A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.
The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.
The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The stock market in the United States is NYSE while in Canada, it is theToronto Stock Exchange. Major European examples of stock exchanges include the London Stock Exchange, Paris Bourse, and the Deutsche Börse. Asian examples include the Tokyo Stock Exchange, the Hong Kong Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such exchanges as the BM&F Bovespa and the BMV
The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.
History
has shown that the price of shares 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. 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.
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.
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 employment. In this way
the financial system contributes to increased prosperity.
A
stock exchange provides a liquid, open market for buying selling
shares, debentures and warrants of publicly owned companies. The
Colombo Stock Exchange (CSE) was established under the companies act
No.17 of 1982 and licensed by the Securities and Exchange Commission
of Sri Lanka. CSE currently has 234 listed companies and 15
member firms and 6 trading members
What
is a share?
A
share represents your ownership in a company. As a part owner you are
investing in the future growth of the company.
Distribution
by the Company (Bonus Issues)
The
company will offer a specified number of free shares to existing
share holders at a ratio decided by the Directors of the Company
Liquidity
Shares
quoted on a stock market are generally liquid, therefore they can be
easily sold and converted to cash
Higher
Returns
With
very low interest rates offered by most commercial banks in SL,
the stock market is seen as a very attractive source for investment
which offers investors higher returns specially medium to long term
Collateral
Most
banks accept share portfolios as a guarantee against loan facilities
How
to get started
To
start investing in the stock market you must first open a Central
Depository System (CDS) Account thru your Trading company. Opening a
CDS account is done free of charge. Once the account is opened you
could start trading in the Primary or Secondary markets
Primary
Market
In
the primary market shares could be subscribed directly from the
issuer (Company), who extends an invitation to the public by
publishing a document known as the “Offer Document” or the
“Prospectus”
Secondary
Market
A
market in which an investor could either buy or sell shares from or
to another investor, subsequent to the original issuance in the
primary market.
Is
investing in the stock market risky?
There
is an element of risk. However you can minimize and manage risk
through diversifying strategy
1.Your
portfolio can be a mix of equity and debt instruments (i.e. in shares
and government corporate debt instruments
2.In
the share market you can invest in several sectors. Thereby in an
instance when one sector underperform and another very well, you can
offset your losses in one sector from the gains you made in the other
3.Within
a sector you can invest in several companies. thereby if one company
does not do well, your entire investment returns do not suffer as
other companies in that sector may perform well
Types
of Securities (Shares) Traded at the CSE
1.
Ordinary Share (N)
2.
Non-Voting Shares (X)
3.
Preference Shares (P)
4.
Warrants (W)
Benefits
of investing in Equity
Capital
Gains
This
is where the selling price of the share exceeds the purchase price.
Capital gains are free of Tax
Dividends
This
is when a company decides to payout a portion of its earnings to the
shareholders. Some companies declare interim dividends during the
company’s financial year
Rights
Issue
This
is where the company extends an invitation to existing shareholders
to purchase the respective company’s shares at specified and
discounted rate. This offer is usually in proportion to the number of
shares already owned by the investor