Stock market
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A stock market, equity market, or share market is the aggregation of buyers and sellers of
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
s (also called shares), which represent
ownership Ownership is the state or fact of legal possession and control over property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of th ...
claims on businesses; these may include ''securities'' listed on a public
stock exchange A stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and sell security (finance), securities, such as share (finance), shares of stock, Bond (finance) ...
, as well as stock that is only traded privately, such as shares of private companies which are sold to
investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...
s through
equity crowdfunding Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital market A capital market is a financial market in which long-term debt (over a year) or Eq ...
platforms. Investment is usually made with an investment strategy in mind.


Size of the market

The total
market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
of all publicly traded securities worldwide rose from US$2.5 trillion in 1980 to US$93.7 trillion at the end of 2020. , there are 60 stock exchanges in the world. Of these, there are 16 exchanges with a
market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
of $1 trillion or more, and they account for 87% of
global market In economics, a market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in Exchange (economics), exchange. While parties may exchange goods and services by barter, most markets rel ...
capitalization. Apart from the
Australian Securities Exchange Australian Securities Exchange Ltd or ASX, is an Australian public company that operates Australia's primary Exchange (organized market), securities exchange, the Australian Securities Exchange (sometimes referred to outside of Australia as, or ...
, these 16 exchanges are all in
North America North America is a continent in the Northern Hemisphere and almost entirely within the Western Hemisphere. It is bordered to the north by the Arctic Ocean, to the east by the Atlantic Ocean, to the southeast by South America and the Car ...
,
Europe Europe is a large peninsula conventionally considered a continent in its own right because of its great physical size and the weight of its history and traditions. Europe is also considered a Continent#Subcontinents, subcontinent of Eurasia ...
, or
Asia Asia (, ) is one of the world's most notable geographical regions, which is either considered a continent in its own right or a subcontinent of Eurasia, which shares the continental landmass of Afro-Eurasia with Africa Africa is ...
. By country, the largest stock markets as of January 2022 are in the United States of America (about 59.9%), followed by Japan (about 6.2%) and United Kingdom (about 3.9%).


