A hub in which shares of companies are issued and traded
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What is an Equity Market?
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.
The equity market is also referred to as the stock market and is one of the most important leading indicators of the market economy.It also plays a pivotal role in supporting a market-based economy since it is the bridge between providing capital to companies who require it and providing investments for investors who are seeking a return on their investment.
Understanding Equity Markets
As mentioned, equity markets are the hub that connects buyers and sellers of equities. Equity securities are initially listed on the markets through an initial public offering (IPO) and are subsequently traded among people on the secondary market.
The trading can be done either publicly – which are listed on public exchanges – or privately, where the issuances and trades are initiated through dealers instead of a centralized exchange. The use of dealers in the private market is the defining feature of OTC markets.
History of Equity Markets
Equity markets come with long-entrenched histories, with debt issuances dating back to the 1300s. The first stock market was established in Belgium in 1531. The exchange dealt primarily with promissory notes and bonds, but not with actual stocks.
Throughout the 1600s, the British, Dutch, and French governments gave charters to companies that included ‘East India’ in their monikers. The countries would take stakes in the profits from India and Asia by funding sea voyages that would bring back goods – although it was risky due to the abundance of pirates, poor weather, and faulty navigation.
Instead of bearing all the risk for themselves, ship owners would seek out investors to help fund voyages, and in return, provide investors with a percentage of the profits should the voyage be successful.
They were the earliest forms of limited liability companies (LLCs) that would last a single voyage. Shipowners could send their ships without bearing the risk for themselves, and investors could diversify their risk by investing in multiple different ships and voyages.
The East India companies eventually began paying dividends from the proceeds collected from multiple voyages instead of creating single-time LLCs for each voyage. It was the first form of joint-stock companies in which the companies could demand more capital, build larger fleets, and provide larger returns for investors.
Top Equity Exchanges
Some of the most well-known and largest equity markets are:
- New York Stock Exchange (NYSE) – United States
- Nasdaq (NASDAQ) – United States
- Japan Exchange Group (JPX) – Japan
- London Stock Exchange (LSE) – United Kingdom
- Shanghai Stock Exchange (SSE) – China
- Hong Kong Stock Exchange (HKEX) – Hong Kong
- Euronext – European Union
- Toronto Stock Exchange – Canada
- Bombay Stock Exchange – India
Importance of Equity Markets
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.
1. Capital Raising
Equity markets facilitate the raising of equity capital. This is important for entrepreneurs who have a business idea but do not have the capital on-hand to start the business themselves.
Banks are debt investors who are unlikely to provide a loan to these businesses without collateral or an abnormally high return. Therefore, it is effective for these entrepreneurs to give up a stake in their business in exchange for the capital provided.
Equity markets allow these businesses to access the deepest pools of capital since they do not have to seek out individual investors – the investors are brought to them through the network of investment banks and financial exchanges.
2. Liquidity
Equity markets also provide liquidity for the markets. Liquidity refers to the ease of which an asset can be turned into cash. For example, checking accounts are the most liquid, and a painting will be illiquid.
Since equity markets are a centralized hub for buyers and sellers, it is easy to find someone who is willing to buy or sell your equity securities, and you can readily convert your securities to cash.
Equity markets are powerful pricing mechanisms since they reflect the immediate underlying supply and demand from millions of buyers and sellers across the globe. High demand and increased buying activity for stocks cause prices to rise, while low demand and increased selling activity for stocks cause prices to decline.
3. Investment Options
Equity markets provide a slew of investment options for investors. Investors can customize their risk profile and get exposure to different companies and industries by having the option to pick different equity securities.
Equity markets also provide the main alternative to debt investments, which is beneficial for investors with higher risk tolerance.
Additional Resources
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
FAQs
Equity market is a place where stocks and shares of companies are traded. The equities that are traded in an equity market are either over the counter or at stock exchanges. Often called as stock market or share market, an equity market allows sellers and buyers to deal in equity or shares in the same platform.
