This research tries to provide information about the Stock Market without stopping to make judgments about whether it is good or not; Without a doubt, the path that any company has to follow to reach its goal is to be in harmony with those who govern the world market, understanding harmony as the act of companies to provide goods and services at the level of their competence.
The Stock Market creates a parameter to compare and analyze the situation of a company concerning its competition, for this, there are Financial Indices, it is also intended to guide in a very broad way about the meaning of terms very typical of the Stock Market and to identify the main terms used.
This document is expected to guide university students or anyone interested in knowing what the Stock Market is and its interesting behavior.
- Make known simply and practically the way in which the stock exchanges carry out their mission, as well as their internal functioning in the different areas in which they operate.
- Identify and become familiar with the terminology used by people who work in this area to broaden our knowledge.
- To assume the knowledge of the stock market as a real opportunity for our companies to be able to acquire liquidity and to enter them in the future with solid knowledge.
3. What is the stock market?
The stock market is a private entity constituted as a public limited company, which is officially regulated, where operations of purchase and sale of shares, obligations, bonds, investment certificates, and other securities registered on the stock market are carried out, where the plaintiffs are located. and securities offerors negotiating through their Stock Brokers.
They are important because through them there is a direct encounter between the people who have money and want to invest it, called investors, and the sellers of securities that can be the investors themselves or the companies that decide to sell securities in exchange for money (capital ) either to develop projects, for working capital or to refinance debts.
3.2. Historical review of the stock market
The Origin of the Stock Market as an Institution occurs at the end of the 15th century in the medieval fairs of Western Europe, where the practice of securities and securities transactions began. The term “Bag” appeared in the city of Bruges (Belgium) at the end of the 16th century, merchants used to meet, to carry out their business, in an enclosure owned by Van der Bursen. From there would derive the denomination of “bag”, which remains in force today.
In 1460 the Antwerp Stock Exchange was created as the first stock exchange institution in a modern sense. The London Stock Exchange was created in 1570 and the Lyon Stock Exchange in 1595. The New York Stock Exchange was born in 1792 and the Paris Stock Exchange in 1794, successively other Stock Exchanges appeared in the main cities of the world. The first officially recognized Stock Exchange was that of Madrid in 1831.
4. What does the stock market do?
Its main function is the custody and administration of securities, as well as facilitating the settlement and clearing of operations carried out with securities on and off the stock market.
Facilitate transactions with securities and seek the development of the stock market by providing the necessary infrastructure to put suppliers and applicants of the securities listed on them in contact.
Serve as a place of negotiation of securities through the wheels (public meetings of negotiation in the Stock Market) established for it.
Register titles or securities to be traded on the Stock Exchange, previously reviewing the legal requirements established for this purpose.
Maintain an organized market in operation that offers its participants conditions of security, honor, correctness, transparency (information), and price formation by the purchase and sale of securities and the regulations established for that purpose.
Regulate and monitor the actions of its members and ensure compliance with legal provisions that allow the favorable development of the market and stock market operations.
They give liquidity to investments, understanding liquidity as the ease with which an asset can be sold and the cost incurred to dispose of the asset, thus a higher cost implies less liquidity.
They negotiate risk: The financial instruments that are negotiated in the stock markets, are in effect “instruments with risk”, for example, a share of a company, if the company is successful, the action will gain value, if the company fails, the action will lose its value. Who is willing to assume the risk of the company? The person who buys the action.
Logically, all these risks have a counterpart: the rate of return.
They form prices since it helps companies to value projects and determine if they are viable or not, it helps investors to value their investments.
5. How does the stock market work?
When talking about the Stock Market, the first thing that comes to mind is the word “Shares”, since large companies work and move their capital with shares.
To know the stock markets it is important to know some terms used that we will see below.
It is concluded that a series of stock market transactions are carried out in the Stock Market, whose main function is to provide a safe environment in which operators can carry out their operations.
