In the stock market, shares of a company are bought and sold by investors in exchange for money. Shares represent an ownership stake in the company and usually carry voting rights and a percentage of revenue. At first, the term “stock” referred to any certificate representing part ownership of an enterprise, such as a ship or bond. The first corporation to issue stocks was the Dutch East India Company in 1602. Today, businesses can raise money by issuing stocks to public investors or through private transactions with large corporations or wealthy individuals that want to gain exposure to a particular industry. Stock ownership has become an important means of wealth creation. An IPO or Initial Public Offering is one form of stock market transaction.
Some fundamental factors affect a company’s share price: management, industry, product sales and profitability expectations, company size, and market capitalization. The ideal time to hold a position in a company before selling is related to the logarithm of time (log about time). It translates into an optimal holding time between 1 month and one year. A company’s share value in the stock market is determined by its net asset value (NAV) and market capitalization. The current price of a stock divided by the NAV is called the P/E or Price/Earnings ratio. A low P/E indicates investors are optimistic about the company’s performance (e.g., Google, 2). If a company can maintain high profitability over time, it can increase its intrinsic value and raise its share price.
Sharing ownership allows companies to raise money even if they have no initial capital. Investors buy stocks and thereby become co-owners of a business. They are then entitled to a percentage of the company’s revenue. For example, shares can be bought and sold on an exchange, the New York Stock Exchange (NYSE). In the 1950s, stock markets emerged in Asia, Europe, and Latin America. The American stock market is regarded as the most important because of its size, and many multinational corporations are listed there. Furthermore, it is also a widely used indicator of confidence in the U.S. economy, even though, at times, it may be inaccurate due to rapid, short-term fluctuations in supply and demand factors or other factors that can cause share prices to rise or fall dramatically regardless of economic indicators (e.g., Black Monday).
The stock market is also used to raise capital by businesses that need additional money. The most common way to raise money through the stock market is an Initial Public Offering. This process involves selling company shares to the public either through a listing on a stock exchange or via a syndicated facility. An individual investor can buy company shares only if they have been sold or otherwise made available to the public. In contrast, it is illegal for an individual investor to buy shares from another individual who holds them in their portfolio, for example. It is also illegal to buy and sell shares in the same company within a short period. It can is done, for example, by a bank that wishes to make a large purchase for its portfolio of shares or a hedge fund that wishes to reduce its share count.
The Securities and Exchange Commission (SEC) regulates the stock market and requires that all transactions be executed through the stock exchange on which the stock is listed. It also maintains national databases where information about stocks or other individual investors’ property is stored. The SEC runs these databases and can be accessed directly through its website and registered broker-dealers (brokers).
The New York Stock Exchange is the most important in the United States. It was founded in 1792 and is a member of the NYSE Group. The NYSE is home to 13,500 listed companies with a total market capitalization of approximately $22 trillion (see table 1). Public companies also trade on other stock exchanges. These include NASDAQ OMX, established in 1971 by the National Association of Securities Dealers and trades shares representing ownership stakes in private companies. The purpose of NASDAQ OMX’s listing system is to provide liquidity for smaller companies that usually have less capital compared to corporations listed on NYSE or NASDAQ due to their relatively small size (pioneer).
The technology industry is one of the most important sectors of the economy. There was a time when NASDAQ and NYSE dominated the stock market for technology companies. However, a biotechnology company, Amgen Inc., listed on NASDAQ OMX, changed this dynamic completely because it was not simply an ordinary biotechnology company. Amgen made a name for itself among investors by achieving one of the highest market capitalizations in the United States (see table 2).
Until recently, most technology companies that have listed on a stock exchange have not been able to sell their shares due to their size. In order to make more money, they sold portions of their shares. Microsoft Corp. was an exception because it was able to list its entire equity on a stock exchange. Today, NASDAQ has the highest market capitalization of any stock exchange in the United States and is home to many technology companies, including computer hardware and software providers. Its listing system is also very flexible, which means that stock prices are more susceptible to sudden changes (e.g., Apple Inc.).
The importance of the NASDAQ OMX and other stock exchanges is reflected in the fact that they have online trading systems as well as real-time data. They also have market indices such as NASDAQ Composite Index and the S&P 500 Composite Stock Price Index (see table 3).
It is interesting to note that NASDAQ OMX technology shares have a higher price-to-earnings ratio than the S&P 500 and the Dow Jones Industrial Average (blue chip). In addition, many technology companies have market capitalizations in the billions of dollars. They are therefore vulnerable to sudden changes in supply and demand factors. However, they also have a high level of liquidity because they are listed on many stock exchanges, including NASDAQ and NYSE (Wall Street).