidelines regarding how trades should be executed and what information must be made available to the public to maintain fair and orderly markets.

 

Clearing and Settlement:

• Once a trade is executed, the clearing and settlement process commences. This involves the transfer of ownership of the shares from the seller to the buyer.  The clearinghouse guarantees that both parties meet their obligations, and the transaction is finalized. This process generally takes two days (T+2) in most markets.

 

Impact on Company and Investors:

• Market Capitalization: The market capitalization of a company is determined by multiplying its stock price by the number of outstanding shares, which indicates its total value in the market. Investor Profits/Losses: Investors profit when the stock price increases (capital gains) or receive dividends from the company. Conversely, they incur losses when the stock price declines.

 

          Key Takeaways:

• The stock exchange serves as a marketplace for the buying and selling of stocks.
• Investors rely on brokers to submit orders, and trades are matched electronically.
• Stock prices fluctuate based on supply and demand, market sentiment, and company performance.
• Exchanges are regulated to maintain transparency and fairness in trading.