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What are stock markets?

To understand what stock markets are, how they operate, and why they do exist, we should know first that they are a kind of financial markets.

Financial markets:

A financial market is a mechanism which allows people to trade commodities, normally governed by the theory of supply and demand, and thereby allocates resources through a price mechanism. It typically involves a bid and ask process; simply it is the coming together of buyers and sellers to trade financial products.

Financial markets can be classified into different type, it include:

  • Capital markets which consist of:

  1. Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.

  2. Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.

The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

Capital markets can be described as perfectly competitive financial markets as there is   no trader has the power to change the price of goods or services. Perfect capital markets are characterized by certain conditions: (1) Trading is cost less, and access to the financial markets is free; (2) information about borrowing and lending opportunities is freely available; and (3) there are many traders, and no single trader can have a significant impact on market prices.

  • Commodity markets, which facilitate the trading of commodities.

  • Money markets, which provide short term debt financing and investment, such as certificates of deposits, commercial papers, and treasury bills.

  • Derivatives markets, which provide instruments for the management of financial risk.

  • Futures markets, which provide standardized forward contracts for trading products at some future date.

  • Insurance markets, which facilitate the redistribution of various risks.

  • Foreign exchange markets, which facilitate the trading of foreign exchange.

Stock exchange markets

The stock exchange market is where trading of securities such as stocks and bonds is conducted, The stock market is an important institution for capitalist countries because it encourages investment in corporate securities, providing capital for new businesses and income for investors.

The health of Egypt economy can be measured by the stock market. When stock prices rise and there is a "bull market," Egypt business is assumed to be doing well. When stock prices fall and there is a "bear market," this is usually an indication of a downturn in business and the economy.

Listed corporations: For a corporation's stock to be listed on an exchange market, the company must meet certain exchange requirements. Each exchange market has its own criteria and standards, certain legal and financial requirements are defined in the listing rules of CASE.

 But in general a company must show that it has sufficient capital and is in sound financial condition. Once a company is listed, trading in its Stock will be suspended if the company's financial condition deteriorates to the point that it no longer meets the exchange's minimum requirements

Financial instruments in the stock exchange markets:

  • Stock:  A security issued by a corporation that represents an ownership right in the assets of the corporation and a right to a proportionate share of profits after payment of corporate liabilities and obligations. Stock represents a claim on the company’s assets and earnings.

There are two main types of stock: common and preferred. Common stock usually entitles the owner the right to vote at shareholder meetings and to receive dividends that the company has declared. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event a company goes bankrupt and is liquidated.

The value of a share of stock depends upon the issuing corporation's value, profitability, and future prospects. The market price reflects what purchasers are willing to pay based on their evaluation of the company's prospects

Par value is the face or stated value of a share of stock. It does not correspond to the market value of a stock, and a stated par value is of little significance.

A share or stockholder, earns a capital gain when the price of  the share appreciate, that’s when the company is performing well and its business  proved to be lucrative, more purchasers will be willing to buy its stock, hence its stock market value ”price” will increase.

  • Bond:  A security issued by a corporation or public body and usually carrying a fixed rate of interest and a set date, called the bond's maturity, for redemption of the principal. Like a stock, a bond is a type of investment, but unlike a stock, a bond has a definite, but not necessarily fixed yield.

Bonds issuing is a way of raising capital for an organization, unlike the shareholder, the bondholder is a lender to the corporation, and the corporation owes him/her this specific amount of money.

The bondholder is expecting to earn the amount of return or interest, plus the principal amount on the bond’s maturity date.

  • Mutual funds: provide a form of investment that is both relatively safe and relatively lucrative. Mutual funds offer investors the advantages of professional management of invested money and diversification of that investment. Mutual fund managers assume the responsibility of investigating and researching financial markets and selecting the combination of stocks, bonds, and other investment vehicles to be bought and sold. Thus, consumers purchase shares in a mutual fund and rely on the expertise of the mutual fund manager, whose job is to provide them with the highest possible return on their investments.

Date:08/09/2008 20:18:26