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Introduction to the Market
Market Basics: A market is a dynamic platform where buyers and sellers interact to exchange goods, services, or financial assets.
Supply and Demand: Market prices are determined by the interplay of supply (quantity available) and demand (consumer interest and willingness to pay).
Diverse Markets: Markets vary, ranging from physical goods like groceries to financial assets like stocks and currencies, each with its unique characteristics.
Economic Impact: Markets play a vital role in economies, influencing resource allocation, wealth creation, and overall economic growth.
How the Market Works: Two Perspectives
The Primary Versus Secondary Market
Primary Market
In the primary market, new securities are issued and sold directly by the issuing company to raise capital. The main event in the primary market is the Initial Public Offering (IPO). During an IPO, a private company offers its shares to the public for the first time, transitioning from being privately held to publicly traded. Investors who participate in an IPO have the opportunity to purchase shares directly from the company at the IPO price. The funds raised from the IPO are used by the company for various purposes, such as expansion, research, or debt reduction. Another part of the primary market is private investment in public equity (PIPE). PIPE deals involve an investor agreeing to purchase the sales of the company, so when it turns public it can resell those shares for potential profit.
Secondary Market
Once the shares are publicly traded, they enter the secondary market. This is where investors trade shares among themselves, and the company is no longer directly involved in these transactions. The secondary market includes stock exchanges (NYSE, NASDAQ, etc.) and over-the-counter (OTC) markets. In the secondary market, investors buy and sell shares at prevailing market prices. The secondary market provides liquidity to investors, allowing them to easily enter or exit their positions.
Stock Market Order Types
order types.pptxMarket Participants
Individual Investors:
Regular people who buy and sell stocks for personal investment.
Motivations: Building wealth, achieving financial goals, and participating in market opportunities.
Traders:
Individuals or firms that buy and sell securities frequently to profit from short-term price movements.
Motivations: Capitalizing on market fluctuations, making quick profits, and exploiting arbitrage opportunities.
Institutional Investors:
Large entities managing significant capital, including mutual funds, pension funds, and hedge funds.
Motivations: Achieving long-term growth, generating returns for clients, and diversifying portfolios.
Market Makers:
Financial firms that facilitate trading by providing liquidity through constant buy and sell quotes.
Motivations: Earning bid-ask spreads, maintaining market efficiency, and reducing price volatility.
Investment Banks:
Financial institutions that assist companies in raising capital through IPOs and other financial services like Mergers and Acquisitions (M&A).
Motivations: Earning underwriting fees, advising clients on financial strategies, and facilitating capital raising.
The Impact of These Participants on the Market
Liquidity Providers: Market makers and institutional investors contribute liquidity, making it easier to buy or sell shares without significantly impacting prices.
Intrinsic Price of Companies: Traders and institutional investors help establish fair market prices through their buying and selling activities.
Market Efficiency: Market makers and traders contribute to efficient price discovery by bridging bid-ask spreads and reducing trading frictions.
Market Sentiment: Individual investors and traders influence short-term market sentiment through their buying and selling decisions, affecting short-term price movements.
Capital Allocation: Institutional investors allocate capital across various assets, influencing capital flows and shaping market trends.
Investment Opportunities: Investment banks play a key role in introducing new companies to the market, expanding investment opportunities for various participants.
Market Stability: Institutional investors like pension funds provide stability to markets through their long-term investment horizons, counteracting short-term volatility.
Initial Public Offering
Process
Preparation: The company prepares for the IPO by working with underwriters (investment banks) to determine the IPO price, assess demand, and fulfill regulatory requirements.
Roadshow: The company conducts a roadshow to promote the IPO to potential investors. It involves presentations and meetings to explain the company's business model, financials, and growth prospects.
Pricing: The IPO price is set based on investor demand and market conditions. It's usually higher than the internal valuation used in the last private funding round.
Offering: Shares are offered to the public, and investors who participate are allocated shares at the IPO price.
Listing: The company's shares are listed on a stock exchange, and trading begins. The stock price is determined by supply and demand in the secondary market.
Impact of an IPO
Capital Formation: Raises funds for growth and initiatives. Also ,raises fund through inorganic growth like mergers and acquisitions.
Enhanced Visibility: Increases brand recognition and credibility.
Liquidity for Investors: Provides an exit opportunity
Employee Incentives: Improves ease of equity based compensation.
Valuation Benchmark: Establishes a public market valuation.
Investor Participation: Allows retail investors to access early-stage companies.
Economic Growth: Contributes to job creation and economic expansion.
Subsequent Trading After the IPO
After the IPO, shares are traded among investors in the secondary market. The stock's price fluctuates based on market conditions, company performance, and broader economic factors. Investors can buy shares from other investors or sell their own shares. The secondary market provides ongoing opportunities for investors to trade and profit from price movements.
Market Indices
Article on Market Indices (Click on the photo)
Article on What is a Index? (Click on the photo)
The Creation of Indices
Investment Strategies
Investing strategies cater to diverse investor needs, ranging from value and growth investing to income-focused approaches, passive index tracking, active management, momentum plays, and ethical considerations. The choice of strategy hinges on factors like risk tolerance, time horizon, and personal beliefs, allowing investors to navigate financial markets with approaches tailored to their unique goals.
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