News Letter Subscription
Investing, Investment
Financial Management
Investing Guide
Retirement Planning
Wealth Management
Budget Planning
Budget Calculator
Technical Analysis
Fundamental Analysis
Stock Charts
Alternative Investments
Value Investing
Growth Investing
Futures
Stock Market Futures
Options
Bonds
Commodities
Index Funds
Mutual Funds
Exchange Traded Funds - ETFs
more...
Finance
Financial Planning
US Finance
India Finance
china Finance
UK Finance
Canada Finance
Australia Finance
Singapore Finance
Malaysia Finance
Japan Finance
Europe Finance
Finance Jobs
more...
Trading
Online Trading
Day Trading
Stock Trading
Options Trading
Commodity Trading
Forex Trading
more...
Currency
Currency Converter
Currency Calculator
Forex Software
Forex System
Forex Signals
Forex Options
Exchange Rate
Exchange Rate Calculator
Current Exchange Rates
Exchange Rate Forecast
US Dollar Exchange Rate
Pount Sterling Exchange Rate
Euro Exchange Rate
Japanese Yen Exchange Rate
Indian Rupee Exchange Rate
Dinar Exchange Rate
Canadian Dollar Exchange Rate
Australian Dollar Forex
Singapore Dollar Forex
New Zealand Dollar Forex
Swiss Franc Exchange Rate
more...
Inflation & Interest Rates
Inflation
Inflation Rate
Deflation
Current Inflation Rates
Interest Rates
Best Interest Rates
Fixed Interest Rates
Current Interest Rates
Bank Rates
Certificates of Deposit (CDs)
more...
World Industry
World Organizations
Foreign Direct Investment
Insurance
Finance
Banking
more...
Major Companies
Best Brands(2007)
Forbes Companies
Fortune 500 Companies
Insurance Companies
S & P 500 Companies
more...
 
Home >> Investment >> Stock Markets In World >> Stock Market Investment

Stock Market Investment, Stock Investing, Stock Investment, Equity Investment

A stock market is where company stocks, bonds, their derivatives and other securities are traded. These investment vehicles are listed and traded in large quantities on various stock exchanges. Stock market investment represents huge profit making potential as well as high risk. Stock investing essentially requires detailed knowledge of the stock market, its participants, its functioning and behavior.

Stock Market Investment: Main Participants

Trading in the stock market takes place via brokers. Entities who participate in this market include individuals, banks, insurance companies, mutual funds and pension funds. The stock market has gradually become more ‘institutionalized,’ with large institutions, such as hedge funds and mutual funds and high net worth individuals (HNIs), accounting for the largest trading volume.

Stock Market: How It Works

A stock exchange can either be a physical or virtual entity. In physical bourses, transactions take place through auctioning, with sellers quoting prices and buyers making verbal bids. When a buyer’s bid price matches the seller’s ask price, the transaction takes place. Due to the presence of multiple buyers and sellers, market operations are carried on a first-come, first-served basis.

The Contribution of the Stock Market to the Economy

Businesses that need large financing for expansion or improvement can raise capital by participating in the stock market. Investors seeking high liquidity prefer the stock market to the property market, as stocks can be converted to cash more easily and quickly.

The health of the stock market influences business investment and individual income and consumption. The proper functioning of the stock market impacts a country’s economic growth, through its influence on employment, production of goods and services and inflation. Due to the stock market’s far reaching impact on the economy, every country’s central bank assumes the responsibility of monitoring and tracking the market activities.

Stock Market Investment: Trends and Behavior

The behavior of the stock market and share prices greatly depends upon investor speculation. Overreactions and wrong speculations can result in irrational fluctuations in share prices. The psychology of ‘group thinking’ affects the stock market significantly.

The stock market is also affected by rumors and mass panic. The prices of various stocks can become volatile due to these factors, even if the buzz is not directly related to those specific stocks.

A stock market can witness bearish and bullish trends. The bull market is characterized by high investor confidence and the anticipation of rising prices. A bear market is characterized by steep declines in share prices due to the anticipation of losses and negative investor sentiment.

Evaluating Stock Market Investment

The price of a stock is determined by the market forces of demand and supply. Any positive news (such as a good earnings report by the company or the government announcing a high GDP growth rate) impacts the demand for a company’s stock.

Here are three techniques for valuing stocks:

Discounted Cash Flow (DCF): This method estimates future cash flows and discounts the same using the concept of the time value for money.

Dividend Discount Model (DD): This method estimates future dividend distribution based on the average dividend payout ratio in the past and discounts the same to reflect the time value of money. This method works best for large-cap and high dividend yield stocks. Penny stocks cannot be evaluated using this method.

Earnings Growth Model (EG): This method aims at predicting future earnings growth rates based on a company’s historical performance. This is then discounted using the expected return on investment (ROI).