STOCK MARKET
What is a stock market?
A stock market is a place where you can invest in publicly owned’ or listed companies. By
buying shares of stock in a company, you become a part-owner of that company. And as a
part-owner, you participate in the company’s ability to grow and make money.
Place
It’s a place called the Philippine Stock Exchange or PSE. They have two offices – one in Ortigas
and one in Makati.
Buy and Sell
That’s why it’s called a stock “market”. There are only select representatives called Trading
Participants (or brokers) who can directly buy and sell shares of stock.
Shares of Stock
In a sole-proprietorship, there is just one share of stock owned by the founder of the company.
In corporations, there are multiple shares which can be owned by many different people. These
are the shares which are bought and sold in the stock market.
Publicly-Listed Company
The corporation must be a publicly listed company. A publicly-listed company is a business that
offers its shares of stock to the public.
Shares - a small piece of the company's ownership rights that is traded to an investor for a
certain piece.
Increased company capital - While investors earn profits from the increasing value of the
company over time, the company itself also benefits.
Development of Stock market over the years
New World Trading Begins
Originated by the Dutch, joint-stock companies became a viable business model for many
struggling businesses. In 1602, the Dutch East India Co. issued the first paper shares,
according to Cambridge University Press.
The Market Goes Global
The practice found its way to England.
Humble Beginnings for the Exchange
Sock traders decided to meet at a London coffeehouse, which they used as a marketplace.
Wall Street is Born
The name Wall Street is synonymous with stock exchange. According to the Library of
Congress, the market on Wall Street opened May 17, 1792 on the corner of Wall Street and
Broadway. Twenty-four supply brokers signed the Buttonwood Agreement outside 68 Wall St. in
New York, underneath a buttonwood tree. On March 8, 1817 the group renamed itself the New
York Stock and Exchange Board and moved off the street into 40 Wall St.
The Powerful Stock Market Today
Today, there are many stock exchanges worldwide, each supplying the capital necessary to
support industry growth. Without these vital funds, many revolutionary ideas would never
become a reality, nor would fundamental improvements be made to existing products.
Importance and function of the stock market
● Stock market is an important part of the economy of a country.
● It plays a pivotal role in the growth of the industry and commerce of the country that
eventually affects the economy of the country to a great extent.
Why should I invest in the Stock Market?
Higher Returns
The stock market has historically given higher average returns than bonds and inflation.
Expert partnership
When you buy a stock of a company, you become part owner in these corporations.
Financial Literacy
You get to grow more as an investor.
How does the stock market work?
The Publicly Listed Company and the PSE
The publicly listed company applies to the PSE so that they can be allowed to offer shares of
stock to the public.
The PSE and the Trading Participant (Broker)
Only Trading Participants licensed by the SEC are allowed to buy and sell shares of stock. This
was done simply for control purposes and work simplification. The PSE prioritizes monitoring of
Publicly Listed Companies while the Trading Participants deal with the investing public.
● stockbroker or trading participant - an agent between a buyer and seller of stocks in
the market.
The Trading Participant and the Investor (You!)
You will have to contact a trading participant or broker if you want to buy or sell shares of a
particular company.
How do I make money in the Stock Market?
Dividends - money that a company pays to its stockholders from the profits it makes.
Capital Appreciation or Capital Gains - The company you own is worth more than when you
bought it. There is a rise in an investment's market price.
What sets the prices on a stock exchange?
Market forces change stock prices every day. Share prices change because of supply and
demand.
Misconceptions about stock market
● It is NOT A GAMBLING
● It is NOT something people who are not analysts can't understand.
● It is NOT as risky as some think it is.
● It is NOT only for people who are very rich.
Classification Of Stocks
Income Stocks
Income stocks are the least volatile classification of stocks and offer investors steady dividends.
Most income stocks are from large companies with limited room for growth, so much of the profit
is paid out to shareholders instead of being reinvested into the company. This leads to larger
dividends than most stocks can offer and a fairly reliable income for investors.