Stock exchange

A
stock exchange A stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and sell security (finance), securities, such as share (finance), shares of stock, Bond (finance) ...
is an exchange (or bourse) where
stockbroker A stockbroker is a regulated broker, broker-dealer, or registered investment adviser (in the United States) who may provide financial advisory and investment management services and execute transactions such as the purchase or sale of stocks and ...
s and traders can buy and sell shares (equity
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
), bonds, and other
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
. Many large companies have their stocks listed on a stock exchange. This makes the stock more liquid and thus more attractive to many investors. The exchange may also act as a guarantor of settlement. These and other stocks may also be traded "
over the counter Over-the-counter (OTC) drugs are medication, medicines sold directly to a consumer without a requirement for a medical prescription, prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to co ...
" (OTC), that is, through a dealer. Some large companies will have their stock listed on more than one exchange in different countries, so as to attract international investors. Stock exchanges may also cover other types of securities, such as fixed-interest securities (bonds) or (less frequently) derivatives, which are more likely to be traded OTC. Trade in stock markets means the transfer (in exchange for money) of a stock or security from a seller to a buyer. This requires these two parties to agree on a price.
Equities In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
(stocks or shares) confer an ownership interest in a particular company. Participants in the stock market range from small individual
stock investors A stock trader or equity trader or share trader, also called a stock investor, is a person or company involved in trading equity securities and attempting to profit from the purchase and sale of those securities. Stock traders may be an invest ...
to larger investors, who can be based anywhere in the world, and may include
bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Beca ...
s,
insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to Hedge ( ...
companies,
pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides pension, retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed a ...
s and
hedge fund A hedge fund is a pooled investment fund that trades in relatively Market liquidity, liquid assets and is able to make extensive use of more complex trader (finance), trading, portfolio (finance), portfolio-construction, and risk management techn ...
s. Their buy or sell orders may be executed on their behalf by a stock exchange trader. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as
open outcry Open outcry is a method of communication between professionals on a stock exchange A stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and se ...
. This method is used in some stock exchanges and
commodities exchange A commodities exchange is an Exchange (organized market), exchange, or market, where various Commodity, commodities are traded. Most commodity markets around the world trade in agricultural products and other raw materials (like wheat, barley, ...
s, and involves traders shouting bid and offer prices. The other type of stock exchange has a network of computers where trades are made electronically. An example of such an exchange is the
NASDAQ The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City New York, often called New York City or NYC, is the ...
. A potential buyer ''bids'' a specific price for a stock, and a potential seller ''asks'' a specific price for the same stock. Buying or selling ''at the Market'' means you will accept ''any'' ask price or bid price for the stock. When the bid and ask prices match, a sale takes place, on a first-come, first-served basis if there are multiple bidders at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a
marketplace A marketplace or market place is a location where people regularly gather for the purchase and sale of provisions, livestock, and other goods. In different parts of the world, a marketplace may be described as a ''souk'' (from the Arabic lang ...
. The exchanges provide real-time trading information on the listed securities, facilitating
price discovery In economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the beha ...
. The
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City New York, often called New York City or NYC, is the List o ...
(NYSE) is a physical exchange, with a hybrid market for placing orders electronically from any location as well as on the trading floor. Orders executed on the trading floor enter by way of exchange members and flow down to a floor broker, who submits the order electronically to the floor trading post for the Designated
market maker A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the ''bid–ask spread'', or ''turn.'' The benefit to the firm is that it ...
("DMM") for that stock to trade the order. The DMM's job is to maintain a two-sided market, making orders to buy and sell the security when there are no other buyers or sellers. If a
bid–ask spread The bid–ask spread (also bid–offer or bid/ask and buy/sell in the case of a market maker) is the difference between the prices quoted (either by a single market maker or in a limit order book) for an immediate sale ( ask) and an immediate ...
exists, no trade immediately takes place – in this case, the DMM may use their own resources (money or stock) to close the difference. Once a trade has been made, the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Computers play an important role, especially for program trading. The
NASDAQ The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City New York, often called New York City or NYC, is the ...
is an electronic exchange, where all of the trading is done over a
computer network A computer network is a set of computers sharing resources located on or provided by Node (networking), network nodes. The computers use common communication protocols over digital signal, digital interconnections to communicate with each ot ...
. The process is similar to the New York Stock Exchange. One or more NASDAQ
market maker A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the ''bid–ask spread'', or ''turn.'' The benefit to the firm is that it ...
s will always provide a bid and ask the price at which they will always purchase or sell 'their' stock. The
Paris Bourse Euronext Paris is France's securities market, formerly known as the Paris Bourse, which merged with the Amsterdam, Lisbon, and Brussels exchanges in September 2000 to form Euronext NV. As of 2022, the 795 companies listed had a combined market ...
, now part of
Euronext Euronext N.V. (short for European New Exchange Technology) is a pan-European Exchange (organized market), bourse that offers various trading and post-trade services. Traded assets include regulated equities, exchange-traded funds (ETF), warrants ...
, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange.
Stockbroker A stockbroker is a regulated broker, broker-dealer, or registered investment adviser (in the United States) who may provide financial advisory and investment management services and execute transactions such as the purchase or sale of stocks and ...
s met on the trading floor of the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching system was fully automated. People trading stock will prefer to trade on the most popular exchange since this gives the largest number of potential counter parties (buyers for a seller, sellers for a buyer) and probably the best price. However, there have always been alternatives such as brokers trying to bring parties together to trade outside the exchange. Some third markets that were popular are Instinet, and later Island and Archipelago (the latter two have since been acquired by Nasdaq and NYSE, respectively). One advantage is that this avoids the commissions of the exchange. However, it also has problems such as
adverse selection In economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the beha ...
. Financial regulators have probed dark pools.


Market participant

Market participant The term market participant is another term for economic agent, an actor and more specifically a decision maker in a Economic model, model of some aspect of the economy. For example, ''buyers'' and ''sellers'' are two common types of agents in part ...
s include individual retail investors,
institutional investor An institutional investor is an entity which pools money to purchase Security (finance), securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, ...
s (e.g.,
pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides pension, retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed a ...
s,
insurance companies Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management Risk management is th ...
,
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe ...
s,
index fund An index fund (also index tracker) is a mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, ...
s,
exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the d ...
s,
hedge fund A hedge fund is a pooled investment fund that trades in relatively Market liquidity, liquid assets and is able to make extensive use of more complex trader (finance), trading, portfolio (finance), portfolio-construction, and risk management techn ...
s, investor groups, banks and various other
financial institution Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...
s), and also publicly traded corporations trading in their own shares. Robo-advisors, which automate investment for individuals are also major participants.


