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Stock market Wikipedia

Stockmarket
FromWikipedia,thefreeencyclopedia

Astockmarket,equitymarketorsharemarketistheaggregationofbuyersandsellers(aloosenetwork
ofeconomictransactions,notaphysicalfacilityordiscreteentity)ofstocks(alsocalledshares),which
representownershipclaimsonbusinessesthesemayincludesecuritieslistedonastockexchangeaswell
asthoseonlytradedprivately.

Contents
1 Sizeofthemarket
2 Stockexchange
3 Trade
4 Marketparticipant
4.1 Trendsinmarketparticipation
4.1.1 Indirectvs.directinvestment
4.1.2 Participationbyincomeandwealthstrata
4.1.3 Participationbyheadofhouseholdraceandgender
4.1.4 Determinantsandpossibleexplanationsofstockmarketparticipation
5 History
6 Importance
6.1 Functionandpurpose
6.2 Relationtothemodernfinancialsystem
6.3 UnitedStatesS&Pstockmarketreturns
6.4 Behaviorofthestockmarket
6.5 Irrationalbehavior
6.6 Crashes
6.7 Stockmarketprediction
7 Stockmarketindex
8 Derivativeinstruments

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8 Derivativeinstruments
9 Leveragedstrategies
9.1 Shortselling
9.2 Marginbuying
10 Newissuance
11 ASXShareMarketGame
12 Investmentstrategies
13 Taxation
14 Seealso
15 References
16 Furtherreading
17 Externallinks

Sizeofthemarket
Stockscanalsobecategorizedinvariousways.Onecommonwayisbythecountrywherethecompanyis
domiciled.Forexample,NestlandNovartisaredomiciledinSwitzerland,sotheymaybeconsideredas
partoftheSwissstockmarket,althoughtheirstockmayalsobetradedatexchangesinothercountries.
Atthecloseof2012,thesizeoftheworldstockmarket(totalmarketcapitalisation)wasaboutUS$55
trillion.[1]Bycountry,thelargestmarketwastheUnitedStates(about34%),followedbyJapan(about6%)
andtheUnitedKingdom(about6%).[2]Thiswentupmorein2013.[3]
Thereareatotalof60stockexchangesintheworldwithatotalmarketcapitalizationof$69trillion.Of
thesethereare16exchangesthathaveamarketcapitalizationof$1trillioneachandtheyaccountfor87%
ofglobalmarketcapitalization.ApartfromtheAustralianSecuritiesExchange,allofthese16exchanges
aredividedbetweenthreecontinents:NorthAmerica,EuropeandAsia.[4]

Stockexchange
Astockexchangeisaplaceororganizationbywhichstocktraders(peopleandcompanies)cantrade
stocks.Companiesmaywanttogettheirstocklistedonastockexchange.Otherstocksmaybetraded"over
thecounter"(otc),thatis,throughadealer.Therearemanystockmarketsintheworld.Alargecompany
willusuallyhaveitsstocklistedonmanyexchangesacrosstheworld.[5]
Exchangesmayalsocoverothertypesofsecuritysuchasfixedinterestsecuritiesorinterestderivatives.
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Trade
Tradeinstockmarketsmeansthetransferformoneyofastockor
securityfromasellertoabuyer.Thisrequiresthesetwopartiesto
agreeonaprice.Equities(stocksorshares)conferanownership
interestinaparticularcompany.

TheNewYorkStockExchange

Participantsinthestockmarketrangefromsmallindividualstock
investorstolargertradersinvestors,whocanbebasedanywherein
theworld,andmayincludebanks,insurancecompaniesorpension
funds,andhedgefunds.Theirbuyorsellordersmaybeexecutedon
theirbehalfbyastockexchangetrader.
Someexchangesarephysicallocationswheretransactionsare
carriedoutonatradingfloor,byamethodknownasopenoutcry.
Thismethodisusedinsomestockexchangesandcommodity
exchanges,andinvolvestradersenteringoralbidsandoffers
simultaneously.Theothertypeofstockexchangeisavirtualkind,
composedofanetworkofcomputerswheretradesaremade
electronicallybytraders.Anexampleofsuchanexchangeisthe
NASDAQ.

Apotentialbuyerbidsaspecificpriceforastock,andapotential
sellerasksaspecificpriceforthesamestock.Buyingorsellingat
TheLondonStockExchange
marketmeansyouwillacceptanyaskpriceorbidpriceforthe
stock,respectively.Whenthebidandaskpricesmatch,asaletakes
place,onafirstcomefirstservedbasisiftherearemultiplebiddersoraskersatagivenprice.
Thepurposeofastockexchangeistofacilitatetheexchangeofsecuritiesbetweenbuyersandsellers,thus
providingamarketplace(virtualorreal).Theexchangesproviderealtimetradinginformationonthelisted
securities,facilitatingpricediscovery.
TheNewYorkStockExchange(NYSE)isaphysicalexchange,withahybridmarketforplacingorders
electronicallyfromanylocationaswellasthetradingfloor.Ordersexecutedonthetradingfloorenterby
wayofexchangemembersandflowdowntoafloorbroker,whosubmitstheorderelectronicallytothe
floortradingpostfortheDesignatedMarketMaker("DMM")forthatstocktotradetheorder.TheDMM's
jobistomaintainatwosidedmarket,meaningorderstobuyandsellthesecurityiftherearenoother
buyersandsellers.Ifaspreadexists,notradeimmediatelytakesplaceinthiscasetheDMMshoulduse
theirownresources(moneyorstock)toclosethedifferenceaftertheyjudgedtime.Onceatradehasbeen
madethedetailsarereportedonthe"tape"andsentbacktothebrokeragefirm,whichthennotifiesthe
investorwhoplacedtheorder.Computersplayanimportantrole,especiallyforsocalled"program
trading".
TheNASDAQisavirtuallistedexchange,whereallofthetradingisdoneoveracomputernetwork.The
processissimilartotheNewYorkStockExchange.OneormoreNASDAQmarketmakerswillalways
provideabidandaskpriceatwhichtheywillalwayspurchaseorsell'their'stock.