Markets have licensed members, operating procedures, and regulations that govern how trades are conducted and disputes are resolved. In addition, the bags perform the following functions:
- They regulate the list of titles.
- Promotes a capital market, encouraging the participation of the largest number of people, through the purchase and sale of all kinds of transaction securities.
- It holds Trading Sessions daily, providing the necessary technological infrastructure and facilitating communication between the agents representing the Stock Brokerage Houses and the issuers of securities and investors.
- One of its main objectives is the efficient channeling of internal savings towards investment needs that require additional financial resources, be they public or private.
- It offers investors the necessary and sufficient security conditions of legality and security in the transactions carried out through it, based on its internal regulations.
- They adopt the appropriate measures to promote savings and investment, allowing greater shareholding, and ensure compliance with the rules to maintain seriousness and trust in securities, adjusting operations to the laws, regulations, and the strictest standards of ethics.
- It keeps a record of quotes and effective prices of securities and has available to the public information on everything that happens in the stock market.
- They provide facilities for the settlement of operations.
Trading Systems in the Stock Market
In general, there are two trading systems in the stock markets, one is based on quotes and the other on orders.
The systems that are based on the Quote require the participation of market makers who continuously offer buy and sell prices of listed securities. Market makers give their prices through a system of screens where brokers and investors can find the best prices. Quote-based systems provide liquidity to the markets, but they are more expensive to trade because the difference between the buy and sell price ( spread ) is relatively larger.
Systems based on orders received are based on a continuous auction system. In this system, investors or the brokers that represent them send buy and sell orders to a centralized location.
Once the orders are entered into the system, they are matched, executed, or canceled according to the client’s instructions. It is cheaper to invest in this type of system since the spread is lower and on the other hand, the orders are delivered before the prices are determined.
These systems based on quotes and orders are particular to Secondary Markets. In general, a transaction within the stock market can be classified depending on the term for which it has been carried out or by the type of operation carried out, this is how the stock market has a basic classification:
In the money market, all those financial activities that promote short-term credit are carried out. Its main institutions are Commercial Banks.
The capital market is that financial activity that promotes medium-term and mainly long-term credit. Its main institutions are Development Banks, Mortgage Banks, Housing Institutions, and especially the Stock Markets. There are three types of Capital Markets, namely:
- Money Markets: They are characterized by borrowing and lending large amounts of money for short periods, usually from one day to twelve months.
- Debt Markets: They are characterized by instruments that generally pay interest for a fixed loan period ranging from twelve months to thirty years. For this reason, these markets are also known as fixed-income markets, in which the loans are medium and long-term.
- Stock Markets: In these markets, loans are also medium and long-term, but in this case, interest is not paid to the lender. Instead, the organization borrowing the money issues shares to investors, who become part owners of the organization. Investors receive or do not receive dividends on their shares depending on the results of the organization.
There are radical differences between equity and debt markets from the perspective of issuers and from that investors. An organization that issues shares is selling shares in the company and its assets. Investors who own these shares do not get their money back but expect a share of the profits in return. A debt-issuing organization is trying to get a loan and will have to pay it back in full, with interest, within a certain period. Investors know what interest they will receive and that their initial investment will be returned to them.
It is generally considered that those who invest in shares have more risk than those who invest in debt since they place their money in partial ownership of an organization that they do not know how it will work, whether good or bad. These investors expect a higher rate of return over the long term, with a combination of growth in the value of their shares and dividend income from those shares. If the organization they invested in fails, the investor may lose their initial investment.
Investors in the debt market are looking for more security or more predictable payments. They lend their money to a government or a large international corporation with considerable assurance that the organization in question will continue to exist for the life of the loan and will not default on the debt. Generally, if a company goes into liquidation, it first has to pay off its debts before paying its shareholders. In exchange for this security, investors accept a lower return on their investment than they might earn by making higher-risk investments, such as stocks.
