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A stock market consists of several different entities. First of all…
The Share/Stock Itself
The word share and stock often mean the same thing. However if you were to clearly define the two:
- stock is the capital raised by a company through the issue of shares
- a share is a single unit of stock
Buying a share in a company will allow you to share their profits if the company grows and performs well. Shares are bought and sold in stock exchanges…
Stock Exchanges
Stock exchanges are where ‘it all happens'. These are buildings that provide platforms for stock brokers and traders to buy and sell shares. For someone to buy or sell shares in a company at a stock exchange, it must be officially listed there. The NASDAQ for example contains around 3,200 listings.
Stock exchange examples include;
London stock exchange (LSE),
National Association of Securities Dealers Automated Quotations (NASDAQ),
New York stock exchange (NYSE),
Tokyo stock exchange (TSE)
Market Makers
Market makers are companies that quote you the buy (ask) and sell (bid) price of a share. They work inside the stock exchanges and their quotes will often look like this;
Bid $30.10 Ask £30.12
The gap of 2 cents between the bid and the ask is where the market makers obtain their profit.
Brokers
Brokers are the middle men between you and the market makers as individuals can not directly deal with the market makers. To trade shares you must open up a brokerage account with a broker. They normally charge you between US $2-12, UK £8-13 to buy and sell a block of shares.
Indexes
Indexes measure the performance of a group of stocks and give a strong indication of the direction shares in the market are going. Examples of common indexes include
FTSE 100 (Financial Times Stock Exchange 100)
S&P 500 (Standard & Poor's 500)
DJ30 (Dow Jones 30)
You might be thinking how you determine what companies make it into the top 30, 100, 500 etc. Take the FTSE 100 for example; the top 100 companies are the 100 most capitalised companies in the UK. This could also mean the 100 companies whose share prices are most likely to influence the direction of the market.
Sectors
Stock markets are also split up into different sectors, this is to help investors and financial analysts work out which sectors are performing well and which ones should be left alone. The 11 most common sectors are;
Basic Materials
Capital Goods
Communications
Consumer Cyclical
Consumer Staples
Energy
Financial
Health Care
Technology
Transportation
Utilities
There are also indexes for each sector to help investors quickly monitor the best performing sectors.
Bull/Bear Market
Lately you might have often heard the phrase “were in a bear market”, bear simply refers to a falling market and bull refers to a rising market. A market will usually get labelled a bull or bear market after it has risen or fallen by 20%.
There is a general overview of the stock market for you, if there are any terms/concepts you don't understand then you will most likely find them explained on my website listed below.
Unless you are involved in the stock market, or understand the jargon you may not understand what the term bull market or a bear market means. Stock prices are reflected in what is known as the financial market trends. These trends can best be demonstrated in a price chart and the purpose is to pick the best investment and trading opportunities. You may ask what drives these trends. Buyers and sellers are the driving factor, they are also known as the bulls and the bears.
When we say that it is a bull or bear stock market we are talking about the driving force behind the market. The bulls are the buyers so that would make the sellers the bears. Incidentally when we use the term bull or bear we could also be talking about specific securities and sectors.
A bull market is a market that is associated with investor confidence. As a result of this increase in confidence investors are more likely buy in anticipation of making a capital gain. The most memorable and longest running bull market was seen in the 1990s. This was the time when the U.S. and other global markets saw their fastest growth spurt ever.
Just to recap, in a bull stock market the investors are buying. They are looking for more ways to increase their capital gains. So then if it is a bear market, the opposite would be true. Investors will be more pessimistic about buying and are more inclined to sell their stocks to cut their losses. A bear stock market does not come about from a small decline, but a considerable drop in prices over a prolonged period of time. From 1930 to 1932 was probably the most infamous bear market in history. This bear market was the beginning of the Great Depression. There was a much less severe bear market from 1967 - 1983, which included the energy crises of the 1970s and the unemployment surge in the 1980s.
As we already stated a bear stock market does not come about as a result of a small dip in stock prices, it indicates sizable fall in prices over a prolonged period of time. It is most commonly accepted that in order for the stock market it to be considered a bear market there has to be a price fall of at least 20% in a key stock market index from a recent peak that happens over at least two months.
To summarize a bull stock market has investor looking to buy to increase their capital gains. They will be seeking out the best investment opportunities. A bear stock market has these same investors looking to sell their stocks so they can minimize their losses. Historically the U.S. has been a bull market. That is one of the factors why we have been considered the land of opportunity.