stock market - wikipedia, the free encyclopedia

8/18/2019 Stock Market - Wikipedia, The Free Encyclopedia

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Stock marketFrom Wikipedia, the free encyclopedia

A stock market or 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);

these may include securities listed on a stock exchange as well as those only traded privately.

Contents

1 Size of the market

2 Stock exchange

3 Trade

4 Market participant

4.1 Tr ends in market participation

4.1.1 Indirect vs. direct investment

4.1.2 Participation by income and wealth strata

4.1.3 Participation by head of household race and gender [12]

4.1.4 Determinants and possible explanations of stock market participation

5 History6 Importance of stock market

6.1 Function and purpose

6.2 Relation of the stock market to the modern financial system

6.3 United States S&P stock market returns

6.4 Behavior of the stock market

6.5 Irrational behavior

6.6 Crashes

6.7 Stock market prediction

7 Stock market index

8 Derivative instruments

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9 Leveraged strategies

9.1 Short selling

9.2 Margin buying

10 New issuance

11 ASX Share Market Game

12 Investment strategies

13 Taxation

14 See also

15 References

16 Further reading

17 External links

Size of the market

Stocks can 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.[1] 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.[3]

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 "ove

the counter", that is, through a dealer. A large company will usually have its stock listed on many

exchanges across the world.[4]

Exchanges may also cover other types of security such as fixed interest securities or interest derivatives.

Trade

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.

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The New York Stock Exchange

The London Stock Exchange

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. An example of such an exchange is the New York Stock Exchange. 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 bidderor 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 both electronically and manually on the trading floor. Orders

executed on the trading floor enter by way of exchange members and flow down to a floor broker, whogoes to the floor trading post specialist for that stock to trade the order. The specialist's job is to match buy

and sell orders using open outcry. If a spread exists, no trade immediately takes place—in this case the

specialist should use his/her own resources (money or stock) to close the difference after his/her 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. Although there is a significant amount of human

contact in this process, 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. However, buyers and sellers are electronically

matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will

always purchase or sell 'their' stock.[5]

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 o

potential counterparties (buyers for a seller, sellers for a buyer) and probably the best price. However, ther

have always been alternatives such as brokers trying to bring parties together to trade outside the exchange

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The offices of Bursa Malaysia,

Malaysia's national stock

exchange (known beforedemutualization as Kuala Lumpur

Stock Exchange)

Some third markets that were popular are Instinet, and later Island and Archipelago. One advantage is that

this avoids the commissions of the exchange. However, it also has problems such as adverse selection. [6]

Financial regulators are probing dark pools.[7][8]

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.[9]

A few decades ago, 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 ha

been a gradual tendency for "fixed" (and exorbitant) fees being reduced for all investors, partly from fallin

administration costs but also assisted by large institutions challenging brokers' oligopolistic approach to

setting standardised fees.

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 occur

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.[10] Th

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% i

1992 to 17.9% in 2007 with the median value of these holdings rising from $14,778 to $17,000.[11][12]

Indirect participation in the form of retirement accounts rose from 39.3% in 1992 to 52.6% in 2007 with th

median value of these accounts more than doubling from $22,000 to $45,000 in that time.[11][12] Rydqvist,

Spizman, and Strebulaev attribute the differential growth in direct and indirect holdings to differences in th

way each are taxed. Investments in pension funds and 401ks, the two most common vehicles of indirect

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participation, are taxed only when funds are withdrawn from the accounts. Conversely, the money used todirectly 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. [13]

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 ofretirement accounts.[12] 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%.[12] The median value of directly owned stoc

in the bottom quintile of income is $4,000 and is $78,600 in the top decile of income as of 2007.[14] 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.[14] 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%.[15] The mean value of direct and

indirect holdings at the bottom half of the income distribution moved slightly downward from $53,800 in2007 to $53,600 in 2013.[15] In the top decile, mean value of all holdings fell from $982,000 to $969,300 in

the same time.[15] The mean value of all stock holdings across the entire income distribution is valued at

$269,900 as of 2013.[15]

Participation by head of household race and gender[12]

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 was24.5%, 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. Household

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. [16] 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


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Established in 1875, the Bombay

Stock Exchange is Asia's first

stock exchange

participation rates are 5% more likely to participate than individuals that do not share those

characteristics.[17] This phenomena also explained in cost terms. Knowledge of market functioning diffusethrough communities and consequently lowers transaction costs associated with investing.

