The stock market is one of most essential pieces of an economy, it allows companies to access capital that would otherwise be unavailable.
While simultaneously providing a seemingly limitless source of for investors to own a piece of a company, and earn money if the company does well.
Stock exchanges are where the trades actually happen, and there are many different exchanges around the world, both physical and virtual. The New York Stock Exchange (NYSE) is a famous example of a physical exchange, although today, most trades happen online.
How Does a Company Get Listed on an Exchange?
An Initial Public Offering (IPO) is the first public sale of a company’s stock and requires approval by a governing body, in Singapore this is the MAS, in the United States this is the SEC.
How Do Investment Banks Help?
Underwriting: Purchases stock at agreed upon price and accepts the risk of reselling to the general public.
Underwriting Syndicate: A group formed by investment banks to share the apparent risk of an IPO.
A stockbroker is an intermediary between a buyer and seller, their primary service is to represent clients to buy and sell stocks.
Stockbrokers are typically paid on a commision basis, creating a sort of interdependence between broker and client.
Less than 4,000 companies are actively traded in NYSE or NASDAQ, and another 15,000 stocks are traded over the counter (OTC) in the US. Just like any public company, shares of these exchanges can be bought or sold by investors.
Indexes - What is an Index? How are they used?
An index measures the current price behavior of a collection of different stocks relative to a predetermined base value.
They create a sort of average for a market allowing you to gauge market conditions, compare your portfolio, or monitor cycles and trends. Some of the most popular indexes are the S&P 500, DJIA, and NASDAQ 100. The chart below shows the performance of all three over a 4 month period up to January 2018.
Standard & Poor’s 500 (S&P 500)
A type of benchmark based on the market capitalisation of the top 500 companies. The S&P 500 is closely followed because it lends a fairly accurate portrayal of the current status of the overall market. Some investors choose to move exclusively within these stocks for the lower level of risk they offer. It is not uncommon to find retirement funds or mutual funds with holdings weighted towards companies in the S&P 500 index.
Dow Jones Industrial Average (DJIA)
The DJIA, created by Charles Dow, is a compilation of 30 significant stocks that are traded on the NYSE. Just as the economy changes so does the index, if a company experiences financial problems and is no longer a good representation of the overall economy, the Dow could remove the company from its index. Disney, Goldman Sachs, and Boeing are some examples of companies that are typically in the DJIA.
How Does One Participate in the Global Economy
Indirectly Investing in foreign securities with global exposure?
- Purchase shares of a multinational company with global operations.
Directly investing in foreign securities
- Purchase shares of foreign companies that trade on either foreign or local stock exchanges
Risks of International Investing to Look Out for
Government Policy Risks
- Unstable foreign governments
- Different laws pertaining to trade, labor, and taxation
- Political and Economic conditions
- Level of regulation and security in a market
Currency Exchange Rate Risk
- Value of foreign currency fluctuates pegged to your local currency
- Exchange rate fluctuations can affect foreign investment value
While the stock market is an incredibly valuable tool to take advantage of, it can be equally as dangerous. Sites like Yahoo Finance and Google Finance offer free practice portfolio services where you can try your hand at a few stock picks and track their performance. This can be a great tool to get a better understanding of how a market preforms.
This article is meant to give you a broad overview of the investing environment, as someone just beginning their journey into the world of investing it is important to realize that there is much more to learn before diving in yourself.
Did you find this introduction to stock markets useful? What do you think would be helpful to learn next? Let us know on via our social media or send us an email.