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TheParisBourse,nowpartofEuronext,isanorderdriven,electronicstockexchange.Itwasautomatedin
thelate1980s.Priortothe1980s,itconsistedofanopenoutcryexchange.Stockbrokersmetonthetrading
floororthePalaisBrongniart.In1986,theCATStradingsystemwasintroduced,andtheordermatching
processwasfullyautomated.
Peopletradingstockwillprefertotradeonthemostpopularexchangesincethisgivesthelargestnumberof
potentialcounterparties(buyersforaseller,sellersforabuyer)andprobablythebestprice.However,there
havealwaysbeenalternativessuchasbrokerstryingtobringpartiestogethertotradeoutsidetheexchange.
SomethirdmarketsthatwerepopularareInstinet,andlaterIslandandArchipelago(thelatertwohave
sincebeenacquiredbyNasdaqandNYSE,respectively).Oneadvantageisthatthisavoidsthecommissions
oftheexchange.However,italsohasproblemssuchasadverseselection.[6]Financialregulatorsare
probingdarkpools.[7][8]

Marketparticipant
Marketparticipantsincludeindividualretailinvestors,institutional
investorssuchasmutualfunds,banks,insurancecompaniesandhedge
funds,andalsopubliclytradedcorporationstradingintheirownshares.
Somestudieshavesuggestedthatinstitutionalinvestorsand
corporationstradingintheirownsharesgenerallyreceivehigherrisk
adjustedreturnsthanretailinvestors.[9]
Afewdecadesago,worldwide,buyersandsellerswereindividual
investors,suchaswealthybusinessmen,usuallywithlongfamily
historiestoparticularcorporations.Overtime,marketshavebecome
more"institutionalized"buyersandsellersarelargelyinstitutions(e.g.,
pensionfunds,insurancecompanies,mutualfunds,indexfunds,
exchangetradedfunds,hedgefunds,investorgroups,banksand
variousotherfinancialinstitutions).

TheofficesofBursaMalaysia,
Malaysia'snationalstock
exchange(knownbefore
demutualizationasKualaLumpur
StockExchange)

Theriseoftheinstitutionalinvestorhasbroughtwithitsomeimprovementsinmarketoperations.Therehas
beenagradualtendencyfor"fixed"(andexorbitant)feesbeingreducedforallinvestors,partlyfromfalling
administrationcostsbutalsoassistedbylargeinstitutionschallengingbrokers'oligopolisticapproachto
settingstandardisedfees.Acurrenttrendinstockmarketinvestmentsincludesthedecreaseinfeesdueto
computerizedassetmanagementtermedRoboAdviserswithintheindustry.Theautomationofinvestment
managementhasdecreasedhowmuchhumanportfoliomanagementcostsbyloweringthecostassociated
withinvestingasawhole.