Penny Stocks
The term "penny stock” refers to shares that trade at no more than $5 each. The issuing
companies are often small start-ups that need to raise capital. The value of penny stocks can
increase dramatically if the company experiences the growth investors predict, but many penny
stocks do not end up making investors much money because most of these companies are not
successful. For this reason, penny stocks are considered high-risk, even if the initial cost is low.
Speculative Stocks
Speculative stocks are issued by start-ups, by companies that are developing new products or
technologies, by companies exploring untapped, often foreign, markets, or by companies that
have undergone drastic management changes or financial restructuring. These stocks carry a
high amount of risk because the companies are often untested and many do not succeed, but
the payoff can be substantial if the company succeeds or if enough investors buy into the
company and raise the value of the stock.
Growth Stocks
Growth stocks are issued by companies that consistently reinvest profits back into the business
to fund development. Growth stocks do not pay high dividends. Instead, as the company grows
and its value increases, investors receive higher capital gains on the increased value of the
stock. These stocks can lose value when growth slows as a natural effect of a business’s life
cycle, or if the company experiences a financial downturn that decreases the profit it can
reinvest in the company.
Cyclical Stocks
Cyclical stocks increase in value when the economy is strong and lose value during economic
decline. These stocks often represent companies that offer luxury and discretionary goods and
services, including airlines, vehicle manufacturers, and companies that manufacture and sell
electronics.
Defensive Stocks
Defensive stocks are sound investments during economic downturns because the industries
and companies that issue the stock are unaffected by, or even profit from, financial slumps.
Food, fuel, utility and health care stocks are considered defensive because the demand for
them doesn’t decrease with the economy. Stock issued by companies that sell low-cost goods,
such as some notable "big box" stores, are considered defensive because demand for their
products increases as the economy gets worse.
Value Stocks
Investors believe that value stocks have been underestimated by the market. This may be
because the industry that the stock is in is experiencing trouble, because the company is new
and unproven, or because the company doesn’t fit all the criteria for stronger investments, such
as income and growth stocks, but has the potential to do so.
Type of stocks
Common Stock
● Common stock is the type most people purchase. It represents ownership of a company
and a claim on part of the profits. Investors get one vote per stock.
● It grants shareholders ownership rights and allows them to vote on important decisions
such as electing the board of directors. They also get a say in certain policy decisions
and management issues.
● Common stock tends to be better suited to long-term investors.
Preffered stock
● don’t have the same voting rights, but investors are usually guaranteed a fixed dividend.
If the company is liquidated, they are paid off first.
● may be a better investment for short-term investors who can’t hold common stock long
enough to overcome dips in the share price.
TWO BROAD SEGMENTS OF THE STOCK MARKET
ORGANIZED STOCK EXCHANGE
A securities marketplace where purchasers and sellers regularly gather to trade securities
according to the formal rules adopted by the exchange.
OVER-THE-COUNTER (OTC) EXCHANGE
Those in which participants trade directly between two parties, without the use of a central
exchange or other third party. OTC markets do not have physical locations or market-makers.
Examples of stock market globally
● New York Stock Exchange
● NASDAQ Exchange
● Tokyo Stock Exchange
● London Stock Exchange
● Hong Kong Stock Exchange
● Shanghai Stock Exchange
Philippine Stock Exchange
● self-regulatory organization that provides and ensures a fair, efficient, transparent, and
orderly market for the buying and selling of securities.
● responsible for screening companies who wish to be part of the PSE.
Initial Public Offering (IPO)
● refers to the first time the public is given an opportunity to buy shares of a newly publicly
listed company.
● allows a company to raise capital from public investors.
Reference:
https://www.bankrate.com/investing/common-vs-preferred-stocks/
https://www.investopedia.com/insights/biggest-stock-market-myths/
https://smallbusiness.chron.com/stock-market-started-whom-14745.html
https://www.investopedia.com/financial-edge/1212/stock-exchanges-around-the-world.aspx
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