Markets based on the Form of Operation of the stock market
Primary Securities Market or Issuances
It is where the supply and demand for securities take place when a company is listed on the stock market (for example, when a public company is privatized). There is a direct relationship between the issuer and the subscriber of the securities issued for the first time to the public.
Primary Markets exist as a means for organizations to raise funds in the public markets. Different stock markets around the world have different rules and procedures for an organization to list and float on the primary market, but almost all exchanges follow the same general principles and the rules and procedures differ in detail.
The Planning for the issuance of shares includes very important and detailed aspects such as the strategic calculation of the moment that will affect the launch date, setting the price of the shares, and choosing the members that will integrate the team in charge of carrying out the Flotation Process. and Quotation must include at least a sponsor, a stock and exchange agent, an accountant, a legal representative of the company (a lawyer), and a public relations specialist.
6. Main participants in the stock market
The commission agents
They are members of the Stock Markets and in turn, the only ones authorized to act on them. They are professionals specialized in the purchase and sale of securities, dedicated to carrying out, on behalf of another person (based on an order), operations in their name according to the opportunities offered by the market, indicating precisely to their clients the best alternatives. to manage your money. The main task of commission agents is to advise their clients in making decisions on how to make their investments.
The purpose of investment companies is the acquisition of selected securities and documents according to risk diversification criteria, using for this purpose resources from the placement of shares representing its capital stock among the investing public.
Securities rating companies
These are companies whose purpose is to present an opinion regarding the degree of risk related to a debt issue.
The authorities establish the regulations that should govern the healthy operation of the stock market. They also supervise and monitor compliance with these regulations, imposing sanctions on those who violate them.
The issuing companies are companies that are in compliance with the corresponding regulatory provisions and offer to the Stock Market the representative titles of their social capital (shares) or securities that cover a collective credit at their expense (debentures).
To protect the interest of investors, issuing companies periodically provide financial and administrative information that allows for estimating their probable returns and the soundness of their titles. In simpler terms, an issuer is a company that makes its securities available to the Stock Market as a legally established and for-profit company.
An Investor is a Natural or Legal Person who contributes his financial resources to obtain a future benefit.
A share is a variable income title that allows any person to own a part of the company that issues the title, making him a shareholder of it and granting him political and economic rights. The investor must consider the investment in shares as medium and long-term, however, being able to sell it at the desired moment takes into account the liquidity of the market. Once a company has registered its shares on the Stock Market, the sales or purchases made must be made on the Stock Market through a Brokerage Company.
7.2 Types of Shares
They grant the right to participate with voice and vote in the company’s shareholders’ meetings and to receive dividends from it. They are issued to link new shareholders to finance and develop the company, without the need to incur financial expenses (borrow). Preferred shares: The owner of these shares has the right to receive a minimum dividend with preference over ordinary shareholders and preferential reimbursement of his investment in the event of the dissolution of the company. This shareholder does not have the right to vote. This alternative allows the issuer to capitalize on his company without losing control of it since it offers the investor a dividend defined by the company, in exchange for not interfering in its management.
In addition to the benefits of an ordinary shareholder, these shares grant other economic rights such as the preferential right for redemption in the event of liquidation. To issue privileged shares, once the company has been incorporated, it is an essential requirement that the General Assembly of Shareholders approve the issuance of the same with a favorable minimum of 75% of the subscribed shares. This requirement will not take place if the issue occurs during the execution of the company constitution contract.
7.3 Values of a share
- Nominal value: It is the amount of money represented in the title at the time of issuance.
- Equity value or intrinsic value: It is also called equity or book value. It is the result of dividing the net worth of the company by the number of outstanding shares of the same.
- Market value: It is the price of the share in the public stock market.
The capital market
In economic matters, a market is a place or area where buyers and sellers meet to carry out exchange operations, it is made up of a series of participants who buy and sell shares and credit instruments to offer a range of financial products that promote internal savings and sources of capital for companies.
Capital markets are an ideal source of financing through the issuance of shares or debt securities, to keep the company’s capital structure balanced.