Demographics of market participation


Indirect vs. Direct Investment

Indirect investment involves owning shares indirectly, such as via a mutual fund or an exchange traded fund. Direct investment involves direct ownership of shares. Direct ownership of stock by individuals rose slightly from 17.8% in 1992 to 17.9% in 2007, with the median value of these holdings rising from $14,778 to $17,000. Indirect participation in the form of retirement accounts rose from 39.3% in 1992 to 52.6% in 2007, with the median value of these accounts more than doubling from $22,000 to $45,000 in that time. Rydqvist, Spizman, and Strebulaev attribute the differential growth in direct and indirect holdings to differences in the way each are taxed in the United States. Investments in pension funds and 401ks, the two most common vehicles of indirect participation, are taxed only when funds are withdrawn from the accounts. Conversely, the money used to directly purchase stock is subject to taxation as are any dividends or capital gains they generate for the holder. In this way, the current tax code incentivizes individuals to invest indirectly.


Participation by income and wealth strata

Rates of participation and the value of holdings differ significantly across strata of income. In the bottom quintile of income, 5.5% of households directly own stock and 10.7% hold stocks indirectly in the form of retirement accounts. The top decile of income has a direct participation rate of 47.5% and an indirect participation rate in the form of retirement accounts of 89.6%. The median value of directly owned stock in the bottom quintile of income is $4,000 and is $78,600 in the top decile of income as of 2007. The median value of indirectly held stock in the form of retirement accounts for the same two groups in the same year is $6,300 and $214,800 respectively. Since the Great Recession of 2008 households in the bottom half of the
income distribution In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes eco ...
have lessened their participation rate both directly and indirectly from 53.2% in 2007 to 48.8% in 2013, while over the same period households in the top decile of the income distribution slightly increased participation 91.7% to 92.1%. The mean value of direct and indirect holdings at the bottom half of the income distribution moved slightly downward from $53,800 in 2007 to $53,600 in 2013. In the top decile, mean value of all holdings fell from $982,000 to $969,300 in the same time. The mean value of all stock holdings across the entire income distribution is valued at $269,900 as of 2013.


Participation by race and gender

The racial composition of stock market ownership shows households headed by whites are nearly four and six times as likely to directly own stocks than households headed by blacks and Hispanics respectively. As of 2011 the national rate of direct participation was 19.6%, for white households the participation rate was 24.5%, for black households it was 6.4% and for Hispanic households it was 4.3%. Indirect participation in the form of 401k ownership shows a similar pattern with a national participation rate of 42.1%, a rate of 46.4% for white households, 31.7% for black households, and 25.8% for Hispanic households. Households headed by married couples participated at rates above the national averages with 25.6% participating directly and 53.4% participating indirectly through a retirement account. 14.7% of households headed by men participated in the market directly and 33.4% owned stock through a retirement account. 12.6% of female-headed households directly owned stock and 28.7% owned stock indirectly.


Determinants and possible explanations of stock market participation

In a 2003 paper by Vissing-Jørgensen attempts to explain disproportionate rates of participation along wealth and income groups as a function of fixed costs associated with investing. Her research concludes that a fixed cost of $200 per year is sufficient to explain why nearly half of all U.S. households do not participate in the market. Participation rates have been shown to strongly correlate with education levels, promoting the hypothesis that information and transaction costs of market participation are better absorbed by more educated households. Behavioral economists Harrison Hong, Jeffrey Kubik and Jeremy Stein suggest that sociability and participation rates of communities have a statistically significant impact on an individual's decision to participate in the market. Their research indicates that social individuals living in states with higher than average participation rates are 5% more likely to participate than individuals that do not share those characteristics. This phenomenon also explained in cost terms. Knowledge of market functioning diffuses through communities and consequently lowers transaction costs associated with investing.