Trendsinmarketparticipation
Stockmarketparticipationreferstothenumberofagentswhobuyandsellequitybackedsecuritieseither
directlyorindirectlyinafinancialexchange.Participantsaregenerallysubdividedintothreedistinct
sectorshouseholds,institutions,andforeigntraders.Directparticipationoccurswhenanyoftheabove
entitiesbuysorsellssecuritiesonitsownbehalfonanexchange.Indirectparticipationoccurswhenan
institutionalinvestorexchangesastockonbehalfofanindividualorhousehold.Indirectinvestmentoccurs
intheformofpooledinvestmentaccounts,retirementaccounts,andothermanagedfinancialaccounts.
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Indirectvs.directinvestment
ThetotalvalueofequitybackedsecuritiesintheUnitedStatesroseover600%inthe25yearsbetween
1989and2012asmarketcapitalizationexpandedfrom$2,789,999,902,720to$18,668,333,210,000.[10]The
demographiccompositionofstockmarketparticipation,accordingly,isthemaindeterminantofthe
distributionofgainsfromthisgrowth.Directownershipofstockbyhouseholdsroseslightlyfrom17.8%in
1992to17.9%in2007withthemedianvalueoftheseholdingsrisingfrom$14,778to$17,000.[11][12]
Indirectparticipationintheformofretirementaccountsrosefrom39.3%in1992to52.6%in2007withthe
medianvalueoftheseaccountsmorethandoublingfrom$22,000to$45,000inthattime.[11][12]Rydqvist,
Spizman,andStrebulaevattributethedifferentialgrowthindirectandindirectholdingstodifferencesinthe
wayeacharetaxed.Investmentsinpensionfundsand401ks,thetwomostcommonvehiclesofindirect
participation,aretaxedonlywhenfundsarewithdrawnfromtheaccounts.Conversely,themoneyusedto
directlypurchasestockissubjecttotaxationasareanydividendsorcapitalgainstheygenerateforthe
holder.Inthiswaycurrenttaxcodeincentivizeshouseholdstoinvestindirectlyatgreaterrates.[13]
Participationbyincomeandwealthstrata
Ratesofparticipationandthevalueofholdingsdifferssignificantlyacrossstrataofincome.Inthebottom
quintileofincome,5.5%ofhouseholdsdirectlyownstockand10.7%holdstocksindirectlyintheformof
retirementaccounts.[12]Thetopdecileofincomehasadirectparticipationrateof47.5%andanindirect
participationrateintheformofretirementaccountsof89.6%.[12]Themedianvalueofdirectlyownedstock
inthebottomquintileofincomeis$4,000andis$78,600inthetopdecileofincomeasof2007.[14]The
medianvalueofindirectlyheldstockintheformofretirementaccountsforthesametwogroupsinthe
sameyearis$6,300and$214,800respectively.[14]SincetheGreatRecessionof2008householdsinthe
bottomhalfoftheincomedistributionhavelessenedtheirparticipationratebothdirectlyandindirectly
from53.2%in2007to48.8%in2013,whileoverthesametimeperiodhouseholdsinthetopdecileofthe
incomedistributionslightlyincreasedparticipation91.7%to92.1%.[15]Themeanvalueofdirectand
indirectholdingsatthebottomhalfoftheincomedistributionmovedslightlydownwardfrom$53,800in
2007to$53,600in2013.[15]Inthetopdecile,meanvalueofallholdingsfellfrom$982,000to$969,300in
thesametime.[15]Themeanvalueofallstockholdingsacrosstheentireincomedistributionisvaluedat
$269,900asof2013.[15]
Participationbyheadofhouseholdraceandgender
Theracialcompositionofstockmarketownershipshowshouseholdsheadedbywhitesarenearlyfourand
sixtimesaslikelytodirectlyownstocksthanhouseholdsheadedbyblacksandHispanicsrespectively.As
of2011thenationalrateofdirectparticipationwas19.6%,forwhitehouseholdstheparticipationratewas
24.5%,forblackhouseholdsitwas6.4%andforHispanichouseholdsitwas4.3%Indirectparticipationin
theformof401kownershipshowsasimilarpatternwithanationalparticipationrateof42.1%,arateof
46.4%forwhitehouseholds,31.7%forblackhouseholds,and25.8%forHispanichouseholds.Households
headedbymarriedcouplesparticipatedatratesabovethenationalaverageswith25.6%participating
directlyand53.4%participatingindirectlythrougharetirementaccount.14.7%ofhouseholdsheadedby
menparticipatedinthemarketdirectlyand33.4%ownedstockthrougharetirementaccount.12.6%of
femaleheadedhouseholdsdirectlyownedstockand28.7%ownedstockindirectly.[12]
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Determinantsandpossibleexplanationsofstockmarketparticipation
Ina2002paperAnntteVissingJorgensenfromtheUniversityofChicagoattemptstoexplain
disproportionateratesofparticipationalongwealthandincomegroupsasafunctionoffixedcosts
associatedwithinvesting.Herresearchconcludesthatafixedcostof$200peryearissufficienttoexplain
whynearlyhalfofallU.S.householdsdonotparticipateinthemarket.[16]Participationrateshavebeen
showntostronglycorrelatewitheducationlevels,promotingthehypothesisthatinformationand
transactioncostsofmarketparticipationarebetterabsorbedbymoreeducatedhouseholds.Behavioral
economistsHarrisonHong,JeffreyKubikandJeremySteinsuggestthatsociabilityandparticipationrates
ofcommunitieshaveastatisticallysignificantimpactonanindividualsdecisiontoparticipateinthe
market.Theirresearchindicatesthatsocialindividualslivinginstateswithhigherthanaverage
participationratesare5%morelikelytoparticipatethanindividualsthatdonotsharethose
characteristics.[17]Thisphenomenaalsoexplainedincostterms.Knowledgeofmarketfunctioningdiffuses
throughcommunitiesandconsequentlylowerstransactioncostsassociatedwithinvesting.

History
In12thcenturyFrance,thecourretiersdechangewereconcernedwith
managingandregulatingthedebtsofagriculturalcommunitieson
behalfofthebanks.Becausethesemenalsotradedwithdebts,they
couldbecalledthefirstbrokers.Acommonmisbeliefisthatinlate
13thcenturyBrugescommoditytradersgatheredinsidethehouseofa
mancalledVanderBeurze,andin1409theybecamethe"Brugse
Beurse",institutionalizingwhathadbeen,untilthen,aninformal
meeting,butactually,thefamilyVanderBeurzehadabuildingin
Antwerpwherethosegatheringsoccurred[18]theVanderBeurzehad
Antwerp,asmostofthemerchantsofthatperiod,astheirprimaryplace
fortrading.TheideaquicklyspreadaroundFlandersandneighboring
countriesand"Beurzen"soonopenedinGhentandRotterdam.
Inthemiddleofthe13thcentury,Venetianbankersbegantotradein
governmentsecurities.In1351theVenetiangovernmentoutlawed
Establishedin1875,theBombay
spreadingrumorsintendedtolowerthepriceofgovernmentfunds.
StockExchangeisAsia'sfirst
BankersinPisa,Verona,GenoaandFlorencealsobegantradingin
stockexchange.
governmentsecuritiesduringthe14thcentury.Thiswasonlypossible
becausethesewereindependentcitystatesnotruledbyadukebuta
councilofinfluentialcitizens.Italiancompanieswerealsothefirsttoissueshares.CompaniesinEngland
andtheLowCountriesfollowedinthe16thcentury.
TheDutchEastIndiaCompany(foundedintheyearof1602)wasthefirstjointstockcompanytogeta
fixedcapitalstockandasaresult,continuoustradeincompanystockoccurredontheAmsterdam
Exchange.Soonthereafter,alivelytradeinvariousderivatives,amongwhichoptionsandrepos,emerged
ontheAmsterdammarket.Dutchtradersalsopioneeredshortsellingapracticewhichwasbannedbythe
Dutchauthoritiesasearlyas1610.[19]