History

In 12th century France, the courretiers de change were concerned with

managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they

could be called the first brokers. A common misbelief is that in late

13th century Bruges commodity traders gathered inside the house of a

man called Van der Beurze, and in 1409 they became the "Brugse

Beurse", institutionalizing what had been, until then, an informal

meeting, but actually, the family Van der Beurze had a building in

Antwerp where those gatherings occurred;[18] the Van der Beurze had

Antwerp, as most of the merchants of that period, as their primary place

for trading. The idea quickly spread around Flanders and neighboring

countries and "Beurzen" soon opened in Ghent and Rotterdam.

In the middle of the 13th century, Venetian bankers began to trade in

government securities. In 1351 the Venetian government outlawed

spreading rumors intended to lower the price of government funds.

Bankers in Pisa, Verona, Genoa and Florence also began trading in

government securities during the 14th century. This was only possible

because these were independent city states not ruled by a duke but a

council of influential citizens. Italian companies were also the first to issue shares. Companies in England

and the Low Countries followed in the 16th century.

The Dutch East India Company (founded in 1602) was the first joint-stock company to get a fixed capital

stock and as a result, continuous trade in company stock occurred on the Amsterdam Exchange. Soon

thereafter, a lively trade in various derivatives, among which options and repos, emerged on the Amsterdam

market. Dutch traders also pioneered short selling – a practice which was banned by the Dutch authorities

as early as 1610.[19]

There are now stock markets in virtually every developed and most developing economies, with the world

largest markets being in the United States, United Kingdom, Japan, India, Pakistan, China, Canada,

Germany (Frankfurt Stock Exchange), France, South Korea and the Netherlands.[20]

Importance of stock market

Function and purpose

The stock market is one of the most important ways for companies to raise money, along with debt

markets which are generally more imposing but do not trade publicly.[21] This allows businesses to be

publicly traded, and raise additional financial capital for expansion by selling shares of ownership of the

company in a public market. The liquidity that an exchange affords the investors enables their holders to

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The main trading room of

the Tokyo Stock

Exchange,where trading is

currently completed through

computers.

quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less

liquid investments such as property and other immoveable assets. Some companies actively increase

liquidity by trading in their own shares.[22][23]

History has shown that the price of stocks and other assets is an important

part of the dynamics of economic activity, and can influence or be an

indicator of social mood. An economy where the stock market is on the rise

is considered to be an up-and-coming economy. In fact, the stock market is

often considered the primary indicator of a country's economic strength and

development.[24]

Rising share prices, for instance, tend to be associated with increased

business investment and vice versa. Share prices also affect the wealth of

households and their consumption. Therefore, central banks tend to keep an

eye on the control and behavior of the stock market and, in general, on the

smooth operation of financial system functions. Financial stability is the

raison d'être of central banks.[25]

Exchanges also act as the clearinghouse for each transaction, meaning that

they collect and deliver the shares, and guarantee payment to the seller of a

security. This eliminates the risk to an individual buyer or seller that the

counterparty could default on the transaction.[26]

The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise

risks promote the production of goods and services as well as possibly employment. In this way the

financial system is assumed to contribute to increased prosperity, although some controversy exists as to

whether the optimal financial system is bank-based or market-based.[27]

Recent events such as the Global Financial Crisis have prompted a heightened degree of scrutiny of the

impact of the structure of stock markets[28][29] (called market microstructure), in particular to the stability

the financial system and the transmission of systemic risk.[30]

Relation of the stock market to the modern financial system

The financial system in most western countries has undergone a remarkable transformation. One feature of

this development is disintermediation. A portion of the funds involved in saving and financing, flows

directly to the financial markets instead of being routed via the traditional bank lending and deposit

operations. The general public interest in investing in the stock market, either directly or through mutualfunds, has been an important component of this process.