History

In 12th-century France, the courtiers ''de change'' were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first
broker A broker is a person or firm who arranges transactions between a Purchasing, buyer and a sales, seller for a commission (remuneration), commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a :wikt:princip ...
s. The Italian historian Lodovico Guicciardini described how, in late 13th-century
Bruges Bruges ( , nl, Brugge ) is the capital and largest city A city is a human settlement of notable size.Goodall, B. (1987) ''The Penguin Dictionary of Human Geography''. London: Penguin.Kuper, A. and Kuper, J., eds (1996) ''The Social Scienc ...
, commodity traders gathered outdoors at a market square containing an inn owned by a family called ''Van der Beurze'', and in 1409 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting. The idea quickly spread around
Flanders Flanders (, ; Dutch language, Dutch: ''Vlaanderen'' ) is the Dutch language, Flemish-speaking northern portion of Belgium and one of the communities, regions and language areas of Belgium. However, there are several overlapping definitions, in ...
and neighboring countries and "Beurzen" soon opened in
Ghent Ghent ( nl, Gent ; french: Gand ; traditional English: Gaunt) is a city and a Municipalities of Belgium, municipality in the Flemish Region of Belgium. It is the capital and largest city of the East Flanders province, and the third largest i ...
and
Rotterdam Rotterdam ( , , , lit. ''The Dam on the River Rotte'') is the second largest city A city is a human settlement of notable size.Goodall, B. (1987) ''The Penguin Dictionary of Human Geography''. London: Penguin.Kuper, A. and Kuper, J., ed ...
. International traders, and specially the Italian bankers, present in Bruges since the early 13th-century, took back the word in their countries to define the place for stock market exchange: first the Italians (Borsa), but soon also the French (Bourse), the Germans (börse), Russians (birža), Czechs (burza), Swedes (börs), Danes and Norwegians (børs). In most languages, the word coincides with that for money bag, dating back to the Latin bursa, from which obviously also derives the name of the Van der Beurse family. In the middle of the
13th century The 13th century was the century which lasted from January 1, 1201 (Roman numerals, MCCI) through December 31, 1300 (Roman numerals, MCCC) in accordance with the Julian calendar. The Mongol Empire was founded by Genghis Khan, which stretched fr ...
, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in
Pisa Pisa ( , or ) is a city and ''comune'' in Tuscany, central Italy, straddling the Arno just before it empties into the Ligurian Sea. It is the capital city of the Province of Pisa. Although Pisa is known worldwide for its Leaning Tower of Pisa, ...
,
Verona Verona ( , ; vec, Verona or ) is a city on the Adige River in Veneto, Northern Italy, Italy, with 258,031 inhabitants. It is one of the seven provincial capitals of the region. It is the largest city Comune, municipality in the region and the ...
,
Genoa Genoa ( ; it, Genova ; lij, Zêna ). is the capital of the Regions of Italy, Italian region of Liguria and the List of cities in Italy, sixth-largest city in Italy. In 2015, 594,733 people lived within the city's administrative limits. As of t ...
and
Florence Florence ( ; it, Firenze ) is a city in Central Italy and the capital city of the Tuscany region. It is the most populated city in Tuscany, with 383,083 inhabitants in 2016, and over 1,520,000 in its metropolitan area.Bilancio demografico ...
also began trading in government securities during the 14th century. This was only possible because these were independent city-states not ruled by a duke but a council of influential citizens. Italian companies were also the first to issue shares. Companies in England and the Low Countries followed in the 16th century. Around this time, a
joint stock company A joint-stock company is a business entity in which shares of the company's capital stock, stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their share (finance), shares (certificates ...
—one whose stock is owned jointly by the shareholders—emerged and became important for the colonization of what Europeans called the "New World". There are now stock markets in virtually every developed and most developing economies, with the world's largest markets being in the United States, United Kingdom, Japan,
India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area, the List of countries and dependencies by population, second-most populous ...
, China,
Canada Canada is a country in North America. Its Provinces and territories of Canada, ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world ...
, Germany (
Frankfurt Stock Exchange The Frankfurt Stock Exchange (german: link=no, Börse Frankfurt, former German name – FWB) is the world's 12th largest stock exchange by market capitalization. It has operations from 8:00 am to 10:00 pm (Time in Germany, German time). Orga ...
), France,
South Korea South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korea, Korean Peninsula and sharing a Korean Demilitarized Zone, land border with North Korea. Its western border is formed ...
and the
Netherlands ) , anthem = ( en, "William of Nassau") , image_map = , map_caption = , subdivision_type = Sovereign state , subdivision_name = Kingdom of the Netherlands , established_title = Before independence , established_date = Spanish Neth ...
.


Importance


Function and purpose

The stock market is one of the most important ways for
companies A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...
to raise money, along with debt markets which are generally more imposing but do not trade publicly. This allows businesses to be publicly traded, and raise additional financial capital for expansion by selling shares of ownership of the company in a public market. The
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liqui ...
that an exchange affords the investors enables their holders to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as
property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to Consumables, consume, alte ...
and other immoveable assets. History has shown that the price of
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
s 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. 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 bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial bank, commercial banking system. In contrast to a commercial ba ...
s tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of
financial system A financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors, and borrowers. Financial systems operate at national and global levels. Financial institutions consist of complex, c ...
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 A counterparty (sometimes contraparty) is a Juristic person, legal entity, unincorporated entity, or collection of entities to which an exposure of financial risk may exist. The word became widely used in the 1980s, particularly at the time of the ...
could default on the transaction. The smooth functioning of all these activities facilitates
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economics, economy in a financial year. Statisticians conventionally measure such growth as the perce ...
in that lower costs and enterprise risks promote the production of goods and services as well as possibly employment. In this way the financial system is assumed to contribute to increased prosperity, although some controversy exists as to whether the optimal financial system is bank-based or market-based. Recent events such as the
Global Financial Crisis Global means of or referring to a globe and may also refer to: Entertainment * Global (Paul van Dyk album), ''Global'' (Paul van Dyk album), 2003 * Global (Bunji Garlin album), ''Global'' (Bunji Garlin album), 2007 * Global (Humanoid album), ''Gl ...
have prompted a heightened degree of scrutiny of the impact of the structure of stock markets (called
market microstructure Market microstructure is a branch of finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economi ...
), in particular to the stability of the financial system and the transmission of
systemic risk In finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumpt ...
.


