Equity Market: What It Is, How It Works, Types, and Examples (2024)

What Is an Equity Market?

An equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy. It gives companies access to capital to grow their business, and investors a piece of ownership in a company with the potential to realize gains in their investment based on the company's future performance.

Key Takeaways

  • Equity markets are meeting points for issuers and buyers of stocks in a market economy.
  • Equity markets are a method for companies to raise capital and investors to own a piece of a company.
  • Stocks can be issued in public markets or private markets. Depending on the type of issue, the venue for trading changes.
  • Most equity markets are stock exchanges that can be found around the world, such as the New York Stock Exchange and the Tokyo Stock Exchange.

Understanding an Equity Market

Equity markets are the meeting point for buyers and sellers of stocks. The securities traded in the equity market can either be public stocks, which are those listed on the stock exchange, or privately traded stocks. Often, private stocks are traded through dealers, which is the definition of an over-the-counter market.

When companies are born they are private companies, and after a certain time, they go through an initial public offering (IPO), which is a process that turns them into public companies traded on a stock exchange. Private stocks operate slightly differently as they are only offered to employees and certain investors.

Some of the largest equity markets, or stock markets, in the world are the New York Stock Exchange, Nasdaq, Tokyo Stock Exchange, Shanghai Stock Exchange, and Euronext Europe.

Companies list their stocks on an exchange as a way to obtain capital to grow their business. An equity market is a form of equity financing, in which a company gives up a certain percentage of ownership in exchange for capital. That capital is then used for a variety of business needs. Equity financing is the opposite of debt financing, which utilizes loans and other forms of borrowing to obtain capital.

Trading in an Equity Market

In the equity market, investors bid for stocks by offering a certain price, and sellers ask for a specific price. When these two prices match, a sale occurs. Often, there are many investors bidding on the same stock. When this occurs, the first investor to place the bid is the first to get the stock. When a buyer will pay any price for the stock, they are buying at market value; similarly, when a seller will take any price for the stock, they are selling at market value.

When a company offers its stock on the market, it means the company is publicly traded, and each stock represents a piece of ownership. This appeals to investors, and when a company does well, its investors are rewarded as the value of their stocks rise.

The risk comes when a company is not doing well, and its stock value may fall. Stocks can be bought and sold easily and quickly, and the activity surrounding a certain stock impacts its value. For example, when there is a high demand to invest in the company, the price of the stock tends to rise, and when many investors want to sell their stocks, the value goes down.

Stock Exchanges

Stock exchanges can be either physical places or virtual gathering spots. Nasdaq is an example of a virtual trading post, in which stocks are traded electronically through a network of computers. Electronic trading posts are becoming more common and a preferred method of trading over physical exchanges.

The New York Stock Exchange (NYSE) on Wall Street is a famous example of a physical stock exchange; however, there is also the option to trade in online exchanges from that location, so it is technically a hybrid market.

Most large companies have stocks that are listed on multiple stock exchanges throughout the world. However, companies with stocks in the equity market range from large-scale to small, and traders range from big companies to individual investors.

Most buyers and sellers tend to prefer trading at larger exchanges, where there are more options and opportunities than at smaller exchanges. However, in recent years, there has been an uptick in the number of exchanges through third-party markets, which bypass the commission of a stock exchange, but pose a greater risk of adverse selection and don't guarantee the payment or delivery of the stock.

Physical Exchanges

In a physical exchange, orders are made in open outcry format, which is reminiscent of depictions of Wall Street in the movies: traders shout and display hand signals across the floor in order to place trades. Physical exchanges are made on the trading floor and filter through a floor broker, who finds the trading post specialist for that stock to put through the order.

Physical exchanges are still very much human environments, although there are a lot of functions performed by computers. Brokers are paid commissions on the stocks they work. This form of trading has become rare and replaced by electronic communication.

Equity Market: What It Is, How It Works, Types, and Examples (2024)


Equity Market: What It Is, How It Works, Types, and Examples? ›

An equity market is a hub in which shares of companies are issued and traded. The market comes in the form of an exchange – which facilitates the trade between buyers and sellers – or over-the-counter (OTC) in which buyers and sellers find each other.

