Equity Market

REVIEWED BY JAMES CHEN

Updated Mar 29, 2019

What is an Equity Market?
An equity market is a market in which shares 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 because it gives companies access to capital and investors a slice of ownership
in a company with the potential to realize gains based on its future performance.

Understanding Equity Markets

Equity markets are the meeting point for buyers and sellers of stocks. The securities traded in the
equity market can be 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.

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, he or she is buying at market value;
similarly, when a seller will take any price for the stock, he or she is selling at market value.

Companies sell stocks in order to get capital to grow their businesses. When a company offers
stocks 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 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.

KEY TAKEAWAYS

 Equity markets are meeting points for issuers and buyers of stocks in a market economy.
They are critical for capital formation and allocation in such economies.
 Stocks can be issued in public markets or private markets. Depending on the type of issue,
the venue for trading changes.
Stock Exchanges
The place where stocks in the equity market are traded is the stock exchange. There are many
stock exchanges around the world, and they 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 stock exchanges often include a market maker, which
is a broker-dealer company that both buys and sells stocks in order to facilitate trading for a
particular stock. This comes at a risk to the company, but it makes the exchange process for a
given stock operate smoothly. 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. 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
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.

Most large companies have stocks that are listed at 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.

The oldest existing stock exchange is the Amsterdam Stock Exchange (AEX), which was founded
in the 1600s to trade stocks of the Dutch East India Trading Company, one of the first companies
(then called joint-stock companies) to offer shareholder stock. Prior to the AEX, many countries
and towns had their own systems of trade regulation that operated much like stock exchanges,
but the AEX was the first official stock exchange as we know it. Today, equity markets exist in
most developed and developing countries.

Reference: REVIEWED BY JAMES CHEN Updated Mar 29, 2019

MANILA, Philippines - Across the Philippines and Asia’s other emerging economies, some $800 billion in
investment opportunities go unfilled each year because capital markets are less reliable than issuers might
like.

Infrastructure is a particularly acute need for the Philippines, which has set an ambitious goal of increasing
its infrastructure spending to seven percent of GDP.

In addition, if the cost of capital in the Philippines were lower and more stable, businesses would have an
easier time raising money to fund new ventures and growth projects that could turbo-boost the country’s
development and add to the incomes and wealth of its people.

Policies and institutions to promote deeper capital markets

Policy makers in the Philippines recognize the country’s need for deeper capital markets, and the country’s
Capital Market Development Plan Blueprint calls for a variety of measures to strengthen markets and build
the capacity of regulators. Two complementary courses of action could augment this.

The first is creating basic economic and social policies that will provide a foundation for longer-term market
growth. We see four areas that warrant particular focus:

1. Expanding the investor base would help to expand the supply of capital. This base would ideally become
both deep and broad, encompassing the full range of investors: buy-and-hold investors such as insurance
companies and pension funds; buy-and-trade investors such as mutual fund managers; active investors,
such as hedge funds, who help provide liquidity and improve pricing, but also need to be regulated
appropriately; and private-market investors, who can provide capital to fund early stage businesses as well
as turnarounds. Pulling in more investors will likely require a combination of marketing and education
efforts.

2. Increasing the participation of issuers in the capital markets would help increase demand for capital.
Various policies can help in this regard, such as encouraging the development of fast-growing small
companies, accelerating the release of public-private partnership (PPP) initiatives that require fund raising
by larger companies, and providing incentives for more private investment in infrastructure. Privatizing or
listing state-owned enterprises, or at least mandating the use of debt markets by these entities, would also
bring more issuers into the Philippines’ capital markets.

3. Charting a path toward sustainable integration with global markets should make it easier for foreign
players to invest in the Philippines and for local investors to place money abroad, thereby diversifying
sources of capital and types of investments. This might include marketing the Philippines as a destination
for investments in industries other than business-process outsourcing, opening the Philippines to flows of
inbound and outbound capital and trade, and aligning regulations with international standards.

4. Developing a deep, liquid government bond market would provide the benchmark pricing information that
can help the corporate bond market to expand. To do this, governments need to issue debt on an ongoing
basis, even when they run budget surpluses. In many cases, they also need to adopt different practices for
issuing and managing debt: following a predictable issuance calendar, reopening “on the run” benchmarks
(the most recently-issued debt securities of a given maturity), and establishing primary-dealer programs
that balance dealers’ duties and privileges.

Reference: (The Philippine Star) - August 20, 2017 - 4:00p

Read more at https://www.philstar.com/business/2017/08/20/1731024/deepening-capital-markets-
philippines#FLWTDdifoJgMqY84.99
 Floating on the stock market

Advantages and disadvantages of stock market flotation

Even if your business is suited to flotation, it may not be the right choice for you. Being a public
company can present a range of benefits to your business, but there are also issues that might
require careful consideration.

Advantages of stock market flotation

The benefits of stock market flotation could include:
 giving access to new capital to develop the business
 making it easier for you and other investors - including venture capitalists - to realize their
investment
 allowing you to offer employees extra incentives by granting share options - this can encourage
and motivate your employees to work towards long-term goals
 placing a value on your business
 increasing your public profile, and providing reassurance to your customers and suppliers
 allowing you to do business - eg acquisitions - by using quoted shares as currency
 creating a market for the company's shares
Disadvantages of stock market flotation
However, you should also consider the following potential problems:
 Market fluctuations - your business may become vulnerable to market fluctuations beyond your
control - including market sentiment, economic conditions or developments in your sector.
 Cost - the costs of flotation can be substantial and there are also ongoing costs of being a public
company, such as higher professional fees.
 Responsibilities to shareholders - in return for their capital, you will have to consider
shareholders' interests when running the company - which may differ from your own objectives.
 The need for transparency - public companies must comply with a wide range of additional
regulatory requirements and meet accepted standards of corporate governance including
transparency, and needing to make announcements about new developments.
 Demands on the management team - managers could be distracted from running the business
during the flotation process and through needing to deal with investors afterwards.
 Investor relations - to maximize the benefits of being a public company and attract further
investor interest in shares, you will need to keep investors informed.
Reference: https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-stock-market-
flotation