Relation to the modern financial system

A transformation is the move to
electronic trading In finance, an electronic trading platform also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary. Various financial products c ...
to replace human trading of listed
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
.


Behavior of stock prices

Changes in stock prices are mostly caused by external factors such as
socioeconomic Socioeconomics (also known as social economics) is the social science Social science is one of the branches of science, devoted to the study of society, societies and the Social relation, relationships among individuals within those societi ...
conditions, inflation, exchange rates.
Intellectual capital Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people (human capital), the value relat ...
does not affect a company stock's current earnings.
Intellectual capital Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people (human capital), the value relat ...
contributes to a stock's return growth. The
efficient-market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or ano ...
(EMH) is a hypothesis in financial economics that states that asset prices reflect all available information at the current time. The 'hard'
efficient-market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or ano ...
does not explain the cause of events such as the crash in 1987, when the
Dow Jones Industrial Average The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity inde ...
plummeted 22.6 percent—the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall dramatically even though no generally agreed upon definite cause has been found: a thorough search failed to detect ''any'' 'reasonable' development that might have accounted for the crash. (Note that such events are predicted to occur strictly by
randomness In common usage, randomness is the apparent or actual lack of pattern A pattern is a regularity in the world, in human-made design, or in abstraction, abstract ideas. As such, the elements of a pattern repeat in a predictable manner. A ...
, although very rarely.) It seems also to be true more generally that many price movements (beyond those which are predicted to occur 'randomly') are ''not'' occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period seems to confirm this. A 'soft' EMH has emerged which does not require that prices remain at or near equilibrium, but only that market participants cannot ''systematically'' profit from any momentary '
market anomaly A market anomaly in a financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. Some of the securities i ...
'. Moreover, while EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e. non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer. Various explanations for such large and apparently non-random price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and
value at risk Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by ...
limits, ''theoretically could'' cause financial markets to overreact. But the best explanation seems to be that the distribution of stock market prices is non-Gaussian (in which case EMH, in any of its current forms, would not be strictly applicable). Other research has shown that psychological factors may result in ''exaggerated'' (statistically anomalous) stock price movements (contrary to EMH which assumes such behaviors 'cancel out'). Psychological research has demonstrated that people are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just ''noise'', e.g. seeing familiar shapes in clouds or ink blots. In the present context, this means that a succession of good news items about a company may lead investors to overreact positively, driving the price up. A period of good returns also boosts the investors' self-confidence, reducing their (psychological) risk threshold. Another phenomenon—also from psychology—that works against an objective assessment is '' group thinking''. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group. In one paper the authors draw an analogy with
gambling Gambling (also known as betting or gaming) is the wagering of something of Value (economics), value ("the stakes") on a Event (probability theory), random event with the intent of winning something else of value, where instances of strategy (ga ...
. In normal times the market behaves like a game of
roulette Roulette is a casino game named after the French language, French word meaning ''little wheel'' which was likely developed from the Italians, Italian game Biribi''.'' In the game, a player may choose to place a bet on a single number, various ...
; the probabilities are known and largely independent of the investment decisions of the different players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the psychology of other investors and how they are likely to react psychologically. Stock markets play an essential role in growing industries that ultimately affect the economy through transferring available funds from units that have excess funds (savings) to those who are suffering from funds deficit (borrowings) (Padhi and Naik, 2012). In other words, capital markets facilitate funds movement between the above-mentioned units. This process leads to the enhancement of available financial resources which in turn affects the economic growth positively. Economic and financial theories argue that stock prices are affected by macroeconomic trends. Macroeconomic trends include such as changes in GDP, unemployment rates, national income, price indices, output, consumption, unemployment, inflation, saving, investment, energy, international trade, immigration, productivity, aging populations, innovations, international finance. increasing corporate profit, increasing profit margins, higher concentration of business, lower company income, less vigorous activity, less progress, lower investment rates, lower productivity growth, less employee share of corporate revenues, decreasing Worker to Beneficiary ratio (year 1960 5:1, year 2009 3:1, year 2030 2.2:1), increasing female to male ratio college graduates. Many different academic researchers have stated that companies with low P/E ratios and smaller-sized companies have a tendency to outperform the market. Research has shown that mid-sized companies outperform large cap companies, and smaller companies have higher returns historically.