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Therearenowstockmarketsinvirtuallyeverydevelopedandmostdevelopingeconomies,withtheworld's
largestmarketsbeingintheUnitedStates,UnitedKingdom,Japan,India,China,Canada,Germany
(FrankfurtStockExchange),France,SouthKoreaandtheNetherlands.[20]

Importance
Functionandpurpose
Thestockmarketisoneofthemostimportantwaysforcompaniestoraisemoney,alongwithdebtmarkets
whicharegenerallymoreimposingbutdonottradepublicly.[21]Thisallowsbusinessestobepublicly
traded,andraiseadditionalfinancialcapitalforexpansionbysellingsharesofownershipofthecompanyin
apublicmarket.Theliquiditythatanexchangeaffordstheinvestorsenablestheirholderstoquicklyand
easilysellsecurities.Thisisanattractivefeatureofinvestinginstocks,comparedtootherlessliquid
investmentssuchaspropertyandotherimmoveableassets.Somecompaniesactivelyincreaseliquidityby
tradingintheirownshares.[22][23]
Historyhasshownthatthepriceofstocksandotherassetsisanimportantpartofthedynamicsofeconomic
activity,andcaninfluenceorbeanindicatorofsocialmood.Aneconomywherethestockmarketisonthe
riseisconsideredtobeanupandcomingeconomy.Thestockmarketisoftenconsideredtheprimary
indicatorofacountry'seconomicstrengthanddevelopment.[24]
Risingshareprices,forinstance,tendtobeassociatedwithincreasedbusinessinvestmentandviceversa.
Sharepricesalsoaffectthewealthofhouseholdsandtheirconsumption.Therefore,centralbankstendto
keepaneyeonthecontrolandbehaviorofthestockmarketand,ingeneral,onthesmoothoperationof
financialsystemfunctions.Financialstabilityistheraisond'treofcentralbanks.[25]
Exchangesalsoactastheclearinghouseforeachtransaction,meaningthattheycollectanddeliverthe
shares,andguaranteepaymenttothesellerofasecurity.Thiseliminatestherisktoanindividualbuyeror
sellerthatthecounterpartycoulddefaultonthetransaction.[26]
Thesmoothfunctioningofalltheseactivitiesfacilitateseconomicgrowthinthatlowercostsandenterprise
riskspromotetheproductionofgoodsandservicesaswellaspossiblyemployment.Inthiswaythe
financialsystemisassumedtocontributetoincreasedprosperity,althoughsomecontroversyexistsasto
whethertheoptimalfinancialsystemisbankbasedormarketbased.[27]
RecenteventssuchastheGlobalFinancialCrisishavepromptedaheighteneddegreeofscrutinyofthe
impactofthestructureofstockmarkets[28][29](calledmarketmicrostructure),inparticulartothestabilityof
thefinancialsystemandthetransmissionofsystemicrisk.[30]

Relationtothemodernfinancialsystem
Thefinancialsysteminmostwesterncountrieshasundergonearemarkabletransformation.Onefeatureof
thisdevelopmentisdisintermediation.Aportionofthefundsinvolvedinsavingandfinancing,flows
directlytothefinancialmarketsinsteadofbeingroutedviathetraditionalbanklendinganddeposit
operations.Thegeneralpublicinterestininvestinginthestockmarket,eitherdirectlyorthroughmutual
funds,hasbeenanimportantcomponentofthisprocess.
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Statisticsshowthatinrecentdecades,shareshavemadeupanincreasinglylargeproportionofhouseholds'
financialassetsinmanycountries.Inthe1970s,inSweden,depositaccountsandotherveryliquidassets
withlittleriskmadeupalmost60percentofhouseholds'financialwealth,comparedtolessthan20percent
inthe2000s.Themajorpartofthisadjustmentisthatfinancialportfolioshavegonedirectlytosharesbuta
gooddealnowtakestheformofvariouskindsofinstitutionalinvestmentforgroupsofindividuals,e.g.,
pensionfunds,mutualfunds,hedgefunds,insuranceinvestmentofpremiums,etc.
Thetrendtowardsformsofsavingwithahigherriskhasbeenaccentuatedbynewrulesformostfundsand
insurance,permittingahigherproportionofsharestobonds.Similartendenciesaretobefoundinother
developedcountries.Inalldevelopedeconomicsystems,suchastheEuropeanUnion,theUnitedStates,
Japanandotherdevelopednations,thetrendhasbeenthesame:savinghasmovedawayfromtraditional
(governmentinsured)"bankdepositstomoreriskysecuritiesofonesortoranother".
Asecondtransformationisthemovetoelectronictradingtoreplacehumantradingoflistedsecurities.[29]

UnitedStatesS&Pstockmarketreturns
(assumes2%annualdividend)
AverageAnnualReturn
YearstoDecember31,2012
%

AverageCompounded
AnnualReturn
%

15.5

15.5

10.9

11.6

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

ComparedtoOtherAssetClassesOverthelongterm,investinginawelldiversifiedportfolioofstocks
suchasanS&P500IndexoutperformsotherinvestmentvehiclessuchasTreasuryBillsandBonds,with
theS&P500havingageometricannualaverageof9.55%from19282013.[31]

