A stock market, equity market or share market is the aggregation of
buyers and sellers (a loose network of economic transactions, not a
physical facility or discrete entity) of stocks (also called shares), which
represent ownership claims on businesses; these may include securities
listed on a stock exchange as well as those only traded privately.
Size of the market
Stocks can also be categorized in various ways. One common
way is by the country where the company is domiciled. For example,
Nestlé and Novartis are domiciled in Switzerland, so they may be
considered as part of the Swiss stock market, although their stock may
also be traded at exchanges in other countries.
At the close of 2012, the size of the world stock market (total market
capitalisation) was about US$55 trillion.By country, the largest market
was the United States (about 34%), followed by Japan (about 6%) and
the United Kingdom (about 6%).[2] This went up more in 2013.
There are a total of 60 stock exchanges in the world with a total market
capitalization of $69 trillion. Of these there are 16 exchanges that have
a market capitalization of $1 trillion each and they account for 87% of
global market capitalization. Apart from the Australian Securities Exchange,
all of these 16 exchanges are divided between three continents: North America,
Europe and Asia
Stock exchange:
A stock exchange is a place or organization by which stock traders (people
and companies) can trade stocks. Companies may want to get their stock
listed on a stock exchange. Other stocks may be traded "over the counter" (otc),
that is, through a dealer. There are many stock markets in the world. A large
company will usually have its stock listed on many exchanges across the world.
Exchanges may also cover other types of security such as fixed interest securities
or interest derivatives.
Trade in stock markets means the transfer for money of a stock or security from a
seller to a buyer. This requires these two parties to agree on a price. Equities (stocks
or shares) confer an ownership interest in a particular company.
Participants in the stock market range from small individual stock investors to
larger traders investors, who can be based anywhere in the world, and may
include banks, insurance companies or pension funds, and hedge funds. Their
buy or sell orders may be executed on their behalf by a stock exchange trader.
Some exchanges are physical locations where transactions are carried out on a
trading floor, by a method known as open outcry. This method is used in some
stock exchanges and commodity exchanges, and involves traders entering oral
bids and offers simultaneously. The other type of stock exchange is a virtual kind,
composed of a network of computers where trades are made electronically by
traders. An example of such an exchange is the NASDAQ.
A potential buyer bids a specific price for a stock, and a potential seller asks
a specific price for the same stock. Buying or selling at market means you will
accept any ask price or bid price for the stock, respectively. When the bid and
ask prices match, a sale takes place, on a first-come-first-served basis if there
are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities
between buyers and sellers, thus providing a marketplace (virtual or real). The
exchanges provide real-time trading information on the listed securities, facilitating
price discovery.
The New York Stock Exchange (NYSE) is a physical exchange, with a hybrid
market for placing orders electronically from any location as well as the trading
floor. Orders executed on the trading floor enter by way of exchange members and
flow down to a floor broker, who submits the order electronically to the floor trading
post for the Designated Market Maker ("DMM") for that stock to trade the order. The
DMM's job is to maintain a two-sided market, meaning orders to buy and sell the
security if there are no other buyers and sellers. If a spread exists, no trade immediately
takes place—in this case the DMM should use their own resources (money or stock) to
close the difference after they judged time. Once a trade has been made the details are
reported on the "tape" and sent back to the brokerage firm, which then notifies the investor
who placed the order. Computers play an important role, especially for so-called "program
trading".
The NASDAQ is a virtual listed exchange, where all of the trading is done over
a computer network. The process is similar to the New York Stock Exchange.
One or more NASDAQ market makers will always provide a bid and ask price at
which they will always purchase or sell 'their' stock.
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock
exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of
an open outcry exchange. Stockbrokers met on the trading floor or the Palais
Brongniart. In 1986, the CATS trading system was introduced, and the order
matching process was fully automated.
