The Stock Market

• Session 3 covers the stock market with sections on:
• Stocks as primary assets
• Stock indices and ETFs
• Stock attributes
• Trading and Efficiency
• Investor behaviour.

Introduction

• Companies are able to raise external funds by going on financial markets.
• Companies can raise capital via bonds to create debt, or issue shares as ownership.
• All shares issued by publicly held organizations are part of the stock market exchange.
• Stock market exchanges exchanges are heavily regulated; the regulations put in place are designed to govern the market participants and the way the transactions are executed.
• Stock market exchanges facilitate companies' access to capital, enabling their development and expansion.
• Exchanges allow investors to profit from stock investments through trading shares of companies.
• Stock prices fluctuate due to trading activity and the balance of supply and demand.
• Stocks can be risky because prices fluctuate over time.
• Stock market sensitivity can be affected by the economy, geopolitical situations, and external incidents (earthquakes, pandemics).
• Stock market activity has grown over time.
• In 2021, global equity issuance was $1,042 billion.
• US equity issuance in 2021 was $436 billion.
• Stock market trades can be subject to risks.
• External events can change prices with no certainty.
• Stock prices may drop significantly during stock market crises and crashes, which hinder economic development.
• Geopolitical happenings impact stock markets.

Stocks as Primary Assets

• Stock are securities grant ownership in a company.
• The shareholder can receive dividends if the company performs well.
• Two primary stock types gives shareholders individual rights.
• Common stock grants dividends, but the amounts depend on company policy.
• Holders of common stock have the right to vote.
• Various classes of common stock (A, B, etc.) delineate differences in dividends and voting rights.
• Preferred stock receives stable and fixed dividends.
• Preferred stock have no voting rights.
• Holders of preferred stock have priority on asset claims before common stockholders.
• Investors offer equity capital to companies with opportunity for growth when buying stocks.
• When a company decides to "go public," it uses the primary market to raise capital.
• The primary market is used to issue stocks for the first time.
• Twitter went from an initial public offering in 2013 to delisting in 2022.
• Twitter’s IPO launched on November 7, 2013 with a price of $26/share.
• Twitter’s closing price was $44.90 per share (73% on the first trading day).
• Elon Musk finished the acquisition of Twitter on October 27, 2022, at $54.20 per share.
• To list on the stock exchange an investment bank leads the company to make an Initial Public Offering (IPO).
• Investment banks sell shares to institutional and retail investors after a cost.
• Investors sell and buy stocks on the secondary market.
• Stock tradings are visible on order books.
• Market capitalization helps differentiate stocks.
• Market capitalization represents the size of the company and affects stocks' growth, volatility, and liquidity.
• Apple is number one in market capitalization at the world level
• LVMH is number twelve in market capitalization at the world level.
• Stock market indexes like the S&P 500 and Nikkei 225 are useful indicators.
• Capitalization and sector specific indexes are types of indices.
• Buying shares, purchasing stock, and buying individual stock in the correct proportions are methods to buy a stock index.
• Potential dividend and stock price appreciation are sources of stock return.
• Stocks have more risk than bonds because dividends are uncertain.
• Stocks can be unpredictable, and price can decrease.
• Stockholders are residual claimants meaning debt claims are typically satisfied before equity holders.
• When buying a stock the shareholder incurs risks with money.
• Market risk is the highest risk when resulting from stock price fluctuations and lower price drops.
• The volatility of stocks can be calculated using standard deviation.
• Liquidity risk considers cost and tradability of share.
• Liquidity is the ability to buy or sell stocks quickly.
• Tightness indicates spread prices on the market.
• Depth indicates the quantities avalible at best prices.

Stock Return

• Buying shares at a lower price then selling at a higher price leads to profit.
• Returns are a relative price, the higher return is usually riskier.
• Stock price is found with the the present value of anticipated future dividends.
• Future dividends are estimated by analysts.
• The constant rate of income affects the number of shares.
• Discount rate is required by investors.
• Volatility is a standard deviation of the return.

Better Investing

• New framework of investing should consider factors such as the environment and social performance.
• Investing that includes Environmental Social and Governance (ESG) , Socially Responsible Investing (SRI), and Impact Investing are examples.
• Investment performance can be evaluated by social, governmental influence.
• Socially Responsible Investment eliminates or contribute to ethical considerations.
• Impact Investing means making returns from improvements of social or environmental impacts.

Stock Markets, Trading, Efficiency, and Investor Behaviors

• Analyzing stocks can be fundamental or technical.
• Fundamental analysis defines the value of fairness.
• Technical analyses relies on trading trends
• Trading uses an exchange model for buyers and sellers.
• The New York Stock Exchange (NYSE) was created in 1792 and uses to stock trades.
• Transparency, cost reduction, faster execution and after-hours trading are advantageous for electronic communication networks.
• The Electronic Communication Networks help speedy trading through computer assistance.
• Algorithmic trading uses trading methods automatically through computers.
• Algorithmic methods allow investors to first make a profit.
• The difference between algorithmic trading and High Frequency Trading (HFT) is the speed of trades.
• An arbitration chance is apparent when a product has high price on exchange A and a low price on exchange B .
• An arbitration plan has the investor buying a cheap share on exchange A and immediately selling on exchange B.
• Prices level due to supply and demand.
• HFT allows traders to make quick profits while also decreasing risk. 
• Flash crashes are destabilizing and happen frequently.
• Publicly available information affects the cost of stocks. 
• Random walk says it could be arbitrage if any unexploited arbitrage opportunity can be found quickly.
• Efficient market theories (EMH) say that stocks will change in value quickly.
• Market inefficiency is a listed anomaly that can provide empirical evidence for EMH such as, effect January effect, reversion, market overreaction.
• Cognitive and behavioral bias can result in the violation of EMH
• Mispricing can result in issues from decision making.
• Cognitive biases can be anchoring bias or other issues. 
• Portfolio management depends on EMH's rate.
• Actively managed portfolios lead to better trade opportunity, which may not be correct for current market.