Introduction to Stocks - The Stock Market

Question 1

What does the term stock market refer to?

Answer 1

The term stock market refers to several exchanges in which shares of publicly held companies are bought and sold.

Question 2

How are stock market activites conducted?

Answer 2

Such financial activities are conducted through formal exchanges and via over-the-counter (OTC) marketplaces that operate under a defined set of regulations.

Question 3

What is the Over-the-counter (OTC) process?

Answer 3

Over-the-counter (OTC) is the process of trading securities via a broker-dealer network as opposed to on a centralized exchange like the New York Stock Exchange.

Over-the-counter trading can involve stocks, bonds, and derivatives, which are financial contracts that derive their value from an underlying asset such as a commodity.

Question 4

What is the difference between stock market and stock exchange?

Answer 4

Both “stock market” and “stock exchange” are often used interchangeably. Traders in the stock market buy or sell shares on one or more of the stock exchanges that are part of the overall stock market.

Question 5

What are the leading U.S. Stock exchanges?

Answer 5

The leading U.S. stock exchanges include the New York Stock Exchange (NYSE) and the Nasdaq.

Question 6

What does the stock market allow for?

Answer 6

The stock market allows buyers and sellers of securities to meet, interact, and transact.

The markets allow for price discovery for shares of corporations and serve as a barometer for the overall economy.

Question 7

What are buyers and sellers assured of?

Answer 7

Buyers and sellers are assured of a fair price, high degree of liquidity, and transparency as market participants compete in the open market.

Question 8

What was the first stock market?

Answer 8

The first stock market was the London Stock Exchange which began in a coffeehouse, where traders met to exchange shares, in 1773.

Question 9

Where and when did the first stock exchange in the U.S. begin?

Answer 9

The first stock exchange in the United States began in Philadelphia in 1790.

Question 10

What was The Buttonwood Agreement?

Answer 10

The Buttonwood Agreement, so named because it was signed under a buttonwood tree, marked the beginning of New York’s Wall Street in 1792.

The agreement was signed by 24 traders and was the first American organization of its kind to trade in securities.

The traders renamed their venture the New York Stock and Exchange Board in 1817.

Question 11

Who are the main regulators of the stock market in the U.S.?

Answer 11

A stock market is a regulated and controlled environment. In the United States, the main regulators include the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Question 12

Is it only stocks that can be traded in the stock market?

Answer 12

Though it is called a stock market, other securities, such as exchange-traded funds (ETFs) are also traded in the stock market.

Question 13

What does the stock market provide?

Answer 13

Stock markets provide a secure and regulated environment where market participants can transact in shares and other eligible financial instruments with confidence, with zero to low operational risk.

Question 14

What do the stock makets act as?

Answer 14

Operating under the defined rules as stated by the regulator, the stock markets act as primary markets and secondary markets.

Question 15

What is a Primary market?

Answer 15

A primary market is a source of new securities. Often on an exchange, it’s where companies, governments, and other groups go to obtain financing through debt-based or equity-based securities.

Question 16

What are seconday markets?

Answer 16

The secondary market is where investors buy and sell securities they already own. It is what most people typically think of as the “stock market,” though stocks are also sold on the primary market when they are first issued. The national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.

Question 17

What is an IPO?

Answer 17

As a primary market, the stock market allows companies to issue and sell their shares to the public for the first time through the process of an initial public offering (IPO).

This activity helps companies raise necessary capital from investors.

Question 18

How does a company enter the stock market?

Answer 18

A company divides itself into several shares and sells some of those shares to the public at a price per share.

To facilitate this process, a company needs a marketplace where these shares can be sold and this is achieved by the stock market.

Question 19

After a company has entered the stock market, how do they add additional shares?

Answer 19

A listed company may also offer new, additional shares through other offerings at a later stage, such as through rights issues or follow-on offerings.

They may even buy back or delist their shares.

Question 20

What is a rights offering (rights issue)?

Answer 20

A rights offering (rights issue) is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants, in proportion to their existing holdings. These are considered to be a type of option since it gives a company’s stockholders the right, but not the obligation, to purchase additional shares in the company.

Question 21

What are follow-on offerings? (FPO)

Answer 21

A follow-on offering (FPO) is an issuance of stock shares following a company’s initial public offering (IPO).

There are two types of follow-on offerings: diluted and non-diluted.

A diluted follow-on offering results in the company issuing new shares after the IPO, which causes the lowering of a company’s earnings per share (EPS).

During a non-diluted follow-on offering, shares coming into the market are already existing and the EPS remains unchanged.

Question 22

Why would investors be interested in owning company shares?

Answer 22

Investors will own company shares in the expectation that share value will rise or that they will receive dividend payments or both.

The stock exchange acts as a facilitator for this capital-raising process and receives a fee for its services from the company and its financial partners.

Using the stock exchanges, investors can also buy and sell securities they already own in what is called the secondary market.

Question 23

What are some of the market-level and sector-spectic indicators of the stock market? What is their purpose?

Answer 23

The stock market or exchange maintains various market-level and sector-specific indicators, like the S&P (Standard & Poor’s) 500 index and the Nasdaq 100 index, which provide a measure to track the movement of the overall market.

Question 24

What does the stock exchange serve as following an IPO?

Answer 24

Following an IPO, the stock exchange serves as a trading platform for buying and selling the outstanding shares. This constitutes the secondary market. The stock exchange earns a fee for every trade that occurs on its platform during secondary market activity.