To understand what the stock market is, it is necessary to go far beyond the definition itself. Therefore, in this post we will touch on various aspects and components that actively participate in it.
The Stock Market Definition corresponds to that of a type of capital market where it operates on variable income and fixed income, through the sale of negotiable securities. Something that allows the channeling of capital to investors and users in the medium and long term.
The issuance, placement and distribution process depends on the participants, which are the issuers, investors, intermediaries and other economic agents.
Negotiable securities issued by individuals or entities, whether public or private, are also affected in the process. They are, for example, negotiable securities: the shares of companies and negotiable securities equivalent to shares, the participative shares of the savings banks, the securitization bonds, the mortgage participations, the money marketing instruments, the preferred participations, the territorial certificates, the warrants, among others.
Likewise, option contracts, forward interest rate agreements and other financial instrument contracts related to securities, financial instruments, raw materials, etc. are considered as negotiable securities.
Characteristics of the stock market
Among the most important characteristics of the stock market can be found the following:
- Profitability : By investing in the stock market it is expected to obtain a return for this. Something that can happen in two ways:
- Collection of dividends
- The difference between the sale price and the purchase price of the securities. In other words, with the gain or loss obtained.
- Security : We are talking about an equity market. This means that the values can change up or down, as the market fluctuates. As is evident, this represents a risk, since it is not known with certainty if the investment is going to result in a profit. Investments in long-term securities are more likely to be a profitable and safe investment. Another way to reduce risk when investing is diversification. In this way the probability of having losses decreases.
- Liquidity : There is great ease in investing in securities, so buying and selling occurs quickly.
The main objective of the stock market is to help the movement of capital, thus contributing to monetary and financial stability. This is how the democratic use of the stock markets drives the development of more active and secure monetary policies.
In this way, the stock markets become places where intermediary agents and developed instruments exchange assets with each other. This facilitates the transparency and freedom of the process of buying and selling the securities.
In them it is also possible to set the prices of the securities according to the order of the corresponding law of supply and demand. Furthermore, this can be a very liquid investment for many investors, because regardless of the moment, they will be able to sell their shares.
Role of the stock marketsIn summary, the stock market is of great importance in the national and international economy for having the following functions:
- It contributes to economic development by channeling savings towards investment.
- It provides liquidity to the investment, allowing holders of securities to convert their shares into money.
- It connects companies and state entities that need investment resources from savers.
- They favor the valuation of financial assets and the efficient allocation of resources.
The stock market is a set of institutions and financial agents that trade on different types of assets, such as stocks, bonds, funds, etc. All this using the instruments specifically created for this purpose as a means.
It works by capturing in part personal and business savings, an extra financing point for those companies that are in processes such as the issuance of new shares.
But listing on the stock market is subject to the risks of economic cycles , in addition to suffering the effects of psychological phenomena that are capable of raising or lowering the prices of stocks and shares. So it is considered an instrument to measure the impact of all those political, economic and social events that a society may go through.
This is how it becomes a barometer of the behavior of economies in countries around the world. Here is its most representative importance.
What are the primary and secondary market?The primary market and the secondary market are two types of trading and trading that differ greatly from each other. Taking this into account, we have the following definitions and differences:
Primary marketThe primary market is the placement or exit to the market of new shares. This means that they are the shares coming directly from the company, and that they are normally sold through an auction.
The sale occurs either in a public tender or direct negotiation. And in the event that it occurs indirectly, when financial intermediaries interfere, it can be carried out in three ways, which are:
- Firm sale : Regardless of whether all the shares are sold or it is not a closed deal, a firm sale closes a number of shares for a certain amount.
- Stand-by Agreement : This is the most common form among several financial intermediaries that manage securities simultaneously. A pre-agreement is closed between the issuing company and the intermediary. The intermediary makes sales in multiple batches and closes more shareholding packages as the number of the company needs to expand.
- Best Effort : It is a direct sale on commission between intermediaries. The commission earned by the companies issuing these shares is based on the sale price.
- Gray Market : Its name comes from the fact that it deals with the use of certain parts of the market that companies do not use on a regular basis. Although they are not illegal, it is an unexplored market, so the knowledge of its real result is uncertain.
- Private Placement : These are shares issued that are located in the private market to one or more people in a private capacity but directly.
