An equity market is a cluster of buyers and sellers of stocks, which represent ownership claims on businesses. ‘Stocks’ may include securities listed on a public stock exchange, or stocks that are only traded privately. Examples of private stocks include shares of private companies which are sold to investors through equity crowdfunding platforms.
Stock market and share market are other names for an equity market. An equity market is not a physical facility or discrete entity. Stock exchanges list shares of common equity as well as other security types like corporate bonds and convertible bonds.
In contrast, a stock exchange is a physical entity, a designated place. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus acting like a marketplace. Stock exchanges provide real-time trading information on the listed securities, facilitating price discovery. Examples in India include the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).
In simple terms, an equity market can be viewed as a market where the buyer and seller of a stock meet.
What is a share/equity?
Before understanding equity markets, we need to know what the underlying term ‘equity’ means. Equity, in simple terms, can be defined as the value of the shares issued by a company. To put it simply, equities are stock or shares of a company. A stock or a share refers to the individual blocks that make up the equity of a company. Anybody who hold a stock/share of a company owns a piece of that company.
Categorization of equities
Stocks are classified in many ways. One is by the country where the company is based. For example, a company may have its base in the USA (like Apple), so it may be considered as part of the US stock market, although its stock may also be traded on exchanges in other countries.
Size of stock markets in the world
As of 2017, the size of the world stock market (also called as ‘total market capitalization’) was about US$79.225 trillion. Among individual countries, the largest stock market was the United States, followed by Japan and the United Kingdom. As of 2015, there are 60 stock exchanges in the world with a total market capitalization of $69 trillion. Of these, there are 16 exchanges with a market capitalization of $1 trillion or more, and they account for 87% of global market capitalization.
What is trading?
The buying and selling of stocks that takes place in an equity market is called trading. An interested buyer bids a specific price for a stock, and an interested seller asks a specific price for the same stock. Buying or selling at the market means an individual will accept any ask price or bid price for the stock. When the bid and ask prices match, a sale takes place.
Importance of equity markets
The equity market is one of the most important ways through which companies can raise capital, along with debt markets. This allows businesses to become publicly traded and raise additional financial resources for expansion of their operations by selling shares of ownership of the company in a public market, i.e. the equity market. The liquidity that a stock exchange affords the investors enables the holders of stocks to quickly and easily sell them.
The price of stocks and other assets is an important part of the dynamics of economic activity and can influence the social mood of a country. A country where the equity market is on the rise is an emerging economy. The equity market is often considered to be a major indicator of a country’s economic might and development.
Rising stock prices, for instance, tend to be associated with increased business investment and it is true the other way around. Stock prices affect the wealth of households and their consumption patterns, thereby impacting the economy of the country in an indirect way as well. Therefore, central banks and market regulators (RBI and SEBI, respectively, in case of India) tend to closely monitor on the behaviour of the market. Financial stability is the raison d’être of central banks.
Bull and Bear markets
You might have read the terms ‘bull market’ and ‘bear market’ almost every other day if you glance through the finance/economy section of any newspaper. These terms are used to describe the behaviour of the market on a given day. When the economy is doing well, it results in a bull market. Stock prices are rising in general; unemployment rates are low, and GDP is high. Here, ‘bulls’ refers to the people who are optimistic and think that stock prices will rise.
When the economy is not doing well, conditions opposite to those mentioned before existing, and a bear market result. ‘Bears’ are those who think that stock prices will fall.
What is an equity/stock market crash?
A stock market crash is often defined as a sharp fall in prices of stocks listed on the exchanges. Apart from various economic factors, a reason for stock market crashes is also due to panic and public’s loss of confidence in the market. Often, stock market crashes mark the end of speculative economic bubbles.
There have been many such crashes that have resulted in the loss of billions of dollars and wealth erosion of investors. The number of people/entities involved in the stock market is ever increasing, especially since even pension/retirement plans are being privatized and linked to equities and other elements of the market. There have been several famous stock market crashes like the Wall Street Crash of 1929, the stock market crash of 1973–74, the Black Monday of 1987, the Dot-com bubble of 2000, and the Stock Market Crash of 2008. The repercussions of the last crash were felt strongly in many countries of the world, including India. This also resulted in loss of jobs on a large scale and many companies scaled back investment and hiring, further exacerbating the unemployment situation.
Equity market tips
After having gone through the previous sections, you might have realised that it is impossible to predict the behaviour of equity markets. And you are not entirely wrong. Since the behaviour of the equity market is based not only on the performance of the companies (whose stocks are being traded on the market) but on investor sentiment as well. We can also go so far as to say that investor sentiment is more dominant among the two. So, do not ever be fooled by any promises of sure-shot appreciation of your investment. A diligent study of the companies and market dynamics can help to a certain extent. If you do not have the time or the inclination, there is another way – mutual funds. Your risk is significantly reduced through this way, as the analysis of markets and choice of equities is delegated to professional fund managers. Through mutual funds, you can invest in the equity market and make use of the high returns provided by the equity market.