The Online Encyclopedia and Dictionary






Stock market

A stock market is a market for the trading of publicly held company stock and associated financial instruments (including stock options, convertibles and stock index futures).



Traditionally, stock markets were open-outcry where trading occurred on the floor of a stock exchange. Most modern stock trading is done in electonic exchanges where buying and selling occurs via online real-time matching of orders placed by buyers and sellers.


Many years ago, worldwide, buyers and sellers were individual investors and businessmen. Over time, markets have become more "institutionalized": buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, investor groups, and banks). The rise of the institutional investor has brought with it an increase of professional diligence which has tended to regulate the market.

The character of markets around the world varies, for example with the majority of the shares in the Japanese market being held by financial companies and industrial corporations, compared with the broader ownership of stock by individuals in the USA or the UK.

International markets

There are stock markets in most developed economies, with the world's biggest markets being in the USA, China, Japan, and Europe. Because global stock-market indices suggest the state of the global universe of stock opportunities, may shape the choices made by buyers and sellers.

Stock index

Main article: stock market index

The movements of the prices in a market or section of a market are captured in price indices called Stock Market Indices, of which there are many, e.g., the Standard and Poors Indices and the Financial Times Indices. Such indices are usually market-capitalisation weighted.

Derivative instruments

Main article: derivative security

An option is a contract that gives an investor the right to buy or sell a security such as a stock or index at an agreed-upon price during a specified period with no obligation.

A future is a contract that gives an investor the obligation to buy or sell a security at an agreed-upon price during a specified period.

The markets for options and futures are generally somewhat less liquid and more risky than for the underlying stock.

Leverage Strategies

Stock that a trader does not actually own may be traded using short selling and margin buying.

Short selling

In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it rose. Exiting a short position by buying back the stock is called "covering a short position".

Margin buying

See also: leverage (finance)

In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. Other rules may include the prohibition of freeriding: putting in an order to buy stocks without paying initially, and then selling them and using part of the proceeds to make the original payment.

Stock Market Regulation in the U.S.

Before 1929, there were few regulations governing trades. In the 1920s there were many abuses in the sale and trading of securities. State blue sky laws were easy to evade by making security sales across state lines. After holding hearings on the abuses Congress passed The Securities Act of 1933. It regulates the interstate sales of securities and made it illegal to sell securities into a state without complying with the state law. It requires companies which want to sell securities publicly to file a registration statement with the Securities & Exchange Commission. The registration statement provides a lot of information about the company and is a matter of public record. The SEC does not approve or disapprove the issue, but lets the statement "become effective" if sufficient required detail is provided, including risk factors. Then the company can begin selling the stock issue, usually through investment bankers.

The next year Congress passed the Securities Exchange Act of 1934 which regulates the secondary market (general-public) trading of securities. Initially it applied only to stock exchanges and their listed companies (as the word "Exchange" in the act's name implies). In the late 1930s it was amended to provide regulation of the over-the-counter (OTC) market (i.e., trades between individuals with no stock exchange involved). In 1964 it was amended to apply to companies traded in the OTC market.

Levels and flows

Main article: equity levels and flows

Issuance of equity and equity-related instruments totaled $505bn worldwide in 2004, a 29.9% increase over the $389bn raised in 2003. Initial public offerings increased nearly 220% with 233 offerings that raised $44 billion.

See also


External links



Last updated: 10-10-2005 06:18:45
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