Equity Market / Stock Market)

 

Definition

The stock market is a centralized system for trading shares of companies, which represent a stake of ownership in a business. By purchasing a share, an investor acquires the right to a portion of the company's future profits and participation in its growth. It is a market of expectations regarding the corporate future.

Unlike currencies or bonds, shares do not reflect the value of money – they reflect the value of a business.

Purpose

The stock market performs two fundamental functions:

1. Allows companies to raise capital for development

2. Gives investors the opportunity to participate in economic growth

When a company conducts an IPO (Initial Public Offering), it effectively sells a part of itself to investors in exchange for financing.

Market Structure

The stock market is centralized. Trading takes place on exchanges – NYSE, NASDAQ, LSE, Euronext. There is an order book where buyers and sellers meet. The price is formed through an auction mechanism.

Participants:

– Institutional funds

– Pension funds

– ETFs

– Algorithmic traders

– Retail investors

– Market makers

Exchanges provide clearing and guarantee of transaction execution.

Working Hours

Stocks are traded within exchange hours. For example, in the US, this is 9:30 AM–4:00 PM EST. There is a pre-market and post-market with lower liquidity. Unlike FX, it is not a 24-hour market.

How the Price is Formed

A stock's price is based on the company's expected future earnings, discounted at the current interest rate.

The formula is simple in logic:

Higher expected earnings → higher valuation

Higher rate → lower current valuation

This is why the stock market is so sensitive to bond yield movements.

Main Indices

S&P 500 (SPX) — 500 largest US companies

Nasdaq 100 (NDX) — technology sector

Dow Jones (DJIA) — 30 large companies

FTSE 100 — United Kingdom

DAX — Germany

Indices reflect the state of the economy and the corporate sector.

Main Drivers

– Company earnings

– Interest rates

– Economic growth

– Liquidity

– Debt level

– Geopolitics

Stocks are particularly sensitive to monetary policy. Rate cuts often stimulate stock market growth.

Types of Investors

Long-term investors — focused on dividends and growth

Traders — work with short-term movements

Institutional funds — shape trends through volumes

ETFs — passive reflection of indices

Risks

– Volatility

– Corporate risk

– Recession

– Overvaluation

– Liquidity during crises

Stocks carry higher risk than government bonds, but also potentially higher returns.

Stocks vs Bonds

Bonds are debt.

Stocks are ownership.

Bonds have a fixed income.

Stocks have variable potential.

Stocks vs FX

FX reacts to rates and flows.

Stocks react to earnings and the economic cycle.

Role in the Financial System

The stock market reflects confidence in the future. When the economy grows – profits grow – stocks grow. A falling stock market often signals an economic slowdown.

Summary

The stock market is an indicator of the economic health of corporations. It is centralized, operates within exchange hours, and is driven by expectations regarding future earnings and interest rates. For a trader, it is a market of cycles and sentiments; for an investor, it is a tool for long-term capital growth.