Introduction to Stocks

1.1 What is the stock market?

The stock market is an institution which facilitates the trading of stocks – shares of a publicly listed company which are used to raise capital from investors.

The stock market comprises three main parties:

• Companies that issue shares
• Investors and traders that buy or sell such shares
• Market makers, which are intermediaries that buy and hold shares to ensure stock trades can always take place

Besides stocks, know that other securities such as bonds, commodities, units trusts and index funds are also traded on the stock market. In this online course, our focus will be directed towards stocks.

Why trade the stock market?

A stock or share represents an ownership stake in a company. When an investor purchases or holds stocks, they assume the role of a shareholder, and are accorded certain rights and benefits. This may encompass entitlements such as sharing in profits through dividends, to attend annual general meetings, and to trade their stock on the stock market.

As time progresses, companies have the potential to expand and increase in value. When this happens, the stock price goes up in tandem. Shareholders may experience a capital gain if the value of the stocks they hold appreciates.

Like all other assets, stocks don’t just go up in price in perpetuity. Rather, companies – and indeed, the stock market – undergo periods of upswings and downswings over time. Thus, investors using short-selling strategies may also potentially make gains when stock prices are on a downwards trend, subject to prevailing market conditions. While day traders can find opportunities as the stock market naturally rises and ebbs.

In essence, participating in the stock market enables investors to potentially reap financial rewards through dividend payouts, capitalising on both rising and falling share prices with effective trading strategies, and experiencing long-term appreciation in the share prices of successful companies.

Who trades the stock market?

The stock market is actively traded by a wide range of entities, ranging from institutional investors such as hedge funds, pensions funds and investment funds to independent retail investors who invest and trade via an online brokerage.

Fundamentally, individuals aiming to generate income or expand their wealth would engage in trading on the stock markets. This can range from long-term investors looking to build a retirement nest egg, to passive income seekers building an income stream through dividends, and day traders who trade stocks for a living.

Another group is investment or portfolio managers – in return for a fee, these professionals work to capture and optimise market returns on their clients’ behalf.

1.2 Stock market exchanges

The global stock market consists of a network of stock market exchanges located in different cities and across different time zones.

Stock exchanges fulfil several important functions. For one, companies that wish to raise capital from the public first have to list their shares on a relevant stock exchange. For another, the stock exchange also allows existing shareholders to transact with potential buyers.

To safeguard the investing public, there are strict rules and requirements when listing a stock. External entities, such as financial regulators or monetary authorities, enforce these regulations.

In certain jurisdictions, stock exchanges may also assist financial regulators in their responsibilities by functioning as a watchdog, monitoring the market for anomalies, and ensuring adherence to compliance standards.

Here’s a list of the 10 largest stock exchanges around the world, ranked by total value of all stocks traded ^[1].

What time are the stock markets open? ^[2]

Stock exchanges do not trade round the clock, they are only open during the day, from Mondays to Fridays. The stock market does not trade overnight and on weekends.

During public holidays stock markets do not open, and may close early on important dates, such as Christmas Eve. Some exchanges in Asia also break for lunch during midday.

To illustrate, here are the trading hours of popular stock exchanges around the world.

When to trade the stock markets?

Given the different time zones that stock exchanges around the world operate in, those that are closest to the international date line would be the first ones to open for the day.

In practice, this means that New Zealand and Australia’s markets open first, followed by exchanges located in Asia, then E.U. exchanges, and finally, the U.S. markets.

Stock trades are only executed during the designated trading hours of the respective markets. However, you can place your order at any time, even before the market opens. Your broker will attempt to fulfil your order as soon as the market opens.

After-hours trading ^[3]

However, after-hours trading – trading stocks outside of stock exchange hours – are becoming more widespread. With the help of electronic communication networks (ECNs), buyers and sellers can connect and interact without a stock exchange, thus enabling trading to take place independent of market trading hours.

After-hours trading (aka extended trading) can help traders capture opportunities in the event of sudden, unexpected market developments.

However, during normal times, after-hours trading suffers from lower liquidity, higher spreads and higher volatility, due to the reduced number of active traders.

Additionally, Individual retail traders participating in after-hours trading will come into competition with institutional investors, who have far more resources and capabilities to swing trades in their favour.

Thus, it is advisable for retail investors to adhere to regular exchange trading hours.

1.3 Market capitalisation

One term that you will often come across is “market capitalisation”, or “market cap” for short. In simple terms, this is a gauge of a company’s overall value or size.

For instance, as at November 2023, Apple Inc. has a total market capitalisation of approximately USD 230 trillion, making it one of the largest companies in the world.

The formula for market capitalisation is simple: It is the number of shares outstanding, multiplied by the price per share. The terms “small-cap”, “mid-cap” and “large-cap” are common variations of “market capitalisation”. They are used to categorise companies according to how large or small their market caps are.

Generally, a large-cap company has market capitalisation of USD 10 billion or greater; a mid-cap company has between USD 2 billion and USD 10 billion, while a small-cap company has between USD 2 billion and USD 300 million ^[4]. 

Note that different brokerages may have different standards of measure, although the differences may be minor. Nevertheless, knowing these terms will help an investor gauge their investments in a more qualitative light.

This is because low-cap stocks traditionally exhibit higher growth than mid- or large-cap stocks, but the smaller size of the company also poses greater risk. Inversely, large-cap stocks are likely to have slower growth, but usually offer more stability ^[5].

1.4 Bull markets vs Bear markets

A bull market describes a period when stock prices are progressively moving upwards. A bear market describes the opposite – a period when stock prices are coming down.