The stock market is vital for the growth and development of countries since it allows companies to gather resources to carry out new investment projects, optimizing their cost of capital and expanding the investment options available to the general public, providing the opportunity to diversify your investments to obtain returns commensurate with the levels of risk you are willing to assume.
- It facilitates the transfer of resources from savers or agents with excess liquidity to investments in the productive sector of the economy.
- Efficiently allocate resources to finance companies in the productive sector.
- Reduces the costs of selection and allocation of resources to productive activities.
- It enables risk diversification for participating agents.
- It offers a wide variety of products with different characteristics (term, risk, return) according to the investment or financing needs of the agents participating in the market.
8.3. types of markets
The capital market is divided into intermediate when the transfer of resources from savers to investments is made through institutions such as banks, financial corporations, etc., and not intermediated (or through instruments) when the transfer of resources is carried out directly through instruments.
8.3.1. The intermediated market
The intermediated market is the set of Institutions that act as intermediaries between agents with excess short-term resources and agents with resource needs, either to invest or finance themselves in the long term.
The intermediated market or banking system fulfills the following functions, among others:
- Receive deposits in current, term, and savings accounts.
- grant credits
- Discount and negotiate promissory notes, drafts, bills of exchange, and other debt instruments.
- Collect debts and make payments and transfers.
- Buy and sell bills of exchange
- Act as a transfer agent for any person and in that capacity receive and deliver money, transfer, register, and endorse stock titles, bonds, or other proofs of debt.
It is made up of:
Commercial Banks, Savings and Housing Corporations, Financial Corporations, and Commercial Financing Companies.
8.3.2. The unmediated market
It is the issuance, subscription and intermediation, and negotiation of documents issued in series or in the mass of which a public offer is made, which grant their holders rights of credit, participation, and tradition or representative of the merchandise. It is also known as the Instrument Market or Public Stock Market, because the transfer of savers’ resources to investment and financing activities is done through instruments such as fixed-income securities (CDT, bonds, papers commercial), Equity securities (Shares, BOCAS, etc.), Derivatives, Futures, etc.
The non-brokered market has the following benefits:
- It reduces the transaction costs of resources and allows companies to obtain financing resources at lower costs since the resources are obtained directly from investors. On the other hand, the profitability of investors increases, since the intermediation margin disappears to a great extent.
- It allows investors to diversify their portfolio, with different types of terms, risk, and profitability, according to their preferences.
- It allows the decentralization of the capital of the companies.
- It allows restructuring the composition of the company’s debt, according to its needs and possibilities.
The non-intermediated market is made up of the over-the-counter market, better known as OTC, and the Stock Market. The OTC Market is where all the negotiations with securities carried out outside the Stock Exchanges are carried out, on the securities registered in the National Registry of Intermediaries.
Persons registered as intermediaries in the National Registry of Securities and Intermediaries may carry out negotiations in the over-the-counter market. Negotiations must be registered through a centralized information mechanism for transactions authorized by the entity in charge of monitoring the stock markets. The Stock Markets are the place where stock brokers conduct business for their clients in an open, controlled, and monitored market during the trading session. Its objective is to put applicants and providers of financial resources in contact through intermediaries (commission agents) specialized in the negotiation of securities. Stock brokers are the best connoisseurs of the public stock market and can get the best opportunities for their clients within the market.
- The stock market as a private entity is the goal that every company that has a strategic growth plan must reach.
- The stock markets are important considering that there is direct contact with investors or people who have the intention and sufficient investment capacity to develop projects and businesses, or refinance debts; This allows us to make ourselves known in the market and carry out our ideas.
- The contact of our company with the stock market is useful to establish the real and commercial value of our company.
- Expands the existing investment portfolio to the public, allowing them to diversify them, obtaining returns commensurate with the risks they are willing to assume.
- The stock market could be interpreted as a financial game, where we can acquire large amounts of money using our skills, but we can also be ruined at any moment.