Monique Frances B. RapaconBS Accountancy IIA
How the stock market operates
Stock market is a place where you can buy and sell shares in a company. When a company makes shares available for the public to buy they are called stocks and this is what you are trading. In most cases what you get when you buy a stock is a very small piece of the company. You are an owner of that company and as it grows the company should become more valuable which means that your stocks should become more valuable as well.
At least that is the theory but in practice there are other things that affect the stock price as well.
Like anything that is being bought and sold stocks are subject to the law of supply and demand, since the number of shares is limited when the number of people who want to buy those increases the price will go up. On the other hand when the number of buyers declines, or the number of people who want to sell increases then the price will go down.
In theory the demand is based on how profitable the company is but in practice it is based mainly on expectations of what the company will do in the future. Since the goal of investors is to get the maximum return on their investment the goal is to buy the stock before the price goes up and then to sell it before it goes back down. This means that you have to pay attention to what the value of the company you are buying stock in will be in the future.
This is why you often see the price of the stock go up before an earnings announcement and then decline even if the earnings were higher than expected. People bought the stock in the expectation of good earnings which drove the price up and then sold when the good earnings were announced since it was likely that the stock’s value had peaked, at least temporarily. One thing that confuses a lot of people when the invest in the stock market is that they don’t receive any of the company’s profits. After all as an owner you would normally expect to.
In a few cases you will, mainly with large well established companies, this is called the dividend which is paid on a per share basis. However with most companies they will retain the profits to help pay for future growth. Most investors are more interested in growth than in receiving dividends however there is a school of thought that you should invest in companies that pay dividends. The choice of course will depend on your investment goals.
How bond market operates
The term “Bond Market” is really a very general term. In reality, there are many different bond markets and these markets are a bit less organized and structured than major stock markets. A market is basically a place where buyers and sellers meet to exchange money for a product or service. When it comes to the bond market, the product is the bond. Bonds are simply a way for governments and companies to borrow money. Instead of borrowing money from a bank, a company or government can sell bonds to a large group of investors to raise the funds it needs to operate or grow. Issuing a bond is usually less expensive than a bank loan and tends to offer more flexibility.
The majority of bond trading is done between institutions. As an example, a client of mine may ask me to buy them a bond. I would then call an institution and tell them I had an order for XYZ bond. This institution would either look for that bond from another institution or they may have this bond in their own bond inventory. A price would be quoted for that particular bond and the investor would then choose whether or not they wanted the bond at the quoted price.
Depending on the number of bonds being bought, sometimes the price can be negotiated. On the other hand, If a client came to me asking to sell a bond, the same process would be followed in reverse. I would call an institution and tell them I had an XYZ bond to sell and they would either buy it for their own inventory or contact other institutions to see if someone else wanted to buy the bond. Then, we would be quoted a price we would receive for selling the bond.
Cite this Konseptong Papel
Konseptong Papel. (2016, May 04). Retrieved from https://graduateway.com/konseptong-papel/