Statistics show that in recent decades, shares have made up an increasingly large proportion of households

financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets

with little risk made up almost 60 percent of households' financial wealth, compared to less than 20 percen

in the 2000s. The major part of this adjustment is that financial portfolios have gone directly to shares but

good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g.,

pension funds, mutual funds, hedge funds, insurance investment of premiums, etc.

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The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and

insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other

developed countries. In all developed economic systems, such as the European Union, the United States,

Japan and other developed nations, the trend has been the same: saving has moved away from traditional

(government insured) "bank deposits to more risky securities of one sort or another".

A second transformation is the move to electronic trading to replace human trading of listed securities. [29]

United States S&P stock market returns

(assumes 2% annual dividend)

Years to December 31, 2012 Average Annual Return

%

Average CompoundedAnnual Return

%

1 15.5 15.5

3 10.9 11.6

5 4.3 10.1

10 8.8 7.3

15 6.5 5.9

20 10.0 6.4

30 11.6 7.3

40 10.1 8.0

50 10.0 8.1

60 10.5 8.2

Compared to Other Asset Classes Over the long term, investing in a well diversified portfolio of stocks

such as an S&P 500 Index outperforms other investment vehicles such as Treasury Bills and Bonds, with

the S&P 500 having a geometric annual average of 9.55% from 1928-2013.[31]

Behavior of the stock market

From experience it is known that investors may 'temporarily' move financial prices away from their long

term aggregate price 'trends'. Over-reactions may occur—so that excessive optimism (euphoria) may drive

prices unduly high or excessive pessimism may drive prices unduly low. Economists continue to debatewhether financial markets are 'generally' efficient.[32]

According to one interpretation of the efficient-market hypothesis (EMH), only changes in fundamental

factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the short

term, where random 'noise' in the system may prevail. (But this largely theoretic academic viewpoint—

known as 'hard' EMH—also predicts that little or no trading should take place, contrary to fact, since prices

are already at or near equilibrium, having priced in all public knowledge.) The 'hard' efficient-market

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NASDAQ in Times Square,

New York City

hypothesis is sorely tested and does not explain the cause of events such as the crash in 1987, when theDow Jones Industrial Average plummeted 22.6 percent—the largest-ever one-day fall in the United

States.[33]

This event demonstrated that share prices can fall dramatically even though, to this day, it is impossible to

fix a generally agreed upon definite cause: a thorough search failed to detect any 'reasonable' development

that might have accounted for the crash. (But note that such events are predicted to occur strictly by chance

although very rarely.) It seems also to be the case more generally that many price movements (beyond that

which are predicted to occur 'randomly') are not occasioned by new information; a study of the fifty larges

one-day share price movements in the United States in the post-war period seems to confirm this. [33]

A 'soft' EMH has emerged which does not require that prices remain at or near equilibrium, but only that

market participants not be able to systematically profit from any momentary

market 'inefficiencies'. Moreover, while EMH predicts that all price

movement (in the absence of change in fundamental information) is random

(i.e., non-trending), many studies have shown a marked tendency for the

stock market to trend over time periods of weeks or longer. Various

explanations for such large and apparently non-random price movements

have been promulgated. For instance, some research has shown that changes

in estimated risk, and the use of certain strategies, such as stop-loss limits

and value at risk limits, theoretically could cause financial markets to

overreact. But the best explanation seems to be that the distribution of stock

market prices is non-Gaussian (http://cnx.org/content/m11318/latest/) (in

which case EMH, in any of its current forms, would not be strictly

applicable).[34][35]

Other research has shown that psychological factors may result in

exaggerated (statistically anomalous) stock price movements (contrary to

EMH which assumes such behaviors 'cancel out'). Psychological research

has demonstrated that people are predisposed to 'seeing' patterns, and often

will perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink

blots.) In the present context this means that a succession of good news items about a company may lead

investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts

the investors' self-confidence, reducing their (psychological) risk threshold.[36]

Another phenomenon—also from psychology—that works against an objective assessment is group

thinking . As social animals, it is not easy to stick to an opinion that differs markedly from that of a majorit

of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is

empty; people generally prefer to have their opinion validated by those of others in the group.

