Equity Market

5 Key excerpts on "Equity Market"

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  eBook - ePub

  The Economist Guide To Financial Markets 7th Edition

  Why they exist and how they work

  • Marc Levinson(Author)
  • 2018(Publication Date)
  • Economist Books

    (Publisher)

  7

  Equity Markets

  “IT IS USUALLY AGREED that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges.” So wrote a British economist, John Maynard Keynes, in 1935. Keynes’s jibe is not entirely misplaced; more than a few punters approach the stockmarkets in the same spirit as the racetrack or the roulette wheel. Yet for all their shortcomings, as Keynes himself acknowledged, stockmarkets offer one singular advantage: they are the best way to bring people with money to invest together with people who can put that investment to productive use.

  The origins of equities

  Equity, quite simply, means ownership. Equities, therefore, are shares that represent part ownership of a business enterprise. The idea of share ownership goes back to medieval times. It became widespread during the Renaissance, when groups of merchants joined to finance trading expeditions and early bankers took part ownership of businesses to ensure repayment of loans. These early shareholder-owned enterprises, however, were usually temporary ventures established for a limited purpose, such as financing a single voyage by a ship, and were dissolved once their purpose was accomplished.

  The first shareholder-owned business may have been the Dutch East India Company, which was founded by Dutch merchants in 1602 and issued negotiable share certificates that were readily traded in Amsterdam until the company failed almost two centuries later. By the late 17th century, traders in London coffee houses earned their living dealing in the shares of joint-stock companies. But it was not until the Industrial Revolution made it necessary to raise large amounts of capital to build factories and canals that share trading became widespread. By early 2018, the capitalisation of the world’s stockmarkets exceeded $85 trillion after the widespread recovery in share prices since 2008. Table 7.1 gives the total stockmarket capitalisation – the value of all shares listed – in several countries; Table 7.2

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  eBook - ePub

  Money and Banking

  An International Text

  • Robert Eyler(Author)
  • 2009(Publication Date)
  • Routledge

    (Publisher)

  4 Equity Markets, stock markets and real estate

  Introduction

  The stock market, where ownership in companies is bought and sold, is a market where you must have a license or pay someone with a license to buy and sell assets for you. Securities brokers are such people, and are paid a commission for their services. There are three general ways firms can set up their ownership: sole proprietorships, partnerships or corporations. Corporations are companies that issue certificates of ownership, known as shares, and use Equity Markets to finance real asset purchases initially. Suppose you were a partner in a computer software company. You and your partner decide you need more office space for your employees. Your firm has three ways it can finance this expansion. The firm can use its retained earnings, or the accumulated profits the company has hopefully made and accrued over time. Second, your firm can also take a loan from a bank or find some debt instrument to gain access to cash and pay interest and principal over time. Finally, your firm can expand equity and find new partners who will help finance the expansion as trade for partnership, or go public and expand ownership through the Equity Market.

  This initial choice to go public is where the primary market comes into play. You announce to the world that you are entertaining bids from brokerage houses for your IPO, and the wheel begins to roll. Decisions you need to make if you decide to go public include the amount of common stock you will offer and whether you will offer preferred stock. Common stock is the classic type of stock market asset; it is traded with a value changing every day on the secondary market. It is considered common because each stock has ownership and voting rights, but only has the privilege of receiving dividends if paid; dividends are a disbursement of retained earnings by a firm. A firm is not obliged to pay common stockholders any dividends at all.

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  eBook - ePub

  Equity Asset Valuation

  • Jerald E. Pinto(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  The remainder of this chapter is organized as follows. Section 2 provides an overview of global Equity Markets and their historical performance. Section 3 examines the different types and characteristics of equity securities, and Section 4 outlines the differences between public and private equity securities. Section 5 provides an overview of the various types of equity securities listed and traded in global markets. Section 6 discusses the risk and return characteristics of equity securities. Section 7 examines the role of equity securities in creating company value and the relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return. The final section summarizes the chapter.

  2. Equity Securities in Global Financial Markets

  This section highlights the relative importance and performance of equity securities as an asset class. We examine the total market capitalization and trading volume of global Equity Markets and the prevalence of equity ownership across various geographic regions. We also examine historical returns on equities and compare them to the returns on government bonds and bills.

  Exhibit 1 summarizes the contributions of selected countries and geographic regions to global gross domestic product (GDP) and global Equity Market capitalization. Analysts may examine the relationship between Equity Market capitalization and GDP as a rough indicator of whether the global Equity Market (or a specific country’s or region’s Equity Market) is under-, over-, or fairly valued, particularly compared to its long-run average.

