IPO: The stock market, as it is often called, is the market for buying and selling shares of public companies. The shares represent an ownership right in the company and therefore a right to future profits.
The stock market generally refers to the secondary market and is the link where buyers and sellers come together to trade. The organizations and places that facilitate this market are called stock exchanges.
Understanding the stock market
When people refer to the rise or fall of the stock markets, they usually refer to one of the major stock market indices. A market index tracks the performance of a group of stocks, which represents the market as a whole or a specific sector of the market, such as technology or retail companies. You will probably hear about the 1929 stock market crash and the Great Depression, they are often used as proxies for overall market performance.
Investors use indices to evaluate the performance of their own portfolios and in some cases to inform their stock trading decisions. You can also invest in a comprehensive index through index funds and exchange-traded funds, which track a specific index or market sector.
The stock exchange is an adversarial trading system.
The stock market brings together millions of investors with diametrically opposed opinions. Indeed, when one investor sells a particular security, another must be willing to buy it. Since both investors cannot be right, it is an adversarial system. In short, one investor will profit and the other will suffer a loss. Therefore, it is important to be familiar with the investment you are considering.
What makes stock prices go up and down?
Many factors determine whether stock prices rise or fall. These include the media, the opinions of known investors, natural disasters, political and social unrest, risk, supply and demand, and the lack or abundance of suitable alternatives.
The compilation of these factors, together with all relevant information that has been disseminated, creates a certain type of sentiment and a corresponding number of buyers and sellers. If there are more sellers than buyers, stock prices will tend to fall. Conversely, when there are more buyers than sellers, stock prices tend to rise.
Best time to buy and sell
There are 2 biggest decisions an investor has to make: when to buy and when to sell. One of the best times to buy is when others are pessimistic. The best time to sell is when others are actively optimistic. When buying, remember that the prospect of a high return is more important if you buy after the price has gone down than after it has gone up. But you have to be careful.
For example, after fictitious company X’s stock has decreased by 45%, 50% or more, the first question to ask is why? Why did the stock fall like that? Did other stocks in the same sector decline? Did the entire stock market fall? If the broader market or other stocks in the same sector have been performing relatively well, there may be a problem specific to Company X. It is best to adopt and comply with a buy-sell discipline.
Why does a company go public?
When a company is listed on the stock exchange and investors can buy and sell their shares, it is said to be a public company. An IPO is the process by which a company is floated on the stock exchange.
A private company may decide to go through the IPO process for a number of reasons. Going public essentially means that existing shareholders will sell some of their shares to the public. This can be an exit strategy for existing investors, while at the same time diversifying the investment risk for a larger number of investors. In addition, public disclosure is an excellent way for a company to raise funds and awareness. The increased visibility and additional funds will allow the company to grow faster and achieve its goals.
Risks associated with shares
There are several risks associated with the shares, we will note them in this part of the course.
As with any market, there is an inherent liquidity risk.. This problem is most evident in thinly traded stocks with large bid-ask spreads and during periods of panic.
Market risk refers to events that cannot be diversified and can have a negative effect on your portfolio. In this case, prices may move up or down against you in the market at any time and cannot be diversified. This is also often referred to as equity risk.