In one paper the authors draw an analogy with gambling.[37] In normal times the market behaves like a

game of roulette; the probabilities are known and largely independent of the investment decisions of the

different players. In times of market stress, however, the game becomes more like poker (herding behavior

takes over). The players now must give heavy weight to the psychology of other investors and how they ar

likely to react psychologically.

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The stock market, as with any other business, is quite unforgiving of amateurs. Inexperienced investors

rarely get the assistance and support they need. In the period running up to the 1987 crash, less than 1

percent of the analyst's recommendations had been to sell (and even during the 2000–2002 bear market, th

average did not rise above 5%). In the run up to 2000, the media amplified the general euphoria, with

reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in th

so-called new economy stock market. (And later amplified the gloom which descended during the 2000–

2002 bear market, so that by summer of 2002, predictions of a DOW average below 5000 were quite

common)

On the other hand, Stock markets play an essential role in growing industries that ultimately affect the

economy through transferring available funds from units that have excess funds (savings) to those who are

suffering from funds deficit (borrowings) (Padhi and Naik, 2012). In other words, capital markets facilitate

funds movement between the above-mentioned units. This process leads to the enhancement of available

financial resources which in turn affects the economic growth positively. Moreover, both of economic and

financial theories argue that stocks‘ prices are affected by the performance of main macroeconomic

variables, see Al-Majali and Al-Assaf (2014) (http://eujournal.org/index.php/esj/article/view/3129).[38]

Many different academic researchers have stated companies with low P/E ratios and smaller sized

companies have a tendency to outperform the market. Research carried out states mid-sized companiesoutperform large cap companies and smaller companies have even higher returns historically.

Irrational behavior

Sometimes, the market seems to react irrationally to economic or financial news, even if that news is likely

to have no real effect on the fundamental value of securities itself.[39] But, this may be more apparent than

real, since often such news has been anticipated, and a counterreaction may occur if the news is better (or

worse) than expected. Therefore, the stock market may be swayed in either direction by press releases,

rumors, euphoria and mass panic.

Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-

changing events, making the stock market behavior difficult to predict. Emotions can drive prices up and

down, people are generally not as rational as they think, and the reasons for buying and selling are generall

obscure. Behaviorists argue that investors often behave 'irrationally' when making investment decisions

thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities

to make money.[40] However, the whole notion of EMH is that these non-rational reactions to information

cancel out, leaving the prices of stocks rationally determined.

The Dow Jones Industrial Average biggest gain in one day was 936.42 points or 11 percent, this occurred

on October 13, 2008.[41]

Crashes

A stock market crash is often defined as a sharp dip in share prices of stocks listed on the stock exchanges

In parallel with various economic factors, a reason for stock market crashes is also due to panic and

investing public's loss of confidence. Often, stock market crashes end speculative economic bubbles.

https://en.wikipedia.org/wiki/Mass_panichttps://en.wikipedia.org/wiki/Stockhttps://en.wikipedia.org/wiki/New_economyhttp://eujournal.org/index.php/esj/article/view/3129https://en.wikipedia.org/wiki/Economic_bubblehttps://en.wikipedia.org/wiki/Share_pricehttps://en.wikipedia.org/wiki/Euphoria


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Robert Shiller's plot of the S&P Composite Real Price Index,

Earnings, Dividends, and Interest Rates, from Irrational

Exuberance, 2d ed.[42] In the preface to this edition, Shiller

warns, "The stock market has not come down to historical levels:

the price-earnings ratio as I define it in this book is still, at this

writing [2005], in the mid-20s, far higher than the historical

average... People still place too much confidence in the markets

and have too strong a belief that paying attention to the gyrations

in their investments will someday make them rich, and so they do

not make conservative preparations for possible bad outcomes."