When describing whether the stock market is bullish or bearish, a stock market index is used as a proxy. One of the most popular stock market indexes is the S&P 500, which tracks the prices of the 500 largest companies listed in the U.S. stock exchange.

When the S&P 500 gains 20% or more, we are said to have entered a bull market. When the S&P 500 falls 20% or more, a bear market is said to have arrived.

Note that the 20%-mark is simply a guide, and not a definitive threshold. Some may consider any period in which prices remain trending upwards as a bull market, even if the gains were not significant. The opposite goes for what may be considered a bear market.

Being able to differentiate a bull market from a bear market is helpful in selecting the right trading strategies.

1.5 How stock prices move

Stock prices move in tandem with supply and demand. When a stock is traded, the exchange occurs when there is a match between the price desired by the seller and the price a buyer is willing to pay.

This is known as the bid-ask spread, and finding matches between sellers and buyers is one of the core functions of a stock exchange.

A seller is always going to want to sell their stocks at a higher price, while a buyer is always going to want to buy at a lower price.

However, when shareholders no longer want to hold their shares, they may start selling their shares at lower prices, causing the stock price to drop. This is exacerbated as more shareholders rush to sell their shares, such as upon the disclosure of subpar earnings or any other unfavorable news.

The reverse can also happen. Should there be a breakthrough or other unexpected developments that prompts demand for a stock, the stock price gets bidded up as more buyers start competing with each other. 

1.6 Dividends

Companies may choose to distribute a certain percentage of their profits to shareholders in the form of dividends.

Dividends are regularly distributed, spanning intervals from monthly to annually. However, depending on the company, one might also encounter quarterly or semi-annual dividend payout schedules.

A dividend payment is calculated on a per-share basis. For example, if ABC Co. announces a dividend of USD 0.10 per share, someone who holds 200 shares will receive USD 20 – this could be in cash, or in equivalent shares.

To receive dividends, you must be holding the shares in your brokerage account up till the dividend distribution date. Holding a financial derivative such as a call option on the stock does not entitle you to the dividend.

While many companies offer dividends, not all do. Some of the more popular dividend-paying companies are those that have reached maturity and stability, and have comparatively less headroom for growth.

By themselves, dividends do not make one stock better than another – it depends on what you’re trying to achieve.

Growth-focused investors believe it is more advantageous for a company to retain all its profits to grow the business, which helps stock prices to grow, rewarding investors with capital gains that way.

Income-focused investors prefer dividend-paying stocks as a form of passive income that is received on a regular basis. Such investors are more willing to forego growth potential in favour of income.

Time’s up

Module recap

• The stock market is where company stocks and shares are traded. The three main active parties are public listed companies that issue shares; traders and investors who buy and sell shares; and market makers – intermediaries that buy and hold shares to ensure stock trades can always take place.
• Trading the stock market offers opportunities to generate profits as stock prices rise and fall over time by using effective trading strategies.
• The stock market is actively traded by a wide range of entities, ranging from institutional investors such as hedge funds and pension funds, to day traders and independent retail investors.
• Stock exchanges follow standard business hours of the countries they operate in, and are closed on the weekends and public holidays. Some stock exchanges may close for lunch during the midday.
• Conventionally. , trades are made only when the stock exchange is open. However, with ECNs, buyers and sellers can communicate with each other without a stock exchange, allowing trading to take place outside of normal hours. This is known as after-hours trading.
• Market capitalisation is a measure of the value of a company. It is derived by multiplying the share price by the total number of outstanding shares.
• “Large-cap” companies have market capitalisations of USD 10 billion or more; “mid-cap” companies have between USD 2 billion and USD 10 billion; “small-cap” companies clock in at between USD 300 million and USD 2 billion.
• When the stock market has risen by 20% or more, this indicates a bull market. When the stock market has fallen by 20% or more, this indicates a bear market. The S&P 500 is commonly used by different investors as the benchmark for the stock market on the whole.
• Stock prices move up and down in tandem with supply and demand. When there are more sellers than buyers, stock prices fall. When there are more buyers than sellers, stock prices rise.
• Dividends are regularly distributed, spanning intervals from monthly to annually. However, depending on the company, one might also encounter quarterly or semi-annual dividend payout schedules. Not all companies pay out dividends, but those that do tend to be mature, stable companies with less runway for share price growth.
• Dividends alone do not determine the quality of a stock, and investors should decide whether to choose dividend-paying stocks based on their investing goals.

References 

1. “Mapped: The Largest Stock Exchanges in the World – Visual Capitalist” https://www.visualcapitalist.com/largest-stock-exchanges-in-the-world/ Accessed 27 Dec 2023
2. “Trading Hours Of The World’s Major Stock Exchanges – Investopedia” https://www.investopedia.com/ask/answers/040115/when-do-stock-market-exchanges-close.asp Accessed 27 Dec 2023
3. “What Is After-Hours Trading, And Can You Trade At This Time? – Investopedia” https://www.investopedia.com/ask/answers/after-hours-trading-am-i-able-to-trade-at-this-time/ Accessed 27 Dec 2023
4. “Small Cap Stocks vs. Large Cap Stocks: What’s the Difference? – Investopedia” https://www.investopedia.com/articles/markets/022316/small-cap-vs-mid-cap-vs-large-cap-stocks-2016.asp Accessed 27 Dec 2023
5. “What Is a Bull Market, and How Can Investors Benefit From One? – Investopedia” https://www.investopedia.com/terms/b/bullmarket.asp Accessed 27 Dec 2023