What is Equity Market?
Equity market, also known as stock market, is a platform where shares are issued and exchanged between companies and investors with an objective of providing finance to the organization, and sharing the ownership of the company.
Companies with financial requirements reach here to share ownership (security) with investors. Investors once subscribed to the securities for the first time (in case of Initial Public OfferInitial Public OfferAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.), can either hold or sell the securities in the stock market. So, in short, it is a trading place where the transfer of securities takes place. For example, Alibaba Group, a company based out of China, has listed its shares at NYSE on 18th Sep’2014 for an amount of $25 billion.
Types of Equity Market
The equity market is of two types – Primary Market and Secondary Market.
#1 – Primary Market
It is also known as the issue market where the companies get their securities listed and approach the public to subscribe to it for the first time. Issue of securities in this market could be of four types:
- Public Issue: When security is issued to the public at large, it is known as a public issue. It could be via Initial Public Offer or through the Follow on Public offerFollow On Public OfferFollow on Public Offering (FPO), also known as a seasoned equity offering, is the method to raise capital by offering additional equity or preference shares after raising funds through Initial Public Offer..
- Rights Issue: Here, the listed entities allows its existing shareholders to continue maintaining their earlier ratio in shares by enabling them the securities at a lesser price in comparison to the prevailing market prices.
- Private Placements: Sometimes, securities are not issued to the public at large, and to some select persons, it is known as a private placement. The issuing entity needs to follow various guidelines of the federal agencies to take this path.
- Bonus Issue: An issuance of shares to the existing shareholder on the record date without any consideration is known as a bonus issue.
#2 – Secondary Market
It is a place where securities change hands amongst investors — the securities of entities such as public Undertakings, semi-government bodies, govt. Organizations, Joint Stock CompaniesJoint Stock CompaniesA joint stock company is one in which the company's shares or stocks are jointly held by shareholders in some proportion and in which they have share in the profits based on their shareholding. Each holder is only liable for the amount of their shareholding, and they are free to transfer their shares., etc. are listed and traded. It is more popular and widely used by investors daily.
Example of Equity Market
Equity markets are across all the countries, and for example, the New York Stock Exchange(NYSE) is an equity market situated in New York, The USA. It is the largest equity-focused exchange in the world based on the total capitalization of stocks that are listed here. It was held privately till 2005 and went public after acquiring Archipelago (a trading exchange working on electronic mode), and Euronext ( Europe’s largest exchange). Currently, the ownership of the NYSE is held by an American public company, Intercontinental Exchange.
There are more than ten stock marketsStock MarketsStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price. across the U.S., but the most popular ones are the New York Stock Exchange, and the NASDAQNASDAQThe full form of NASDAQ is the National Association of Securities Dealers Automated Quotation. The NASDAQ is a global electronic marketplace for the buying and selling of securities via an automated network that was founded in 1971 by the NASD i.e., National Association of Securities Dealers, and it is also the benchmark index of U.S. technology stocks. stock market, both based out of New York City. Though there is a presence of multiple stock markets in the U.S., the following tenets of a stock market remain the same.
- The stock markets are controlled and operated by a corporation responsible for the creation and overseeing the rules and regulations. It has a management committee taking care of its day-to-day affairs. For instance, NYSE is owned and controlled by intercontinental exchange, an American Corporation.
- As the stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ. are considered as a barometer of the economy and impact big corporations and the general public, these are heavily regulated by the federal agencies. SEC (Security and Exchange Commission of the USA) is a federal agency involved in making rules and overseeing the compliance in the public interest. The primary objective is to protect the investors and keeping a fair environment for the securities market.
- They have two primary works; Listing of new shares in the primary markets and trading of already listed shares in the secondary marketSecondary MarketA secondary market is where securities are offered to the general public after being offered in the primary market. Such securities are usually listed on the stock exchange. A significant portion of trading happens in such a market and are of two types – equities and debt markets.. These are the most fundamental and structural features of any equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet. market prevalent across nations. The stock markets become the medium between the investor and issuer of securities to facilitate the exchange of funds.
- The discovery of price in all the stock markets also sticks to just one idea, i.e., demand and supply of securities. When the demand for a stock keeps rising, the prices shoot up, and similarly, in the adverse scenario, when the stock price lacks the demands, or there is an oversupply in the market, the prices plummet. The fundamental reason behind increased demand is the prospects of an entity involved. So, the price derivation generally happens in line with the market forces.
- There are three types of players in the market; Investors, Traders, and Speculators. Investors are those markets constituents that hold security for an extended period such as 3-5 yrs. They are less frequent in the market and generally don’t undertake transactions frequently.
- On the other hand, speculators and traders are more regular traders in the market and responsible for the price changes daily. Traders carry on trades for a smaller margin but consistently, whereas speculators try to predict the fate of the securities and to work accordingly by putting sale or buy orders.
- Companies with financial needs and good business prospects could come to stock markets and gets their securities listed (provided that all the requirements are fulfilled). It helps the company to avert debts and consistent payments by parting off with the ownership of the company. Generally, entities avail this route in case of expansion, debt reduction, dilution of shareholdingDilution Of ShareholdingStock dilution is defined as a decrease in the percentage of the ownership held by the existing shareholders because of the new shares issued. Such a dilution can happen either by offering shares in exchange for funds or converting dilutive securities like stock options and convertible debt., etc.
- For investors, the stock market opens up a window to invest in a growing company by sharing ownership. The equity market though risky than the debt market, is considered a highly rewarding option.
- They play an active role in the economy of a nation as well. It indicates the pulse of the country and employs funds of the majority of social security funds. Due to its widespread impact, it is heavily guarded and overseen by federal agencies such as SEC.
Irrespective of numerous benefits entailed by equity markets, it has some severe repercussions too. As it offers lucrative returns, and despite being heavily guarded by federal agencies, many uninformed people get duped in the market. Additionally, as the stock performance is an indicator of the health of the corporation, it builds pressure on the top management to beat its records, which sometimes leads to malpractices.
In spite of several limitations from the standpoint of investors and organizations, They offer an incredible stage to exchange funds with ownership that led to the prosperity of entities, investors, and the public at large.
This article has been a guide to what is the equity market and its meaning. Here we discuss characteristics and types of equity markets with the help of an example. We also discuss the advantages and disadvantages. You may also have a look at the following articles –