There have been famous stock market crashes that have ended in the loss of billions of dollars and wealth

destruction on a massive scale. An increasing number of people are involved in the stock market, especiall

since the social security and retirement plans are being increasingly privatized and linked to stocks and

bonds and other elements of the market. There have been a number of famous stock market crashes like th

Wall Street Crash of 1929, the stock market crash of 1973–4, the Black Monday of 1987, the Dot-com

bubble of 2000, and the Stock Market

Crash of 2008.

One of the most famous stock marketcrashes started October 24, 1929 on Black

Thursday. The Dow Jones Industrial

Average lost 50% during this stock market

crash. It was the beginning of the Great

Depression. Another famous crash took

place on October 19, 1987 – Black

Monday. The crash began in Hong Kong

and quickly spread around the world.

By the end of October, stock markets inHong Kong had fallen 45.5%, Australia

41.8%, Spain 31%, the United Kingdom

26.4%, the United States 22.68%, and

Canada 22.5%. Black Monday itself was

the largest one-day percentage decline in

stock market history – the Dow Jones fell

by 22.6% in a day. The names "Black

Monday" and "Black Tuesday" are also

used for October 28–29, 1929, which

followed Terrible Thursday—the startingday of the stock market crash in 1929.

The crash in 1987 raised some puzzles – main news and events did not predict the catastrophe and visible

reasons for the collapse were not identified. This event raised questions about many important assumption

of modern economics, namely, the theory of rational human conduct, the theory of market equilibrium and

the efficient-market hypothesis. For some time after the crash, trading in stock exchanges worldwide was

halted, since the exchange computers did not perform well owing to enormous quantity of trades being

received at one time. This halt in trading allowed the Federal Reserve System and central banks of other

countries to take measures to control the spreading of worldwide financial crisis. In the United States the

SEC introduced several new measures of control into the stock market in an attempt to prevent a re-occurrence of the events of Black Monday.

Since the early 1990s, many of the largest exchanges have adopted electronic 'matching engines' to bring

together buyers and sellers, replacing the open outcry system. Electronic trading now accounts for the

majority of trading in many developed countries. Computer systems were upgraded in the stock exchanges

to handle larger trading volumes in a more accurate and controlled manner. The SEC modified the margin

requirements in an attempt to lower the volatility of common stocks, stock options and the futures market.

The New York Stock Exchange and the Chicago Mercantile Exchange introduced the concept of a circuit

breaker. The circuit breaker halts trading if the Dow declines a prescribed number of points for a prescribe

https://en.wikipedia.org/wiki/File:IE_Real_SandP_Prices,_Earnings,_and_Dividends_1871-2006.pnghttps://en.wikipedia.org/wiki/Efficient-market_hypothesishttps://en.wikipedia.org/wiki/Dot-com_bubblehttps://en.wikipedia.org/wiki/Theory_of_market_equilibriumhttps://en.wikipedia.org/wiki/Social_securityhttps://en.wikipedia.org/wiki/Dow_Jones_Industrial_Averagehttps://en.wikipedia.org/wiki/Stock_market_crash_of_1973%E2%80%934https://en.wikipedia.org/wiki/Theory_of_rational_conduct_of_human_beinghttps://en.wikipedia.org/wiki/Black_Monday_(1987)https://en.wikipedia.org/wiki/Retirement_planhttps://en.wikipedia.org/wiki/Robert_Shillerhttps://en.wikipedia.org/wiki/Great_Depressionhttps://en.wikipedia.org/wiki/Federal_Reserve_Systemhttps://en.wikipedia.org/wiki/Irrational_Exuberance_(book)https://en.wikipedia.org/wiki/Stock_market_crashhttps://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929https://en.wikipedia.org/wiki/New_York_Stock_Exchangehttps://en.wikipedia.org/wiki/Chicago_Mercantile_Exchangehttps://en.wikipedia.org/wiki/Stock