Behaviorofthestockmarket
Fromexperienceitisknownthatinvestorsmay'temporarily'movefinancialpricesawayfromtheirlong
termaggregateprice'trends'.Overreactionsmayoccursothatexcessiveoptimism(euphoria)maydrive
pricesundulyhighorexcessivepessimismmaydrivepricesundulylow.Economistscontinuetodebate
whetherfinancialmarketsare'generally'efficient.[32]
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Accordingtooneinterpretationoftheefficientmarkethypothesis(EMH),onlychangesinfundamental
factors,suchastheoutlookformargins,profitsordividends,oughttoaffectsharepricesbeyondtheshort
term,whererandom'noise'inthesystemmayprevail.(Butthislargelytheoreticacademicviewpoint
knownas'hard'EMHalsopredictsthatlittleornotradingshouldtakeplace,contrarytofact,sinceprices
arealreadyatornearequilibrium,havingpricedinallpublicknowledge.)The'hard'efficientmarket
hypothesisissorelytestedanddoesnotexplainthecauseofeventssuchas
thecrashin1987,whentheDowJonesIndustrialAverageplummeted22.6
percentthelargesteveronedayfallintheUnitedStates.[33]
Thiseventdemonstratedthatsharepricescanfalldramaticallyeventhough,
tothisday,itisimpossibletofixagenerallyagreedupondefinitecause:a
thoroughsearchfailedtodetectany'reasonable'developmentthatmight
haveaccountedforthecrash.(Butnotethatsucheventsarepredictedto
occurstrictlybychance,althoughveryrarely.)Itseemsalsotobethecase
moregenerallythatmanypricemovements(beyondthatwhichare
predictedtooccur'randomly')arenotoccasionedbynewinformationa
studyofthefiftylargestonedaysharepricemovementsintheUnitedStates
inthepostwarperiodseemstoconfirmthis.[33]
A'soft'EMHhasemergedwhichdoesnotrequirethatpricesremainator
NASDAQinTimesSquare,
nearequilibrium,butonlythatmarketparticipantsnotbeableto
NewYorkCity
systematicallyprofitfromanymomentarymarket'inefficiencies'.Moreover,
whileEMHpredictsthatallpricemovement(intheabsenceofchangein
fundamentalinformation)israndom(i.e.,nontrending),manystudieshaveshownamarkedtendencyfor
thestockmarkettotrendovertimeperiodsofweeksorlonger.Variousexplanationsforsuchlargeand
apparentlynonrandompricemovementshavebeenpromulgated.Forinstance,someresearchhasshown
thatchangesinestimatedrisk,andtheuseofcertainstrategies,suchasstoplosslimitsandvalueatrisk
limits,theoreticallycouldcausefinancialmarketstooverreact.Butthebestexplanationseemstobethatthe
distributionofstockmarketpricesisnonGaussian(http://cnx.org/content/m11318/latest/)(inwhichcase
EMH,inanyofitscurrentforms,wouldnotbestrictlyapplicable).[34][35]
Otherresearchhasshownthatpsychologicalfactorsmayresultinexaggerated(statisticallyanomalous)
stockpricemovements(contrarytoEMHwhichassumessuchbehaviors'cancelout').Psychological
researchhasdemonstratedthatpeoplearepredisposedto'seeing'patterns,andoftenwillperceiveapattern
inwhatis,infact,justnoise.(Somethinglikeseeingfamiliarshapesincloudsorinkblots.)Inthepresent
contextthismeansthatasuccessionofgoodnewsitemsaboutacompanymayleadinvestorstooverreact
positively(unjustifiablydrivingthepriceup).Aperiodofgoodreturnsalsobooststheinvestors'self
confidence,reducingtheir(psychological)riskthreshold.[36]
Anotherphenomenonalsofrompsychologythatworksagainstanobjectiveassessmentisgroup
thinking.Associalanimals,itisnoteasytosticktoanopinionthatdiffersmarkedlyfromthatofamajority
ofthegroup.Anexamplewithwhichonemaybefamiliaristhereluctancetoenterarestaurantthatis
emptypeoplegenerallyprefertohavetheiropinionvalidatedbythoseofothersinthegroup.
Inonepapertheauthorsdrawananalogywithgambling.[37]Innormaltimesthemarketbehaveslikea
gameofroulettetheprobabilitiesareknownandlargelyindependentoftheinvestmentdecisionsofthe
differentplayers.Intimesofmarketstress,however,thegamebecomesmorelikepoker(herdingbehavior
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takesover).Theplayersnowmustgiveheavyweighttothepsychologyofotherinvestorsandhowtheyare
likelytoreactpsychologically.
Thestockmarket,aswithanyotherbusiness,isquiteunforgivingofamateurs.Inexperiencedinvestors
rarelygettheassistanceandsupporttheyneed.Intheperiodrunninguptothe1987crash,lessthan1
percentoftheanalyst'srecommendationshadbeentosell(andevenduringthe20002002bearmarket,the
averagedidnotriseabove5%).Intherunupto2000,themediaamplifiedthegeneraleuphoria,with
reportsofrapidlyrisingsharepricesandthenotionthatlargesumsofmoneycouldbequicklyearnedinthe
socalledneweconomystockmarket.(Andlateramplifiedthegloomwhichdescendedduringthe2000
2002bearmarket,sothatbysummerof2002,predictionsofaDOWaveragebelow5000werequite
common)
Ontheotherhand,Stockmarketsplayanessentialroleingrowingindustriesthatultimatelyaffectthe
economythroughtransferringavailablefundsfromunitsthathaveexcessfunds(savings)tothosewhoare
sufferingfromfundsdeficit(borrowings)(PadhiandNaik,2012).Inotherwords,capitalmarketsfacilitate
fundsmovementbetweentheabovementionedunits.Thisprocessleadstotheenhancementofavailable
financialresourceswhichinturnaffectstheeconomicgrowthpositively.Moreover,bothofeconomicand
financialtheoriesarguethatstockspricesareaffectedbytheperformanceofmainmacroeconomic
variables.
ManydifferentacademicresearchershavestatedcompanieswithlowP/Eratiosandsmallersized
companieshaveatendencytooutperformthemarket.Researchcarriedoutstatesmidsizedcompanies
outperformlargecapcompaniesandsmallercompanieshaveevenhigherreturnshistorically.

