What Is the Stock Market, What Does It Do, and How Does It Work? Flashcards
Stock Market (or Stock Exchange)
The term stock market refers to several exchanges in which shares of publicly held companies are bought and sold. Such financial activities are conducted through formal exchanges and via over-the-counter (OTC) marketplaces that operate under a defined set of regulations
Primary Market
Where new stocks and bonds are sold to the public for the first time.
Secondary Market
The secondary market is where investors buy and sell securities. Trades take place on the secondary market between other investors and traders rather than from the companies that issue the securities. The stock exchange earns a fee for every trade that occurs on its platform during secondary market activity.
Initial Public Offering
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.
Rights Offering (Issue)
An offer to existing shareholders to purchase newly-issued stock, the right to which they can usually exercise or sell on the open market.
Follow-on Offerings (FPOs)
Issuance of stock following the IPO.
Two types:
1. Diluted Follow-on Offering – happens when a company issues additional shares to raise funding and offer those shares to the public market. As the number of shares increases, the earnings per share (EPS) decreases.
2. Non-Diluted Follow-on offering – Non-diluted follow-on offerings happen when holders of existing, privately-held shares bring previously issued shares to the public market for sale. Cash proceeds from non-diluted sales go directly to the shareholders placing the stock into the open market.
Buyback (or Share Repurchase)
when a company buys its own outstanding shares to reduce the number of shares available on the open market.
Delisting
Delisting is the removal of a listed security from a stock exchange. The delisting of a security can be voluntary or involuntary and usually results when a company ceases operations, declares bankruptcy, merges, does not meet listing requirements, or seeks to become private.
What are the functions of the stock market?
The stock market ensures price transparency, liquidity, price discovery, and fair dealings in trading activities.
Price transparency
refers to the extent to which information about the bid prices, ask prices, and trading quantities for a specific stock is available.
Bid price
A bid price is a price for which somebody is willing to buy something, whether it be a security, asset, commodity, service, or contract. It is colloquially known as a “bid” in many markets and jurisdictions.
Ask price
The ask is the price a seller is willing to accept for a security, which is often referred to as the offer price. Along with the price, the ask quote might also stipulate the amount of the security available to be sold at the stated price. The bid is the price a buyer is willing to pay for a security, and the ask will always be higher than the bid.
Price discovery
Price discovery is the process conducted between buyers and sellers, whether explicit or inferred, of setting the spot price or the fair price of any asset that is being traded
Spot Price
The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery. While spot prices are specific to both time and place, in a global economy the spot price of most securities or commodities tends to be fairly uniform worldwide when accounting for exchange rates. In contrast to the spot price, a futures price is an agreed upon price for future delivery of the asset.
Two-sided market
A two-sided market exists when both buyers and sellers meet to exchange a product or service, creating both bids to buy and offers (asks) to sell.