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Price-Earnings ratios as a predictor of twenty-year returns based

upon the plot by Robert Shiller (Figure 10.1, [42] source

(http://irrationalexuberance.com/shiller_downloads/ie_data.xls)). The

horizontal axis shows the real price-earnings ratio of the S&P

Composite Stock Price Index as computed in Irrational

Exuberance (inflation adjusted price divided by the prior ten-year

mean of inflation-adjusted earnings). The vertical axis shows the

geometric average real annual return on investing in the S&P

Composite Stock Price Index, reinvesting dividends, and selling

twenty years later. Data from different twenty-year periods is

color-coded as shown in the key. See also ten-year returns. Shille

states that this plot "confirms that long-term investors—investors

who commit their money to an investment for ten full years—did

do well when prices were low relative to earnings at the beginning

of the ten years. Long-term investors would be well advised,

individually, to lower their exposure to the stock market when it

is high, as it has been recently, and get into the market when it is

low."[42]

amount of time. In February 2012, the

Investment Industry Regulatory

Organization of Canada (IIROC)

introduced single-stock circuit breakers.[43]

New York Stock Exchange (NYSE)

circuit breakers[44]

%drop

time of drop close trading

for

10 before 2 pm one hour halt

10 2 pm – 2:30 pm half-hour halt

10 after 2:30 pm market stays

open

20 before 1 pm halt for two

hours

20 1 pm – 2 pm halt for onehour

20 after 2 pm close for the

day

30any time duringday

close for theday

Stock market prediction

Tobias Preis and his colleagues HelenSusannah Moat and H. Eugene Stanley

introduced a method to identify online

precursors for stock market moves, using

trading strategies based on search volume

data provided by Google Trends.[45] Their

analysis of Google search volume for 98

terms of varying financial relevance,

published in Scientific Reports,[46] suggests

that increases in search volume for financially relevant search terms tend to precede large losses in financi

markets.[47][48][49][50][51][52]

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 S&P, the FTSE and the Euronext indices. Such indices

are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the

index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect th

changing business environment.

https://en.wikipedia.org/wiki/Robert_Shillerhttps://en.wikipedia.org/wiki/File:Price-Earnings_Ratios_as_a_Predictor_of_Ten-Year_Returns_(Shiller_Data).pnghttps://en.wikipedia.org/wiki/File:Price-Earnings_Ratios_as_a_Predictor_of_Twenty-Year_Returns_(Shiller_Data).pnghttp://irrationalexuberance.com/shiller_downloads/ie_data.xlshttps://en.wikipedia.org/wiki/Market_capitalizationhttps://en.wikipedia.org/wiki/H._Eugene_Stanleyhttps://en.wikipedia.org/wiki/Scientific_Reportshttps://en.wikipedia.org/wiki/Googlehttps://en.wikipedia.org/wiki/Standard_%26_Poor%27shttps://en.wikipedia.org/wiki/Tobias_Preishttps://en.wikipedia.org/wiki/File:IE_Real_SandP_Price-Earnings_Ratio,_Interest_1871-2006.pnghttps://en.wikipedia.org/wiki/Euronexthttps://en.wikipedia.org/wiki/FTSE_100_Indexhttps://en.wikipedia.org/w/index.php?title=Helen_Susannah_Moat&action=edit&redlink=1https://en.wikipedia.org/wiki/File:Price-Earnings_Ratios_as_a_Predictor_of_Ten-Year_Returns_(Shiller_Data).png


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erivative instruments

Financial innovation has brought many new financial instruments whose pay-offs or values depend on the

prices of stocks. Some examples are exchange-traded funds (ETFs), stock index and stock options, equity

swaps, single-stock futures, and stock index futures. These last two may be traded on futures exchanges

(which are distinct from stock exchanges—their history traces back to commodity futures exchanges), or

traded over-the-counter. As all of these products are only derived from stocks, they are sometimes

considered to be traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock market.