Irrational behavior

Sometimes, the market seems to react irrationally to economic or financial news, even if that news is likely to have no real effect on the fundamental value of securities itself. However, this market behaviour may be more apparent than real, since often such news was anticipated, and a counter reaction may occur if the news is better (or worse) than expected. Therefore, the stock market may be swayed in either direction by press releases, rumors,
euphoria Euphoria ( ) is the experience (or affect (psychology), affect) of pleasure or excitement and intense feelings of well-being and happiness. Certain natural rewards and social activities, such as aerobic exercise, laughter, listening to or ma ...
and mass panic. Over the short-term, stocks and other securities can be battered or bought by any number of fast market-changing events, making the stock market behavior difficult to predict. Emotions can drive prices up and down, people are generally not as rational as they think, and the reasons for buying and selling are generally accepted. Behaviorists argue that investors often behave ''irrationally'' when making investment decisions thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities to make money. However, the whole notion of EMH is that these non-rational reactions to information cancel out, leaving the prices of stocks rationally determined. The Dow Jones Industrial Average biggest gain in one day was 936.42 points or 11%.


Crashes

A stock market crash is often defined as a sharp dip in
share price A share price is the price of a single share of a number of saleable equity shares of a company. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for. B ...
s of
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
s listed on the stock exchanges. In parallel with various economic factors, a reason for stock market crashes is also due to panic and investing public's loss of confidence. Often, stock market crashes end speculative
economic bubble An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their Intrinsic theory of value, intrinsic valuation, being the valuation that the underlying long-term fundamentals ...
s. There have been famous stock market crashes that have ended in the loss of billions of dollars and wealth destruction on a massive scale. An increasing number of people are involved in the stock market, especially since the
social security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet Basic needs, basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refe ...
and
retirement plan A pension (, from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally a dialect spoken in the lower Tiber area (then known as Latium) aroun ...
s are being increasingly privatized and linked to
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...
s and bonds and other elements of the market. There have been a number of famous stock market crashes like the
Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange col ...
, the stock market crash of 1973–4, the Black Monday of 1987, the
Dot-com bubble The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet. Between 1995 and its peak in March 2000, the Nasdaq Compos ...
of 2000, and the Stock Market Crash of 2008.


1929

One of the most famous stock market crashes started October 24, 1929, on Black Thursday. The
Dow Jones Industrial Average The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity inde ...
lost 50% during this stock market crash. It was the beginning of the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The Financial contagion, ...
.


1987

Another famous crash took place on October 19, 1987 – Black Monday. The crash began in Hong Kong and quickly spread around the world. By the end of October, stock markets in Hong Kong had fallen 45.5%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. Black Monday itself was the largest one-day percentage decline in stock market history – the Dow Jones fell by 22.6% in a day. The names "Black Monday" and "Black Tuesday" are also used for October 28–29, 1929, which followed Terrible Thursday—the starting day of the stock market crash in 1929. The crash in 1987 raised some puzzles – main news and events did not predict the catastrophe and visible reasons for the collapse were not identified. This event raised questions about many important assumptions of modern economics, namely, the theory of rational human conduct, the theory of market equilibrium and the
efficient-market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or ano ...
. For some time after the crash, trading in stock exchanges worldwide was halted, since the exchange computers did not perform well owing to enormous quantity of trades being received at one time. This halt in trading allowed the
Federal Reserve System The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after ...
and central banks of other countries to take measures to control the spreading of worldwide financial crisis. In the United States the SEC introduced several new measures of control into the stock market in an attempt to prevent a re-occurrence of the events of Black Monday.


2007-2009

This marked the beginning of the
Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At t ...
. Starting in 2007 and lasting through 2009, financial markets experienced one of the sharpest declines in decades. It was more widespread than just the stock market as well. The housing market, lending market, and even global trade experienced unimaginable decline. Sub-prime lending led to the housing bubble bursting and was made famous by movies like The Big Short where those holding large mortgages were unwittingly falling prey to lenders. This saw banks and major financial institutions completely fail in many cases and took major government intervention to remedy during the period. From October 2007 to March 2009, the S&P 500 fell 57% and wouldn't recover to its 2007 levels until April 2013.