The secondary market is the market where securities that have already been issued and sold in the primary market are managed in real time by sellers and buyers. Something that occurs simultaneously and is executed by direct operations or corresponding financial intermediaries.
Therefore, the secondary market is the place where purchase and sale operations are carried out. It is these that transform the economic fabric and financial productivity from an investment and trust perspective.
What is traded on the stock market?In the stock market, you not only proceed to contract stocks but also to trade other financial assets such as obligations, bonds and subscription rights. That is, all these financial assets that companies have decided to sell or negotiate for the financing needs they have.
Differences between fixed income and variable income
These traded products are divided into two large groups, which are called fixed income or variable income. The type of income will depend on whether the return received by the investor is predetermined or not, respectively.
In fixed income you can find debt, and shares correspond to the second group, variable income . This last modality is preferred by companies when it is necessary to obtain financing through the stock market.
There are also hybrid products that are a mixture of the above, as in the case of bonds convertible into shares. They first generate a fixed interest and then transform into equity securities. Another type is obligations with warrants, with which the investor obtains the right to a premium or the conversion into another financial asset as well.
It is important to note that in the financial market not all listed equity securities have the same prestige . This is because they do not share the same income statements and neither do they share the same expectations. This is how some values will have more prestige than others when compared.
And it should also be noted that there are
Ordinary shares and preferred shares
Ordinary shares are titles that do not have any type of special right that is further from those provided by law and equally in the articles of association. It is the ordinary shares that are capable of conferring the same rights on all their owners without there being any kind of distinction.
For their part, preferred shares are those that grant their holders or owners some kind of special right. As an example, it can be mentioned that if a corporation goes bankrupt it will be the shareholders and owners who will collect last. This is because in front of them are the creditors and within the shareholders, the preferred securities are free to collect before the rest.
Stock market participantsA fairly extensive participatory system that includes multiple factors develops in the stock markets. Thus, the main participants in this market are:
Issuers of securitiesIssuers of securities represent those companies or trusts that offer securities for sale with the purpose of capturing savings from the investing public. This to finance your investments or also to obtain working capital.
Issuers can be fixed income or variable income. Fixed-income issuers are securities issued by public companies or public institutions and represent loans that they receive through investors. They confer nothing more than economic rights.
This type of securities determines your interests based on various indicators; other interest rates such as TBP, Prime, Libor, etc .; stock indices such as S&P, DOW, IBEX, CAC, etc .; coupons; zero coupon; among others.
Equity issuers are those that are identified as being assets of the aliquot part of a capital. Their performance is determined according to the benefits they obtain from the fund or society. Examples of this are the shares and shares of investment funds.
Investment fund management companiesThese are the companies that serve to manage investment funds. They have specialized people in this field.
Stock ExchangeThey are entities that provide means for the purchase and sale of securities, thus exercising positions of authorization, regulation, supervision and on the positions of the stock market. Among its functions are:
- establish purchase and sale procedures
- carry out remote reviews of stock market taxes
- provide the public with information on the values
- ensure the transparency of price formation
Stock exchanges are entities that are authorized to carry out intermediation activities in the stock market. Other functions include buying and selling securities on behalf of its clients, managing individual investment portfolios and advising the investor in the purchase and sale of securities on the stock exchange.
InvestorsInvestors or investors are people who have resources for the acquisition of shares, bonds or other securities, and who are in search of making a profit from their investments.
Custody entitiesCustodial entities are responsible for providing services for the preservation of securities and the cash related to them. It is also their mission to register their ownership. As well as the return to the owner, securities of the same issuer and the same characteristics that have been delivered for safekeeping.
Risk rating companiesThe risk rating companies are the entities that are authorized to issue risk ratings of the securities. These ratings are nothing more than objective and technical opinions about the issuer's ability to pay. They are expressed through a scale of letters and numbers.
Price providersWhen talking about price providers, we are talking about corporations that are authorized to professionally provide calculation services, as well as the provision of valuation prices for financial instruments.
Trust companiesThey are entities that have been created for the administration of trusts, in turn are subject to inspection by the financial superintendence.
Securitization companiesThese entities are in charge of managing special purpose vehicles such as universities, securitization funds and trusts. Through which the corresponding securitization processes are structured.
