What is Stock Market, Primary and Secondary Market

 What is Stock Market

 

        A stock market or equity market is the place where buyers and sellers exchange stocks, which represent part ownership of the business. The stock market allows companies to raise money by offering company shares and bonds to investors. In return, they get dividends, capital gains, and sometimes tax breaks. The stock market works as a platform through which a person’s excess money moves into productive and useful investment opportunities in the economy.

Traders in the stock market buy and sell shares in one or more exchanges that are part of the overall stock market. 

World’s leading stock exchanges:

•   New York Stock Exchange (NYSE)- USA
•   NASDAQ- USA
•   NIKKEI index – JAPAN
•   London Stock Exchange (LSEG) – UK
•   Moscow Exchange – RUSSIA

Traders follow technical analysis when they make their buy and sell decisions. We will discuss technical and fundamental analysis a bit later.

You may wonder how did these shares originate and how share prices is determined in the stock market. There is a saying that “A stock is only worth what someone is willing to pay” there is some level of truth to it. Large demand to buy could lead higher bid price for the stock. On the other hand, if the business conditions are unfavorable, buyers might get scared and the asking price would have to be reduced to attract buyers. It’s simply a supply and demand situation at that moment.

There are many factors to consider when valuing stock in the stock market. Investors usually focus on much longer term (more than 1,2 year period) and take fundamental criteria to their decision-making process. Meanwhile, traders give their attention to making short-term gains according to their trading strategies. They attempt to take advantage of short-term price changes in the market.

The first stock market was the London stock exchange which started in a coffee house. The first exchange in the United States began in Philadelphia. The “Buttonwood Agreement” named because it was signed under a buttonwood tree, marked the beginning of Wall Street back in 1792. The agreement was signed by 24 Traders and was the first American organization to trade securities. In 1817 they renamed their venture to New York Stock and Exchange.

In the United State stock market is regulated by the Securities and Exchange Commission (SEC). Many countries have stock markets and each one should well regulate by local financial authorities. And those institutions should work independently of the government and without any political pressure to keep investors safe. Stock exchanges set certain requirements for companies such as mandating timely quarterly report (10-Q) filing, annual report filing (10-k), and corporate disclosures.  

Stock markets provide a well-secure and regulated environment for market participants. The stock market acts as a primary and secondary market.

1.  Primary market 

    In primary market allow companies to issue their shares to the general public for the first time through a process called an Initial public offering (IPO). Keep in mind primary market is the place where securities are created. An initial public offering occurs when a company issues its stocks to the public for the first time.

Right issues are the main type of share offering that companies use in the stock market. But also some companies generate their capital requirements through private placement. 

Similarly, some companies choose to collect debt capital by issuing short and long-term bonds. Bonds are issued with a pre-agreed coupon rate that corresponds to the current interest rates of the economy.

The key fact is in the primary market you purchase securities directly from an issuer.

Primary & Secondary markets are regulated by the Securities and Exchange Commission (SEC).

    2.  Secondary market 

    It’s the place where investors and traders buy and sell their / trade their own securities. This market includes the NYSE, NASDAQ, NIKKEI index, and all major exchanges worldwide. In this secondary market, investors buy and sell securities without involving issuing company. 

For example, if you want to buy tesla stock (TSLA), you are dealing with another person who is willing to sell tesla stock at that moment. TESLA Company isn’t directly involved in this transaction. 

In meantime the listed company issue additional share when they require capital for their entity. Mainly through the Right issues or follow-on offerings. And sometimes companies reduce or cancel their shares by share buyback and share delisting options. Investors buy stocks by expecting dividends, capital gains, or both. Investors can benefits from capital gains when the value of the share increase over time. Dividends are sums of money that are paid by the company to its shareholders on a quarterly or annual basis. Dividends are paid out by profits that the company makes.

Stock market exchanges maintain various types of sectors so that investors can well diversify their investment portfolios.