2020

The 2020 stock market crash was a major and sudden global stock market crash that began on 20 February 2020 and ended on 7 April. This market crash was due to the sudden outbreak of the global pandemic,
COVID-19 Coronavirus disease 2019 (COVID-19) is a contagious disease caused by a virus, the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The first known case was COVID-19 pandemic in Hubei, identified in Wuhan, China, in December ...
. The crash ended with a new deal that had a positive impact on the market.


Circuit breakers

Since the early 1990s, many of the largest exchanges have adopted electronic 'matching engines' to bring together buyers and sellers, replacing the open outcry system. Electronic trading now accounts for the majority of trading in many developed countries. Computer systems were upgraded in the stock exchanges to handle larger trading volumes in a more accurate and controlled manner. The SEC modified the margin requirements in an attempt to lower the volatility of common stocks, stock options and the futures market. The
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City New York, often called New York City or NYC, is the List o ...
and the
Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an a ...
introduced the concept of a circuit breaker. The circuit breaker halts trading if the Dow declines a prescribed number of points for a prescribed amount of time. In February 2012, the Investment Industry Regulatory Organization of Canada (IIROC) introduced single-stock circuit breakers. * New York Stock Exchange (NYSE) circuit breakers


Stock market index

The movements of the prices in global, regional or local markets are captured in price indices called stock market indices, of which there are many, e.g. the S&P, the FTSE, the
Euronext Euronext N.V. (short for European New Exchange Technology) is a pan-European Exchange (organized market), bourse that offers various trading and post-trade services. Traded assets include regulated equities, exchange-traded funds (ETF), warrants ...
indices and the NIFTY & SENSEX of India. Such indices are usually
market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.


Derivative instruments

Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. Some examples are
exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the d ...
s (ETFs),
stock index In finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumpti ...
and
stock option In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or financial instrument, instrument at a specified strike price on or be ...
s, equity swaps, single-stock futures, and stock index futures. These last two may be traded on
futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contract In finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not syno ...
s (which are distinct from stock exchanges—their history traces back to
commodity In economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the beh ...
futures exchanges), or traded
over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid pres ...
. As all of these products are only '' derived'' from stocks, they are sometimes considered to be traded in a (hypothetical)
derivatives market The derivatives market is the financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. Some of the s ...
, rather than the (hypothetical) stock market.


Leveraged strategies

Stock that a trader does not actually own may be traded using
short selling In finance, being short in an asset means investing in such a way that the investor will profit if the Market value, value of the asset falls. This is the opposite of a more conventional "Long (finance), long" Position (finance), position, wh ...
; margin buying may be used to purchase stock with borrowed funds; or, '' derivatives'' may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sales.


Short selling

In short selling, the trader borrows stock (usually from his brokerage which holds its clients shares or its own shares on account to lend to short sellers) then sells it on the market, betting that the price will fall. The trader eventually buys back the stock, making money if the price fell in the meantime and losing money if it rose. Exiting a short position by buying back the stock is called "covering". This strategy may also be used by unscrupulous traders in illiquid or thinly traded markets to artificially lower the price of a stock. Hence most markets either prevent short selling or place restrictions on when and how a short sale can occur. The practice of naked shorting is illegal in most (but not all) stock markets.


Margin buying

In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. In the United States, the margin requirements have been 50% for many years (that is, if you want to make a $1000 investment, you need to put up $500, and there is often a maintenance margin below the $500). A margin call is made if the total value of the investor's account cannot support the loss of the trade. (Upon a decline in the value of the margined securities additional funds may be required to maintain the account's equity, and with or without notice the margined security or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall following such forced sales.) Regulation of margin requirements (by the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
) was implemented after the
Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange colla ...
. Before that, speculators typically only needed to put up as little as 10 percent (or even less) of the total
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...
represented by the stocks purchased. Other rules may include the prohibition of ''free-riding:'' putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), but then selling them (before the three-days are up) and using part of the proceeds to make the original payment (assuming that the value of the stocks has not declined in the interim).


Types of financial markets

Financial markets can be divided into different subtypes:


For the assets transferred

*Money market : It is traded with money or financial assets with short-term maturity and high liquidity, generally assets with a term of less than one year. *Capital market : Financial assets with medium and long-term maturity are traded, which are basic for carrying out certain investment processes.


Depending on its structure

*Organized market *Non-organized markets denominated in English (" Over The Counter ").


According to the negotiation phase of financial assets

*Primary market :
Financial assets A financial asset is a non-physical asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. ...
are created. In this market, assets are transmitted directly by their issuer. *Secondary market : Only existing financial assets are exchanged, which were issued at a previous time. This market allows holders of financial assets to sell instruments that were already issued in the primary market (or that had already been transmitted in the
secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial markets, financial market in which previously issued financial instruments such as stock, Bond (finance), bonds, option (finance), options, and Fut ...
) and that are in their possession, or to buy other financial assets.