Irrationalbehavior
Sometimes,themarketseemstoreactirrationallytoeconomicorfinancialnews,evenifthatnewsislikely
tohavenorealeffectonthefundamentalvalueofsecuritiesitself.[38]But,thismaybemoreapparentthan
real,sinceoftensuchnewshasbeenanticipated,andacounterreactionmayoccurifthenewsisbetter(or
worse)thanexpected.Therefore,thestockmarketmaybeswayedineitherdirectionbypressreleases,
rumors,euphoriaandmasspanic.
Overtheshortterm,stocksandothersecuritiescanbebatteredorbuoyedbyanynumberoffastmarket
changingevents,makingthestockmarketbehaviordifficulttopredict.Emotionscandrivepricesupand
down,peoplearegenerallynotasrationalastheythink,andthereasonsforbuyingandsellingaregenerally
obscure.Behavioristsarguethatinvestorsoftenbehave'irrationally'whenmakinginvestmentdecisions
therebyincorrectlypricingsecurities,whichcausesmarketinefficiencies,which,inturn,areopportunities
tomakemoney.[39]However,thewholenotionofEMHisthatthesenonrationalreactionstoinformation
cancelout,leavingthepricesofstocksrationallydetermined.
TheDowJonesIndustrialAveragebiggestgaininonedaywas936.42pointsor11percent,thisoccurred
onOctober13,2008.[40]

Crashes
Astockmarketcrashisoftendefinedasasharpdipinsharepricesofstockslistedonthestockexchanges.
Inparallelwithvariouseconomicfactors,areasonforstockmarketcrashesisalsoduetopanicand
investingpublic'slossofconfidence.Often,stockmarketcrashesendspeculativeeconomicbubbles.
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Stock market Wikipedia

Therehavebeenfamousstockmarketcrashesthathaveendedinthelossofbillionsofdollarsandwealth
destructiononamassivescale.Anincreasingnumberofpeopleareinvolvedinthestockmarket,especially
sincethesocialsecurityandretirement
plansarebeingincreasinglyprivatizedand
linkedtostocksandbondsandother
elementsofthemarket.Therehavebeena
numberoffamousstockmarketcrashes
liketheWallStreetCrashof1929,the
stockmarketcrashof19734,theBlack
Mondayof1987,theDotcombubbleof
2000,andtheStockMarketCrashof2008.
Oneofthemostfamousstockmarket
crashesstartedOctober24,1929onBlack
Thursday.TheDowJonesIndustrial
Averagelost50%duringthisstockmarket
crash.ItwasthebeginningoftheGreat
Depression.Anotherfamouscrashtook
placeonOctober19,1987Black
Monday.ThecrashbeganinHongKong
andquicklyspreadaroundtheworld.

RobertShiller'splotoftheS&PCompositeRealPriceIndex,
Earnings,Dividends,andInterestRates,fromIrrational
Exuberance,2ded. [41]Intheprefacetothisedition,Shiller
warns,"Thestockmarkethasnotcomedowntohistoricallevels:
thepriceearningsratioasIdefineitinthisbookisstill,atthis
writing[2005],inthemid20s,farhigherthanthehistorical
average...Peoplestillplacetoomuchconfidenceinthemarkets
andhavetoostrongabeliefthatpayingattentiontothegyrations
intheirinvestmentswillsomedaymakethemrich,andsotheydo
notmakeconservativepreparationsforpossiblebadoutcomes."

BytheendofOctober,stockmarketsin
HongKonghadfallen45.5%,Australia
41.8%,Spain31%,theUnitedKingdom
26.4%,theUnitedStates22.68%,and
Canada22.5%.BlackMondayitselfwas
thelargestonedaypercentagedeclinein
stockmarkethistorytheDowJonesfellby22.6%inaday.Thenames"BlackMonday"and"Black
Tuesday"arealsousedforOctober2829,1929,whichfollowedTerribleThursdaythestartingdayofthe
stockmarketcrashin1929.
Thecrashin1987raisedsomepuzzlesmainnewsandeventsdidnotpredictthecatastropheandvisible
reasonsforthecollapsewerenotidentified.Thiseventraisedquestionsaboutmanyimportantassumptions
ofmoderneconomics,namely,thetheoryofrationalhumanconduct,thetheoryofmarketequilibriumand
theefficientmarkethypothesis.Forsometimeafterthecrash,tradinginstockexchangesworldwidewas
halted,sincetheexchangecomputersdidnotperformwellowingtoenormousquantityoftradesbeing
receivedatonetime.ThishaltintradingallowedtheFederalReserveSystemandcentralbanksofother
countriestotakemeasurestocontrolthespreadingofworldwidefinancialcrisis.IntheUnitedStatesthe
SECintroducedseveralnewmeasuresofcontrolintothestockmarketinanattempttopreventare
occurrenceoftheeventsofBlackMonday.
Sincetheearly1990s,manyofthelargestexchangeshaveadoptedelectronic'matchingengines'tobring
togetherbuyersandsellers,replacingtheopenoutcrysystem.Electronictradingnowaccountsforthe
majorityoftradinginmanydevelopedcountries.Computersystemswereupgradedinthestockexchanges
tohandlelargertradingvolumesinamoreaccurateandcontrolledmanner.TheSECmodifiedthemargin
requirementsinanattempttolowerthevolatilityofcommonstocks,stockoptionsandthefuturesmarket.
TheNewYorkStockExchangeandtheChicagoMercantileExchangeintroducedtheconceptofacircuit
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breaker.Thecircuitbreakerhaltstradingif
theDowdeclinesaprescribednumberof
pointsforaprescribedamountoftime.In
February2012,theInvestmentIndustry
RegulatoryOrganizationofCanada
(IIROC)introducedsinglestockcircuit
breakers.[42]
NewYorkStockExchange(NYSE)
circuitbreakers[43]
%
drop