People trading stock will prefer to trade on the most popular exchange since
this gives the largest number of potential counterparties (buyers for a seller, sellers
for a buyer) and probably the best price. However, there have always been alternatives
such as brokers trying to bring parties together to trade outside the exchange. Some
third markets that were popular are Instinet, and later Island and Archipelago (the later
two have since been acquired by Nasdaq and NYSE, respectively). One advantage is
that this avoids the commissions of the exchange. However, it also has problems such
as adverse selection.Financial regulators are probing dark pools.
Market participant:
Market participants include individual retail investors, institutional investors such
as mutual funds, banks, insurance companies and hedge funds, and also publicly
traded corporations trading in their own shares. Some studies have suggested that
institutional investors and corporations trading in their own shares generally receive
higher risk-adjusted returns than retail investors.
A few decades ago,[when?] worldwide, buyers and sellers were individual investors,
such as wealthy businessmen, usually with long family histories to particular corporations.
Over time, markets have become more "institutionalized"; buyers and sellers are largely
institutions (e.g., pension funds, insurance companies, mutual funds, index funds,
exchange-traded funds, hedge funds, investor groups, banks and various other
financial institutions).
The rise of the institutional investor has brought with it some improvements in market
operations. There has been a gradual tendency for "fixed" (and exorbitant) fees being
reduced for all investors, partly from falling administration costs but also assisted by
large institutions challenging brokers' oligopolistic approach to setting standardised fees.
A current trend in stock market investments includes the decrease in fees due to
computerized asset management termed Robo Advisers within the industry. The automation
of investment management has decreased how much human portfolio management costs by
lowering the cost associated with investing as a whole.
Trends in market participation
Stock market participation refers to the number of agents who buy and sell
equity backed securities either directly or indirectly in a financial exchange.
Participants are generally subdivided into three distinct sectors; households,
institutions, and foreign traders. Direct participation occurs when any of the above
entities buys or sells securities on its own behalf on an exchange. Indirect participation
occurs when an institutional investor exchanges a stock on behalf of an individual or
household. Indirect investment occurs in the form of pooled investment accounts, retirement
accounts, and other managed financial accounts.
Indirect vs. direct investment:
The total value of equity-backed securities in the United States rose over
600% in the 25 years between 1989 and 2012 as market capitalization
expanded from $2,789,999,902,720 to $18,668,333,210,000.The demographic
composition of stock market participation, accordingly, is the main determinant
of the distribution of gains from this growth. Direct ownership of stock by
households rose slightly from 17.8% in 1992 to 17.9% in 2007 with the median
value of these holdings rising from $14,778 to $17,000.Indirect participation
in the form of retirement accounts rose from 39.3% in 1992 to 52.6% in 2007
with the median value of these accounts more than doubling from $22,000 to $
45,000 in that time.Rydqvist, Spizman, and Strebulaev attribute the differential
growth in direct and indirect holdings to differences in the way each are taxed.
Investments in pension funds and 401ks, the two most common vehicles of indirect
participation, are taxed only when funds are withdrawn from the accounts. Conversely,
the money used to directly purchase stock is subject to taxation as are any dividends
or capital gains they generate for the holder. In this way current tax code incentivizes
households to invest indirectly at greater rates.
Participation by income and wealth strata
Rates of participation and the value of holdings differs significantly across
strata of income. In the bottom quintile of income, 5.5% of households
directly own stock and 10.7% hold stocks indirectly in the form of retirement
accounts.The top decile of income has a direct participation rate of 47.5%
and an indirect participation rate in the form of retirement accounts of 89.6%.
The median value of directly owned stock in the bottom quintile of income is
$4,000 and is $78,600 in the top decile of income as of 2007.The median
value of indirectly held stock in the form of retirement accounts for the same
two groups in the same year is $6,300 and $214,800 respectively.Since
the Great Recession of 2008 households in the bottom half of the income
distribution have lessened their participation rate both directly and indirectly
from 53.2% in 2007 to 48.8% in 2013, while over the same time period
households in the top decile of the income distribution slightly increased
participation 91.7% to 92.1%.The mean value of direct and indirect holdings
at the bottom half of the income distribution moved slightly downward from
$53,800 in 2007 to $53,600 in 2013. In the top decile, mean value of all
holdings fell from $982,000 to $969,300 in the same time.The mean value
of all stock holdings across the entire income distribution is valued at
$269,900 as of 2013.