According to the geographical perspective

*National markets. The
currency A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
in which the financial assets are denominated and the residence of those involved is national. *International markets. The markets situated outside a country's geographical area.


According to the type of asset traded

*Traditional market. In which
financial assets A financial asset is a non-physical asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. ...
such as demand deposits, stocks or bonds are traded. *Alternative market. In which alternative financial assets are traded such as portfolio investments, promissory notes, factoring, real estate (e.g. through fiduciary rights), in private equity funds, venture capital funds, hedge funds, investment projects (e.g. infrastructure, cinema, etc.) among many others.


Other markets

*Commodity markets, which allow the trading of commodities *Derivatives markets, which provide instruments for managing
financial risk Financial risk is any of various types of risk associated with finance, financing, including financial transactions that include company loans in risk of default (finance), default. Often it is understood to include only downside risk, meaning t ...
*Forward markets, which provide standardized forward contracts to trade products at a future date *Insurance markets, which allows the redistribution of varied risks *Foreign exchange market, which allows the exchange of foreign
currencies A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...


Investment strategies

Many strategies can be classified as either
fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, Liability (financial accounting), liabilities, and earnings); health; and Competition, competitors an ...
or
technical analysis In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and Quantitative analysis (finance), quantitati ...
.
Fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, Liability (financial accounting), liabilities, and earnings); health; and Competition, competitors an ...
refers to analyzing companies by their
financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s found in
SEC filing The SEC filing is a financial statements, financial statement or other formal document submitted to the U.S. Securities and Exchange Commission (SEC). Public company, Public companies, certain insiders, and broker-dealers are required to make regul ...
s, business trends, and general economic conditions.
Technical analysis In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and Quantitative analysis (finance), quantitati ...
studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends based on historical performance, regardless of the company's financial prospects. One example of a technical strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns and is also rooted in
risk management Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as ''the effect of uncertainty on objectives'') followed by coordinated and economical application of resources to minimize, monitor, and con ...
and diversification. Additionally, many choose to invest via passive
index fund An index fund (also index tracker) is a mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, ...
s. In this method, one holds a portfolio of the entire stock market or some segment of the stock market (such as the
S&P 500 Index The Standard and Poor's 500, or simply the S&P 500, is a stock market index In finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Produ ...
or
Wilshire 5000 The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all American-stocks Stocks are feet restraining devices that were used as a form of corporal punishmen ...
). The principal aim of this strategy is to maximize diversification, minimize taxes from realizing gains, and ride the general trend of the stock market to rise. Responsible investment emphasizes and requires a long-term horizon on the basis of
fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, Liability (financial accounting), liabilities, and earnings); health; and Competition, competitors an ...
only, avoiding hazards in the expected return of the investment.
Socially responsible investing Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a p ...
is another investment preference.


Taxation

Taxation is a consideration of all investment strategies; profit from owning stocks, including dividends received, is subject to different tax rates depending on the type of security and the holding period. Most profit from stock investing is taxed via a
capital gains tax A capital gains tax (CGT) is the tax on profits realized on the sale of a non-inventory asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible ...
. In many countries, the corporations pay taxes to the government and the shareholders once again pay taxes when they profit from owning the stock, known as "double taxation".


See also

*
Equity crowdfunding Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital market A capital market is a financial market in which long-term debt (over a year) or Eq ...
*
List of stock exchange trading hours This is a list of major stock exchanges. Those futures exchanges that also offer trading in security (finance), securities besides trading in futures contracts are listed both here and in the list of futures exchanges. There are sixteen stock ex ...
*
List of stock exchanges This is a list of major stock exchanges. Those futures exchanges that also offer trading in security (finance), securities besides trading in futures contracts are listed both here and in the list of futures exchanges. There are sixteen stock ex ...
* List of stock market indices * Modeling and analysis of financial markets * Securities market participants (United States) *
Securities regulation in the United States Securities regulation in the United States is the field of Law of the United States, U.S. law that covers transactions and other dealings with Security (finance), securities. The term is usually understood to include both federal and state-level re ...
*
Stock market bubble A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation. Behavioral finance theory attributes stock market bubble ...
* Stock market cycles *
Stock market data systems Stock market data systems communicate market data—information about securities and stock trades—from stock exchanges to stockbrokers and stock traders. History The earliest stock exchanges were in France in the 12th century and in Bruge ...


References


Further reading

* * * {{DEFAULTSORT:Stock Market Private sector Financial markets Capital (economics)