Leveraged strategies

Stock that a trader does not actually own may be traded using short selling; margin buying may be used to

purchase stock with borrowed funds; or, derivatives may be used to control large blocks of stocks for a

much smaller amount of money than would be required by outright purchase or sales.

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, betting that the price will fall. Th

trader eventually buys back the stock, making money if the price fell in the meantime and losing money if

rose. Exiting a short position by buying back the stock is called "covering." This strategy may also be used

by unscrupulous traders in illiquid or thinly traded markets to artificially lower the price of a stock. Hence

most markets either prevent short selling or place restrictions on when and how a short sale can occur. The

practice of naked shorting is illegal in most (but not all) stock markets.

Margin buying

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. I

the United States, the margin requirements have been 50% for many years (that is, if you want to make a

$1000 investment, you need to put up $500, and there is often a maintenance margin below the $500).

A margin call is made if the total value of the investor's account cannot support the loss of the trade. (Upon

a decline in the value of the margined securities additional funds may be required to maintain the account's

equity, and with or without notice the margined security or any others within the account may be sold by

the brokerage to protect its loan position. The investor is responsible for any shortfall following such force

sales.)

Regulation of margin requirements (by the Federal Reserve) was implemented after the Crash of 1929.

Before that, speculators typically only needed to put up as little as 10 percent (or even less) of the total

investment represented by the stocks purchased. Other rules may include the prohibition of free-riding:

putting in an order to buy stocks without paying initially (there is normally a three-day grace period for

delivery of the stock), but then selling them (before the three-days are up) and using part of the proceeds to

make the original payment (assuming that the value of the stocks has not declined in the interim).

https://en.wikipedia.org/wiki/Derivatives_markethttps://en.wikipedia.org/wiki/Stock_indexhttps://en.wikipedia.org/wiki/Futures_contracthttps://en.wikipedia.org/wiki/Investmenthttps://en.wikipedia.org/wiki/Over-the-counter_(finance)https://en.wikipedia.org/wiki/Crash_of_1929https://en.wikipedia.org/wiki/Single-stock_futureshttps://en.wikipedia.org/wiki/Exchange-traded_fundhttps://en.wikipedia.org/wiki/Derivative_(finance)https://en.wikipedia.org/wiki/Naked_shortinghttps://en.wikipedia.org/wiki/Federal_Reservehttps://en.wikipedia.org/wiki/Equity_swaphttps://en.wikipedia.org/wiki/Stock_optionhttps://en.wikipedia.org/wiki/Derivative_(finance)https://en.wikipedia.org/wiki/Short_sellinghttps://en.wikipedia.org/wiki/Futures_exchangehttps://en.wikipedia.org/wiki/Margin_buyinghttps://en.wikipedia.org/wiki/Commodity


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New issuance

Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8% increase ov

the $389 billion raised in 2003. Initial public offerings (IPOs) by US issuers increased 221% with 233

offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by 333%,

from $9 billion to $39 billion.

ASX Share Market Game

ASX Share Market Game is a platform for Australian school students and beginners to learn about trading

stocks. The game is a free service hosted on ASX (Australian Securities Exchange) website. [53] Each year

more than 70,000 students enroll in the game. For vast majority, this is an introduction to Stock Market

investing. Students once enrolled, are given $50,000 virtual money and can buy and sell up to 20 times a

day. The game runs for 10 weeks. This ridiculously short time frame turns the game into a lottery,

encouraging people to take huge risks with their virtual $50,000, breaking the laws of commonsense

investing in the process.[54] Many similar programs are found in secondary educational institutions across

the world.