What is equity market and how it works? ›

Equity market, often called as stock market or share market, is a place where shares of companies or entities are traded. The market allows sellers and buyers to deal in equity or shares in the same platform. In the global context, equities are traded either over the counter or at stock exchanges.

What is an example of an equity market? ›

Some of the largest equity markets, or stock markets, in the world are the New York Stock Exchange, Nasdaq, Tokyo Stock Exchange, Shanghai Stock Exchange, and Euronext Europe. Companies list their stocks on an exchange as a way to obtain capital to grow their business.

What are the 4 types of share market? ›

The four types of share markets are the primary market (for new securities), the secondary market (for existing securities), the equity market (for stocks), and the derivatives market (for financial contracts based on underlying assets).

How many types of equity markets are there? ›

Equity markets comprise structured trading and investment and can be defined into two types of platforms, i.e., primary and secondary markets.

How does equity make you money? ›

Equity is important because it represents the value of an investor's stake in a company, represented by the proportion of its shares. Owning stock in a company gives shareholders the potential for capital gains and dividends.

How does equity work? ›

Equity is the difference between the market value of your property and the amount you still owe on your home loan. Property value minus Amount owed equals Equity. For example, if your home is worth $400,000 and you still owe $220,000, your equity is $180,000.

What is equity market in simple words? ›

An equity market is a platform for trading shares or stocks of publicly listed companies. It provides a space where buyers and sellers come together to trade shares in a transparent and regulated manner.

What are 5 examples of equity? ›

What are Equity Accounts? There are several types of equity accounts that combine to make up total shareholders' equity. These accounts include common stock, preferred stock, contributed surplus, additional paid-in capital, retained earnings, other comprehensive earnings, and treasury stock.

What is equity with simple example? ›

Equity can be calculated by subtracting liabilities from assets and can be applied to a single asset, such as real estate property, or to a business. For example, if someone owns a house worth $400,000 and owes $300,000 on the mortgage, that means the owner has $100,000 in equity.

How do you buy equity shares? ›

Procedure to Buy Shares Online
  1. Getting a PAN Card. A Permanent Account Number (PAN) is mandatory to buy shares online. ...
  2. Open a Demat Account. ...
  3. Open a Trading Account. ...
  4. Register with a Broker/ Brokerage Platform. ...
  5. You will also need a bank account. ...
  6. Get your Unique Identification Number (UIN)

What is the most profitable market to trade? ›

Day traders commonly choose the forex market for its low barriers to entry as well as exchange-traded funds. Long-term investors are often attracted to the commodities market and the market for contracts for difference.

Which type of trading is most profitable? ›

The defining feature of day trading is that traders do not hold positions overnight; instead, they seek to profit from short-term price movements occurring during the trading session.It can be considered one of the most profitable trading methods available to investors.

Which is the biggest equity markets? ›

The largest stock exchange in the world is the New York Stock Exchange. Other large stock exchanges include the Nasdaq, the National Stock Exchange of India, the Hong Kong Stock Exchange, the Singapore Stock Exchange, and the Shanghai Stock Exchange.

What is the difference between the equity market and the stock market? ›

The terms equity market and stock market are synonymous. Both refer to the purchase and sale of ownership shares in public companies through any of the many stock exchanges and over-the-counter markets in the U.S. and around the world. A share of stock represents an equity interest in a company.

What is equity and how do you buy? ›

An equity investment is money that is invested in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange.

What is the equity market in simple terms? ›

An equity market is a platform for trading shares or stocks of publicly listed companies. It provides a space where buyers and sellers come together to trade shares in a transparent and regulated manner.

What is the difference between stock and equity market? ›

Stock owners share in a company's success via dividend payments or price growth or both. Equity market is a broad term for many stock exchanges around the world that match buyers and sellers of stocks.

What are the main functions of the equity market? ›

Equity markets play an important role in a market-based economy. They provide capital raising, liquidity, and investment options. These important functions allow our economy to grow continuously, and they are the hallmark of capitalism.

How do you trade in equity market? ›

Four steps to start online trading in India
  1. Choose an online broker. The first step will be to find an online stockbroker. ...
  2. Open demat and trading account. ...
  3. Login to your Demat/ trading account and add money. ...
  4. View stock details and start trading.

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