Participation by head of household race and gender
The racial composition of stock market ownership shows households
headed by whites are nearly four and six times as likely to directly own
stocks than households headed by blacks and Hispanics respectively.
As of 2011 the national rate of direct participation was 19.6%, for white
households the participation rate was 24.5%, for black households it was
6.4% and for Hispanic households it was 4.3% Indirect participation in
the form of 401k ownership shows a similar pattern with a national
participation rate of 42.1%, a rate of 46.4% for white households, 31.7%
for black households, and 25.8% for Hispanic households. Households
headed by married couples participated at rates above the national averages
with 25.6% participating directly and 53.4% participating indirectly through a
retirement account. 14.7% of households headed by men participated in the
market directly and 33.4% owned stock through a retirement account. 12.6%
of female headed households directly owned stock and 28.7% owned stock
indirectly.
Determinants and possible explanations of stock market participation
In a 2002 paper Anntte Vissing-Jorgensen from the University of Chicago
attempts to explain disproportionate rates of participation along wealth and
income groups as a function of fixed costs associated with investing. Her
research concludes that a fixed cost of $200 per year is sufficient to explain
why nearly half of all U.S. households do not participate in the market.
Participation rates have been shown to strongly correlate with education levels,
promoting the hypothesis that information and transaction costs of market
participation are better absorbed by more educated households. Behavioral
economists Harrison Hong, Jeffrey Kubik and Jeremy Stein suggest that
sociability and participation rates of communities have a statistically significant
impact on an individual’s decision to participate in the market. Their research
indicates that social individuals living in states with higher than average participation
rates are 5% more likely to participate than individuals that do not share those
characteristics.This phenomena also explained in cost terms. Knowledge of market
functioning diffuses through communities and consequently lowers transaction costs
associated with investing
buyers and sellers (a loose network of economic transactions, not a
physical facility or discrete entity) of stocks (also called shares), which
represent ownership claims on businesses; these may include securities
listed on a stock exchange as well as those only traded privately.
Size of the market
Stocks can also be categorized in various ways. One common
way is by the country where the company is domiciled. For example,
Nestlé and Novartis are domiciled in Switzerland, so they may be
considered as part of the Swiss stock market, although their stock may
also be traded at exchanges in other countries.
At the close of 2012, the size of the world stock market (total market
capitalisation) was about US$55 trillion.By country, the largest market
was the United States (about 34%), followed by Japan (about 6%) and
the United Kingdom (about 6%).[2] This went up more in 2013.
There are a total of 60 stock exchanges in the world with a total market
capitalization of $69 trillion. Of these there are 16 exchanges that have
a market capitalization of $1 trillion each and they account for 87% of
global market capitalization. Apart from the Australian Securities Exchange,
all of these 16 exchanges are divided between three continents: North America,
Europe and Asia
Stock exchange:
A stock exchange is a place or organization by which stock traders (people
and companies) can trade stocks. Companies may want to get their stock
listed on a stock exchange. Other stocks may be traded "over the counter" (otc),
that is, through a dealer. There are many stock markets in the world. A large
company will usually have its stock listed on many exchanges across the world.
Exchanges may also cover other types of security such as fixed interest securities
or interest derivatives.
Trade in stock markets means the transfer for money of a stock or security from a
seller to a buyer. This requires these two parties to agree on a price. Equities (stocks
or shares) confer an ownership interest in a particular company.
Participants in the stock market range from small individual stock investors to
larger traders investors, who can be based anywhere in the world, and may
include banks, insurance companies or pension funds, and hedge funds. Their
buy or sell orders may be executed on their behalf by a stock exchange trader.