  Exhibit 1 illustrates the significant value that investors attach to publicly traded equities relative to the sum of goods and services produced globally every year. It shows the continued significance, and the potential overrepresentation, of US Equity Markets relative to their contribution to global GDP. That is, while US Equity Markets contribute around 51 percent to the total capitalization of global Equity Markets, their contribution to the global GDP is only around 25 percent. Following the stock market turmoil in 2008, however, the market capitalization to GDP ratio of the United States fell to 59 percent, which is significantly lower than its long-run average of 79 percent.

  As Equity Markets outside the United States develop and become increasingly global, their total capitalization levels are expected to grow closer to their respective world GDP contributions. Therefore, it is important to understand and analyze equity securities from a global perspective.

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  eBook - ePub

  Mastering the Art of Equity Trading Through Simulation, + Web-Based Software

  The TraderEx Course

  • Robert A. Schwartz, Gregory M. Sipress, Bruce W. Weber(Authors)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  Equities are a critically important financial asset for scores of investors and corporations, and they are essential to the vibrancy and growth of the macro economy. Corporate equities represent shares of ownership in public companies and, as such, equity financing is an essential source of the financial capital that firms must have to undertake their operations. According to the World Federation of Exchanges, the total market capitalization of all publicly traded companies in the world was $40 trillion in the fourth quarter 2008. On a national level, equities comprise a major part of the portfolios of both individual and institutional investors such as mutual funds and pension funds. And, in light of its dynamic properties, an Equity Market is a particularly intriguing micro market to study.

  Trading is not investing, and traders are a very different breed of people than portfolio managers. Portfolio managers (PMs) focus on stock selection. They take careful account of the risk and return characteristics of different stocks and, with increasing attention, their liquidity. Traders implement the PMs’ decisions. Traders bring the orders they are given to the market, interact with other traders and, in the process, they focus out of necessity on liquidity (or the lack thereof).

  A trader’s environment is very different from that of the PM. Once a decision has been made and passed on to the trading desk, time acquires a different meaning. The clock suddenly accelerates. Prices in the marketplace can move sharply in brief intervals of time. As they do, trading opportunities pop up and quickly vanish. Your own order handling can cause a price to move away from you. Poor order placement and imperfect order timing are costly. A hefty portion of the gains that an asset manager might otherwise have realized from a good investment decision can be eroded by a poor trading decision.

  In Blink (Little Brown and Company, 2005),

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  eBook - ePub

  Islamic Capital Markets

  A Comparative Approach

  • Obiyathulla Ismath Bacha, Abbas Mirakhor(Authors)
  • 2019(Publication Date)
  • WSPC

    (Publisher)

  Chapter 9

  COMMON STOCKS AND Equity MarketS

  Topics in this Chapter

  9.1.Introduction 9.2.The Evolution of Stocks 9.3.Why Companies Choose to List 9.4.Rights of Share Ownership

  9.5.Equity Ownership and Shari’ah Compliance

  9.6.The Valuation of Common Stocks 9.7.The Market Required Rate of Return 9.8.Required Return and Stock Price Dynamics Dividend Growth and the Trade-off with Capital Gains Stock Market Indices 9.9.Schools of Thought on Stock Price Behavior

  Chapter Objective

  This chapter is designed to provide readers with an in-depth introduction to common stocks, their evolution, valuation, and pricing models. Beginning with an explanation of how equity differs from debt, the function of stock markets and the terminologies used are explained. The different schools of thought on stock price behavior are also explained. On completing the unit, the reader should have a good understanding of stocks, why companies choose to list and issue stocks, what returns investors get from holding stocks, how to value stocks, and finally, the alternative explanations of stock price behavior.

  9.1.Introduction

  Investment in the form of equity is very different from investment in debt instruments. As explained in Chapter 5 on bonds, debt financing is fixed in claim and time. Equity, on the other hand, represents ownership and is therefore residual in claim and has no fixed time (maturity) — i.e., equity is perpetual. By residual in claim, we mean that an equity-holder has a claim on all assets that have not been mortgaged or pledged in any way. Whereas collateralized debt would constitute a claim on a specific asset(s), equity represents a claim on all assets of the firm and not specific ones. To understand what all these means, let us look at an example in Box 9.1 .

  Box 9.1. Illustration: A Common Stock Purchase

  Suppose Ali buys stocks in Malaysia Airlines (MAS) at RM5.00 each for a total investment of RM5,000 (1,000 shares), Ali now becomes a shareholder in MAS. As a shareholder, Ali is essentially a co-owner of MAS. Ali co-owns MAS together with the thousands of other shareholders who have also invested in MAS shares. The size or proportion of Ali’s ownership of MAS will depend on the size of Ali’s holding relative to the total number of outstanding stocks. If, for example, MAS has a total of 100,000 shares outstanding, then Ali’s stake is 1% of MAS. If, on the other hand, MAS has one million shares outstanding, then Ali’s stake is 0.01% or a tenth of 1%. To understand why equity is a perpetual claim, unlike a bond which has no maturity, Ali’s stake in MAS remains for as long as he holds the shares in the company.

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