What if you invested $1000 in Microsoft 20 years ago? ›
Currently, Microsoft has a market capitalization of $3.07 trillion. Buying $1000 In MSFT: If an investor had bought $1000 of MSFT stock 20 years ago, it would be worth $16,279.07 today based on a price of $413.00 for MSFT at the time of writing.
How many stocks should I own with $100 K? ›
One rule of thumb is to own between 20 to 30 stocks, but this number can change depending on how diverse you want your portfolio to be, and how much time you have to manage your investments. It may be easier to manage fewer stocks, but having more stocks can diversify and potentially protect your portfolio from risk.
What is an equity market best described as? ›
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.
What is equity short answer? ›
Equity is the amount of capital invested or owned by the owner of a company. The equity is evaluated by the difference between liabilities and assets recorded on the balance sheet of a company.
What is the aim of the equity market? ›
Equity markets facilitate the raising of equity capital. This is important for entrepreneurs who have a business idea but do not have the capital on-hand to start the business themselves. Banks are debt investors who are unlikely to provide a loan to these businesses without collateral or an abnormally high return.
What would $1000 invested in Apple in 1990 be worth today? ›
However, as of the search date in 2024, the latest price is $185.58 [1]. Therefore, if you had invested $1,000 in Apple stock in 1990, it would be worth approximately $598,972.50 today.
How much is 200 dollars a month invested for 20 years? ›
If you can invest $200 each and every month and achieve a 10% annual return, in 20 years you'll have more than $150,000 and, after another 20 years, more than $1.2 million. Your actual rate of return may vary, and you'll also be affected by taxes, fees and other influences.
How much to invest to have $1 million in 30 years? ›
To save a million dollars in 30 years, you'll need to deposit around $850 a month. If you make $50k a year, that's roughly 20% of your pre-tax income. If you can't afford that now then you may want to dissect your expenses to see where you can cut, but if that doesn't work then saving something is better than nothing.
How to turn $100,000 into a million? ›
If you keep saving, you can get there even faster. If you invest just $500 per month into the fund on top of the initial $100,000, you'll get there in less than 20 years on average. Adding $1,000 per month will get you to $1 million within 17 years. There are a lot of great S&P 500 index funds.
There are two approaches you could take. The first is increasing the amount you invest monthly. Bumping up your monthly contributions to $200 would put you over the $1 million mark. The other option would be to try to exceed a 7% annual return with your investments.
How much money do I need to invest in stocks to make $3000 a month? ›
If you were to invest in a company offering a 4% annual dividend yield, you would need to invest about $900,000 to generate a monthly income of $3000. While this might seem like a hefty sum, remember that this investment isn't just generating income—it's also likely to appreciate over time.
Why do people invest in equity markets? ›
Owning stocks in different companies can help you build your savings, protect your money from inflation and taxes, and maximize income from your investments. It's important to know that there are risks when investing in the stock market.
Why should one invest in equity market? ›
Investing in equities allows you to earn a high return rate that can potentially beat the inflation rate by a large margin. This is how equities facilitate wealth creation in the long term.
How do you handle stop loss while trading in stocks? ›
Usually, the one who wants to avoid a high risk of losses set the stop-loss order to 10% of the buy price. For example, if the stock is bought at Rs. 100 and the stop-loss order value is set to 10% (Rs. 90), in such a case when the price reaches Rs.
What is the difference between stock and equity 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 an example of equity? ›
For example, let's say Sam owns a home with a mortgage on it. The house has a current market value of $175,000, and the mortgage owed totals $100,000. Sam has $75,000 worth of equity in the home or $175,000 (asset total) - $100,000 (liability total).
What is another name for the equity market? ›
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as stock that is only traded privately, such as shares of private companies that ...
Why is the equity market important? ›
Raising Capital: Most importantly, the stock market offers a platform where companies raise funds by issuing stocks. This capital is essential for business expansion, research and development, and other corporate initiatives. By selling shares to the public, companies gain access to these funds without incurring debt.
