Stocks II: The Stock Market
Not different from a place where buyers and sellers meet to trade goods and services, a stock market is a place where buyers and sellers of stocks/shares meet.
The market also referred to as the exchange, is where the buyers or investors and sellers meet.
The stock market is a secondary market i.e the companies aren’t involved in the trade. The trade that happens on the exchange is between owners and potential buyers.
Prior to an IPO, a company is considered private. As a private company, the business has a relatively small number of shareholders including early investors like the founders, family, friends, and sometimes venture capitalists or angel investors.
What happens during an IPO, the company raises capital directly from public investors and shares are traded at a floating price.
The transition from private to public is a key time for private investors to cash in and earn the returns they were expecting. Private shareholders may decide to hold onto their shares in the public market or sell a portion or all of them for gains.
When a company does an IPO it is said to have gone public
When a company goes public, it opens the opportunity for every other investor to own a piece of the company.
Common ways companies go public include:
- Direct Listing
- Dutch Auction
This refers to the total market value of all outstanding shares or dollar market value of a company. It is used to know the size of a company.
Market Cap = Current price of one share x Number of outstanding shares
The market cap does not represent the equity value. It only represents the market worth of a company. It could be seen as the price to buy out the company.
The price of a commodity is not necessarily the true value of that commodity
There are 3 classifications of market caps:
- Large-cap ($10 billion or more)
- Mid-cap ($2 billion to $10 billion)
- Small-cap ($300 million to $2 billion).
These are some stock market jargon that is used to describe market sentiments and investors' behaviors.
- The Bull: When the GDP is doing great stock prices are on the increase. In short, everything is rosy. It is easier to pick stocks here. Anyone who is optimistic that the stock prices will increase is said to be a or have a bullish outlook. Unfortunately, it doesn’t last forever.
- The Bear: This is the opposite of the bull, when the economy is bad, maybe a recession is looming, stock prices are dropping. It’s difficult for investors to choose stocks at this time. Money can still be made by short-selling. Also, one can stay on the sidelines and wait till the bear is almost over then buy in an anticipation of a bull. When a person is having a pessimistic view of the market, he is said to be a bear or having a bear outlook.
- The Chicken: The fear of losing anything makes a person a chicken. This fear surpasses their want for return so the leave the market entirely or stick to money-market securities. It’s true one shouldn’t lose sleep because of an investment-it’s pointless- but without taking risk there is no way of expecting returns.
- The Pig: These are high-risk investors looking for hot picks to make high returns in the short term. They buy on hot tips and leads without doing any due diligence. They are usually greedy, impatient, and emotional about their investments.
BULLS MAKE MONEY, BEARS MAKE MONEY, BUT THE PIGS JUST GET SLAUGHTERED
STOCK INDICES, STOCK SPLIT, AND BUYBACKS
Indices(plural of index) measures a stock market, or a subset of the stock market, that helps investors compare current price levels with past prices to calculate the performance of the market sectors. Major indices are indices that track the companies with the highest market cap e.g S&P 500 Index, Dow Jones Industrial Average (DJIA), FTSE 100 Index, etc
A stock split is when a company decides to break up a stock into two or more stocks. This reduces the price of a single stock and gives shareholders more number of shares. Popular stock splits are 2-for-1, 3-for-2 and 3-for-1.
Buyback is when a corporation purchases its own shares in the stock market. A repurchase reduces the number of shares outstanding shares.
This is part of my 30 days series of the BYOB challenge.