timeofdrop

closetrading
for

10

before2pm

onehourhalt

10

2pm2:30pm halfhourhalt

10

after2:30pm

marketstays
open

20

before1pm

haltfortwo
hours

20

1pm2pm

haltforone
hour

20

after2pm

closeforthe
day

30

anytimeduring closeforthe
day
day

Stockmarketprediction

PriceEarningsratiosasapredictoroftwentyyearreturnsbased
upontheplotbyRobertShiller(Figure10.1, [41] source(http://irratio
nalexuberance.com/shiller_downloads/ie_data.xls)).Thehorizontalaxis
showstherealpriceearningsratiooftheS&PCompositeStock
PriceIndexascomputedinIrrationalExuberance(inflation
adjustedpricedividedbythepriortenyearmeanofinflation
adjustedearnings).Theverticalaxisshowsthegeometricaverage
realannualreturnoninvestingintheS&PCompositeStockPrice
Index,reinvestingdividends,andsellingtwentyyearslater.Data
fromdifferenttwentyyearperiodsiscolorcodedasshowninthe
key.Seealsotenyearreturns.Shillerstatesthatthisplot
"confirmsthatlongterminvestorsinvestorswhocommittheir
moneytoaninvestmentfortenfullyearsdiddowellwhen
priceswerelowrelativetoearningsatthebeginningoftheten
years.Longterminvestorswouldbewelladvised,individually,
tolowertheirexposuretothestockmarketwhenitishigh,asit

TobiasPreisandhiscolleaguesHelen
SusannahMoatandH.EugeneStanley
introducedamethodtoidentifyonline
precursorsforstockmarketmoves,using
hasbeenrecently,andgetintothemarketwhenitislow."[41]
tradingstrategiesbasedonsearchvolume
dataprovidedbyGoogleTrends.[44]Their
analysisofGooglesearchvolumefor98termsofvaryingfinancialrelevance,publishedinScientific
Reports,[45]suggeststhatincreasesinsearchvolumeforfinanciallyrelevantsearchtermstendtoprecede
largelossesinfinancialmarkets.[46][47][48][49][50][51]

Stockmarketindex
Themovementsofthepricesinamarketorsectionofamarketarecapturedinpriceindicescalledstock
marketindices,ofwhichtherearemany,e.g.,theS&P,theFTSEandtheEuronextindices.Suchindices
areusuallymarketcapitalizationweighted,withtheweightsreflectingthecontributionofthestocktothe
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index.Theconstituentsoftheindexarereviewedfrequentlytoinclude/excludestocksinordertoreflectthe
changingbusinessenvironment.

Derivativeinstruments
Financialinnovationhasbroughtmanynewfinancialinstrumentswhosepayoffsorvaluesdependonthe
pricesofstocks.Someexamplesareexchangetradedfunds(ETFs),stockindexandstockoptions,equity
swaps,singlestockfutures,andstockindexfutures.Theselasttwomaybetradedonfuturesexchanges
(whicharedistinctfromstockexchangestheirhistorytracesbacktocommodityfuturesexchanges),or
tradedoverthecounter.Asalloftheseproductsareonlyderivedfromstocks,theyaresometimes
consideredtobetradedina(hypothetical)derivativesmarket,ratherthanthe(hypothetical)stockmarket.

Leveragedstrategies
Stockthatatraderdoesnotactuallyownmaybetradedusingshortsellingmarginbuyingmaybeusedto
purchasestockwithborrowedfundsor,derivativesmaybeusedtocontrollargeblocksofstocksfora
muchsmalleramountofmoneythanwouldberequiredbyoutrightpurchaseorsales.

Shortselling
Inshortselling,thetraderborrowsstock(usuallyfromhisbrokeragewhichholdsitsclients'sharesorits
ownsharesonaccounttolendtoshortsellers)thensellsitonthemarket,bettingthatthepricewillfall.The
tradereventuallybuysbackthestock,makingmoneyifthepricefellinthemeantimeandlosingmoneyifit
rose.Exitingashortpositionbybuyingbackthestockiscalled"covering."Thisstrategymayalsobeused
byunscrupuloustradersinilliquidorthinlytradedmarketstoartificiallylowerthepriceofastock.Hence
mostmarketseitherpreventshortsellingorplacerestrictionsonwhenandhowashortsalecanoccur.The
practiceofnakedshortingisillegalinmost(butnotall)stockmarkets.

Marginbuying
Inmarginbuying,thetraderborrowsmoney(atinterest)tobuyastockandhopesforittorise.Most
industrializedcountrieshaveregulationsthatrequirethatiftheborrowingisbasedoncollateralfromother
stocksthetraderownsoutright,itcanbeamaximumofacertainpercentageofthoseotherstocks'value.In
theUnitedStates,themarginrequirementshavebeen50%formanyyears(thatis,ifyouwanttomakea
$1000investment,youneedtoputup$500,andthereisoftenamaintenancemarginbelowthe$500).
Amargincallismadeifthetotalvalueoftheinvestor'saccountcannotsupportthelossofthetrade.(Upon
adeclineinthevalueofthemarginedsecuritiesadditionalfundsmayberequiredtomaintaintheaccount's
equity,andwithorwithoutnoticethemarginedsecurityoranyotherswithintheaccountmaybesoldby
thebrokeragetoprotectitsloanposition.Theinvestorisresponsibleforanyshortfallfollowingsuchforced
sales.)
Regulationofmarginrequirements(bytheFederalReserve)wasimplementedaftertheCrashof1929.
Beforethat,speculatorstypicallyonlyneededtoputupaslittleas10percent(orevenless)ofthetotal
investmentrepresentedbythestockspurchased.Otherrulesmayincludetheprohibitionoffreeriding:

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puttinginanordertobuystockswithoutpayinginitially(thereisnormallyathreedaygraceperiodfor
deliveryofthestock),butthensellingthem(beforethethreedaysareup)andusingpartoftheproceedsto
maketheoriginalpayment(assumingthatthevalueofthestockshasnotdeclinedintheinterim).