Some exchanges are physical locations where transactions are carried out on a
trading floor, by a method known as open outcry. This method is used in some
stock exchanges and commodity exchanges, and involves traders entering oral
bids and offers simultaneously. The other type of stock exchange is a virtual kind,
composed of a network of computers where trades are made electronically by
traders. An example of such an exchange is the NASDAQ.
A potential buyer bids a specific price for a stock, and a potential seller asks
a specific price for the same stock. Buying or selling at market means you will
accept any ask price or bid price for the stock, respectively. When the bid and
ask prices match, a sale takes place, on a first-come-first-served basis if there
are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities
between buyers and sellers, thus providing a marketplace (virtual or real). The
exchanges provide real-time trading information on the listed securities, facilitating
price discovery.
The New York Stock Exchange (NYSE) is a physical exchange, with a hybrid
market for placing orders electronically from any location as well as the trading
floor. Orders executed on the trading floor enter by way of exchange members and
flow down to a floor broker, who submits the order electronically to the floor trading
post for the Designated Market Maker ("DMM") for that stock to trade the order. The
DMM's job is to maintain a two-sided market, meaning orders to buy and sell the
security if there are no other buyers and sellers. If a spread exists, no trade immediately
takes place—in this case the DMM should use their own resources (money or stock) to
close the difference after they judged time. Once a trade has been made the details are
reported on the "tape" and sent back to the brokerage firm, which then notifies the investor
who placed the order. Computers play an important role, especially for so-called "program
trading".
The NASDAQ is a virtual listed exchange, where all of the trading is done over
a computer network. The process is similar to the New York Stock Exchange.
One or more NASDAQ market makers will always provide a bid and ask price at
which they will always purchase or sell 'their' stock.
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock
exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of
an open outcry exchange. Stockbrokers met on the trading floor or the Palais
Brongniart. In 1986, the CATS trading system was introduced, and the order
matching process was fully automated.
People trading stock will prefer to trade on the most popular exchange since
this gives the largest number of potential counterparties (buyers for a seller, sellers
for a buyer) and probably the best price. However, there have always been alternatives
such as brokers trying to bring parties together to trade outside the exchange. Some
third markets that were popular are Instinet, and later Island and Archipelago (the later
two have since been acquired by Nasdaq and NYSE, respectively). One advantage is
that this avoids the commissions of the exchange. However, it also has problems such
as adverse selection.Financial regulators are probing dark pools.
Market participant:
Market participants include individual retail investors, institutional investors such
as mutual funds, banks, insurance companies and hedge funds, and also publicly
traded corporations trading in their own shares. Some studies have suggested that
institutional investors and corporations trading in their own shares generally receive
higher risk-adjusted returns than retail investors.
A few decades ago,[when?] worldwide, buyers and sellers were individual investors,
such as wealthy businessmen, usually with long family histories to particular corporations.
Over time, markets have become more "institutionalized"; buyers and sellers are largely
institutions (e.g., pension funds, insurance companies, mutual funds, index funds,
exchange-traded funds, hedge funds, investor groups, banks and various other
financial institutions).
The rise of the institutional investor has brought with it some improvements in market
operations. There has been a gradual tendency for "fixed" (and exorbitant) fees being
reduced for all investors, partly from falling administration costs but also assisted by
large institutions challenging brokers' oligopolistic approach to setting standardised fees.
A current trend in stock market investments includes the decrease in fees due to
computerized asset management termed Robo Advisers within the industry. The automation
of investment management has decreased how much human portfolio management costs by
lowering the cost associated with investing as a whole.
Trends in market participation
Stock market participation refers to the number of agents who buy and sell
equity backed securities either directly or indirectly in a financial exchange.
Participants are generally subdivided into three distinct sectors; households,
institutions, and foreign traders. Direct participation occurs when any of the above
entities buys or sells securities on its own behalf on an exchange. Indirect participation
occurs when an institutional investor exchanges a stock on behalf of an individual or
household. Indirect investment occurs in the form of pooled investment accounts, retirement
accounts, and other managed financial accounts.
