A stock market is a market
for the trading of publicly held company stocks or shares
and associated financial instruments (including stock options, convertibles
and stock index futures). Traditionally such markets were open-outcry
where trading occurred on the floor of an exchange. These days increasingly
the markets are cyber-markets with buying and selling occurring
via online real-time matching of orders placed by buyers and sellers.
Many years ago, worldwide, buyers and sellers were individuals
investors and businessmen. These days markets have generally become
"institutionalized", that is buyers and sellers are largely institutions
whether pension funds, insurance companies, mutual funds or banks.
This rise of the institutional investor has brought growing professionalism
to all aspects of the markets.
The movements of the prices in a market or section of a market are
captured in price indices called Stock
Market Indices, of which there are many e.g. the Standard and
Poors Indices and the Financial Times Indices. Such indices are usually
market capitalisation weighted.
There are stock markets in most developed economies, with the
world's biggest markets being in the USA, Japan, the UK, and Europe.
There are global stock market indices that, because they delineate
the global universe of stock opportunities, shape the choices and
distribution of funds of institutional investors. The character
of markets around the world varies, for example with the majority
of the shares in the Japanese market being closely-held (by financial
companies and industrial corporations) compared with the structures
of ownership in the USA or the UK.
An option is a contract to buy or sell something at an agreed-upon
price during a specified period. A buyer who believes that the price
of a stock will rise can enter a contract known as a "call" which
gives him the right to buy another's stock at a date three to nine
months in the future. He pays a fee to the owner of the stock and
will forfeit it if he does not exercise the option. But if the stock
price rises enough, he can exercise the option and buy the stock at
the fixed price, then re-sell it for a higher price to recover his
premium and make a profit.
Someone who thinks that the price of a stock is about to fall
can write a "put" contract with someone else who agrees to buy the
stock at a fixed price. He does not have to own the stock at the
time the contract is made. Again, he pays a premium. But if the
stock price does fall, he can buy the stock at a low price on the
market and then sell it for agreed-upon higher price.
Option contracts are traded like stocks, often by people who have
no intention of exercising them. Although there is a guaranteed
loss of the premium when an option is not exercised, there is enormous
potential profit from trading the option itself--its price rises
or falls with the price of the underlying stock. Someone who has
a guaranteed buyer for 10,000 shares of stock at $35 has a contract
of enormous value if the price of the stock falls to $10. He may
not want to invest $100,000 to fulfill the contract and earn $350,000.
But someone will want to buy the contract from him for more than
he paid for it.
There are also two sorts of trades involving cash or stock not
actually owned, short selling and margin buying. In short selling,
someone sells stock that they don't actually own, hoping for the
price to fall. They must eventually buy back the stock. In margin
buying, someone borrows money to buy the stock and hopes for it
to rise. Most industralized countries have requlations which require
that if the borrowing is based on collateral from other stocks,
then it can be at only a certain percentage of those other stocks
value. Other rules include a prohibition of freeriding, that is,
putting in an order to buy stocks without paying intially, and then
selling them and using part of the proceeds to make the original
payment.
Before 1929, there were few regulations governing trades. This was
taken advantage of by the so-called "Robber Barons", to amass the
large fortunes for themselves using (today illegal) techniques.
Since then, there have been periodic attempts to solve other perceived
business problems with further regulation. As of this writing (in
2002) there is a stock
market downturn that is prompting such considerations in the
United States.