Investment strategies

One of the many things people always want to know about the stock market is, "How do I make money

investing?" There are many different approaches; two basic methods are classified by either fundamental

analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial

statements found in SEC filings, business trends, general economic conditions, etc. Technical analysis

studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast

price trends regardless of the company's financial prospects. One example of a technical strategy is the

Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strictmoney management and is also rooted in risk control and diversification.

Additionally, many choose to invest via the index method. In this method, one holds a weighted or

unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as th

S&P 500 or Wilshire 5000). The principal aim of this strategy is to maximize diversification, minimize

taxes from too frequent trading, and ride the general trend of the stock market (which, in the U.S., has

averaged nearly 10% per year, compounded annually, since World War II).

Taxation

According to much national or state legislation, a large array of fiscal obligations are taxed for capital gain

Taxes are charged by the state over the transactions, dividends and capital gains on the stock market, in

particular in the stock exchanges. However, these fiscal obligations may vary from jurisdictions to

urisdictions because, among other reasons, it could be assumed that taxation is already incorporated into

the stock price through the different taxes companies pay to the state, or that tax free stock market

operations are useful to boost economic growth.

See also

https://en.wikipedia.org/wiki/S%26P_500https://en.wikipedia.org/wiki/Fundamental_analysishttps://en.wikipedia.org/wiki/SEC_filinghttps://en.wikipedia.org/wiki/Diversification_(finance)https://en.wikipedia.org/wiki/Wilshire_5000https://en.wikipedia.org/wiki/Australian_Securities_Exchangehttps://en.wikipedia.org/wiki/Fundamental_analysishttps://en.wikipedia.org/wiki/Europe,_the_Middle_East_and_Africahttps://en.wikipedia.org/wiki/Financial_statementhttps://en.wikipedia.org/wiki/Ed_Seykotahttps://en.wikipedia.org/wiki/John_W._Henryhttps://en.wikipedia.org/wiki/Stock_pricehttps://en.wikipedia.org/wiki/Risk_managementhttps://en.wikipedia.org/wiki/Initial_public_offeringhttps://en.wikipedia.org/wiki/Technical_analysishttps://en.wikipedia.org/wiki/Capital_gainhttps://en.wikipedia.org/wiki/Technical_analysishttps://en.wikipedia.org/wiki/Index_fundhttps://en.wikipedia.org/wiki/Trend_followinghttps://en.wikipedia.org/wiki/World_War_II


15/17

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Securities regulation in the United StatesSlippage (finance)Stock market bubbleStock market cyclesStock market data systemsMr. MarketStock fund

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Look up stock market in

Wiktionary, the free

dictionary.

Wikiquote has quotations

related to: Stock market

Further reading

Hamilton, W. P. (1922). The Stock Market Baraometer . New York: John Wiley & Sons Inc (1998 reprint).

ISBN 0-471-24764-2.

Preda, Alex (2009). Framing Finance: The Boundaries of Markets and Modern Capitalism. University of

Chicago Press. ISBN 978-0-226-67932-7.

Siegel, Jeremy J. (2008). "Stock Market". In David R. Henderson (ed.). Concise Encyclopedia of Economics

(2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267.

External links

Stock exchanges

(https://www.dmoz.org/Business/Investing/Stocks_and_Bonds/Exchanges/) at DMOZStocks investing (https://www.dmoz.org/Home/Personal_Finance/Investing/Stocks/) at DMOZ

Retrieved from "https://en.wikipedia.org/w/index.php?title=Stock_market&oldid=701743809"

Categories: Stock market Dutch inventions Capitalism

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51. Richard Waters (April 25, 2013). "Google search proves to be new word in stock market prediction". Financial

Times. Retrieved August 28, 2013.

52. Jason Palmer (April 25, 2013). "Google searches predict market moves". BBC . Retrieved August 28, 2013.

53. "Sharemarket Game". asx.com.au. Retrieved August 14, 2015.

54. "How to win the ASX Sharemarket gamt". Intelligent Investor (Company). August 2014. Retrieved 15 March

2015.
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