Indirect vs. direct investment:
The total value of equity-backed securities in the United States rose over
600% in the 25 years between 1989 and 2012 as market capitalization
expanded from $2,789,999,902,720 to $18,668,333,210,000.The demographic
composition of stock market participation, accordingly, is the main determinant
of the distribution of gains from this growth. Direct ownership of stock by
households rose slightly from 17.8% in 1992 to 17.9% in 2007 with the median
value of these holdings rising from $14,778 to $17,000.Indirect participation
in the form of retirement accounts rose from 39.3% in 1992 to 52.6% in 2007
with the median value of these accounts more than doubling from $22,000 to $
45,000 in that time.Rydqvist, Spizman, and Strebulaev attribute the differential
growth in direct and indirect holdings to differences in the way each are taxed.
Investments in pension funds and 401ks, the two most common vehicles of indirect
participation, are taxed only when funds are withdrawn from the accounts. Conversely,
the money used to directly purchase stock is subject to taxation as are any dividends
or capital gains they generate for the holder. In this way current tax code incentivizes
households to invest indirectly at greater rates.
Participation by income and wealth strata
Rates of participation and the value of holdings differs significantly across
strata of income. In the bottom quintile of income, 5.5% of households
directly own stock and 10.7% hold stocks indirectly in the form of retirement
accounts.The top decile of income has a direct participation rate of 47.5%
and an indirect participation rate in the form of retirement accounts of 89.6%.
The median value of directly owned stock in the bottom quintile of income is
$4,000 and is $78,600 in the top decile of income as of 2007.The median
value of indirectly held stock in the form of retirement accounts for the same
two groups in the same year is $6,300 and $214,800 respectively.Since
the Great Recession of 2008 households in the bottom half of the income
distribution have lessened their participation rate both directly and indirectly
from 53.2% in 2007 to 48.8% in 2013, while over the same time period
households in the top decile of the income distribution slightly increased
participation 91.7% to 92.1%.The mean value of direct and indirect holdings
at the bottom half of the income distribution moved slightly downward from
$53,800 in 2007 to $53,600 in 2013. In the top decile, mean value of all
holdings fell from $982,000 to $969,300 in the same time.The mean value
of all stock holdings across the entire income distribution is valued at
$269,900 as of 2013.
Participation by head of household race and gender
The racial composition of stock market ownership shows households
headed by whites are nearly four and six times as likely to directly own
stocks than households headed by blacks and Hispanics respectively.
As of 2011 the national rate of direct participation was 19.6%, for white
households the participation rate was 24.5%, for black households it was
6.4% and for Hispanic households it was 4.3% Indirect participation in
the form of 401k ownership shows a similar pattern with a national
participation rate of 42.1%, a rate of 46.4% for white households, 31.7%
for black households, and 25.8% for Hispanic households. Households
headed by married couples participated at rates above the national averages
with 25.6% participating directly and 53.4% participating indirectly through a
retirement account. 14.7% of households headed by men participated in the
market directly and 33.4% owned stock through a retirement account. 12.6%
of female headed households directly owned stock and 28.7% owned stock
indirectly.
Determinants and possible explanations of stock market participation
In a 2002 paper Anntte Vissing-Jorgensen from the University of Chicago
attempts to explain disproportionate rates of participation along wealth and
income groups as a function of fixed costs associated with investing. Her
research concludes that a fixed cost of $200 per year is sufficient to explain
why nearly half of all U.S. households do not participate in the market.
Participation rates have been shown to strongly correlate with education levels,
promoting the hypothesis that information and transaction costs of market
participation are better absorbed by more educated households. Behavioral
economists Harrison Hong, Jeffrey Kubik and Jeremy Stein suggest that
sociability and participation rates of communities have a statistically significant
impact on an individual’s decision to participate in the market. Their research
indicates that social individuals living in states with higher than average participation
rates are 5% more likely to participate than individuals that do not share those
characteristics.This phenomena also explained in cost terms. Knowledge of market
functioning diffuses through communities and consequently lowers transaction costs
associated with investing
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