Newissuance
Globalissuanceofequityandequityrelatedinstrumentstotaled$505billionin2004,a29.8%increaseover
the$389billionraisedin2003.Initialpublicofferings(IPOs)byUSissuersincreased221%with233
offeringsthatraised$45billion,andIPOsinEurope,MiddleEastandAfrica(EMEA)increasedby333%,
from$9billionto$39billion.

ASXShareMarketGame
ASXShareMarketGameisaplatformforAustralianschoolstudentsandbeginnerstolearnabouttrading
stocks.ThegameisafreeservicehostedonASX(AustralianSecuritiesExchange)website.[52]Eachyear
morethan70,000studentsenrollinthegame.Forthevastmajority,thisisanintroductiontostockmarket
investing.Studentsonceenrolled,aregiven$50,000virtualmoneyandcanbuyandsellupto20timesa
day.Thegamerunsfor10weeks.Thistimeframeturnsthegameintoalottery,encouragingpeopletotake
hugeriskswiththeirvirtual$50,000,breakingthelawsofcommonsenseinvestingintheprocess.[53]Many
similarprogramsarefoundinsecondaryeducationalinstitutionsacrosstheworld.

Investmentstrategies
Oneofthemanythingspeoplealwayswanttoknowaboutthestockmarketis,"HowdoImakemoney
investing?"Therearemanydifferentapproachestwobasicmethodsareclassifiedbyeitherfundamental
analysisortechnicalanalysis.Fundamentalanalysisreferstoanalyzingcompaniesbytheirfinancial
statementsfoundinSECfilings,businesstrends,generaleconomicconditions,etc.Technicalanalysis
studiespriceactionsinmarketsthroughtheuseofchartsandquantitativetechniquestoattempttoforecast
pricetrendsregardlessofthecompany'sfinancialprospects.Oneexampleofatechnicalstrategyisthe
Trendfollowingmethod,usedbyJohnW.HenryandEdSeykota,whichusespricepatterns,utilizesstrict
moneymanagementandisalsorootedinriskcontrolanddiversification.
Additionally,manychoosetoinvestviatheindexmethod.Inthismethod,oneholdsaweightedor
unweightedportfolioconsistingoftheentirestockmarketorsomesegmentofthestockmarket(suchasthe
S&P500orWilshire5000).Theprincipalaimofthisstrategyistomaximizediversification,minimize
taxesfromtoofrequenttrading,andridethegeneraltrendofthestockmarket(which,intheU.S.,has
averagednearly10%peryear,compoundedannually,sinceWorldWarII).

Taxation
Accordingtomuchnationalorstatelegislation,alargearrayoffiscalobligationsaretaxedforcapitalgains.
Taxesarechargedbythestateoverthetransactions,dividendsandcapitalgainsonthestockmarket,in
particularinthestockexchanges.However,thesefiscalobligationsmayvaryfromjurisdictionsto

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jurisdictionsbecause,amongotherreasons,itcouldbeassumedthattaxationisalreadyincorporatedinto
thestockpricethroughthedifferenttaxescompaniespaytothestate,orthattaxfreestockmarket
operationsareusefultoboosteconomicgrowth.

Seealso
Balancesheet
Deadcatbounce
Listofmarketopeningtimes
Listofrecessions
Listofstockexchanges
Listofstockmarketindices
Modelingandanalysisoffinancialmarkets
NASDAQ100
SecuritiesregulationintheUnitedStates
Slippage(finance)
Stockmarketbubble
Stockmarketcycles
Stockmarketdatasystems
Mr.Market
Stockfund
CNXNifty
NiftyFifty

References
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www.aei.org.AmericanEnterpriseInstitute.RetrievedAugust26,2015.
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ghlights.pdf)
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5. "IBMInvestorrelationsFAQ|OnwhatstockexchangesisIBMlisted?".IBM.
6. Ortega,EdgarYalman,Onaran(December4,2006)."UBS,GoldmanThreatenNYSE,NasdaqWithRivalStock
Markets".Bloomberg.com.Retrieved20110531.
7. Mamudi,Sam(June13,2014)."DarkPoolsTakeLargerShareofTradesAmidSECScrutiny".Bloomberg.
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tml)FinancialTimes
9. AmedeoDeCesari,SusanneEspenlaub,ArifKhurshed,andMichaelSimkovic,TheEffectsofOwnershipand
StockLiquidityontheTimingofRepurchaseTransactions(http://ssrn.com/abstract=1884171)(October2010).
PaoloBaffiCentreResearchPaperNo.2011100.
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11. StatisticalAbstractoftheUnitedStates:1995(Report).UnitedStatesCensusBureau.September1995.p.513.
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FinancialAssets".
14. ChangesinU.S.FamilyFinancesfrom2007to2010:EvidencefromtheSurveyofConsumerFinances(PDF)
(Report).FederalReserveBoardofGovernors.June2012.p.24.Retrieved20151217.

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