Markets are the hub for trade. It is the meeting point of buyers and traders. The equity market is not much different. It too, like any other market, is all about transactions. Let us read further into the article to learn more about the feature, types and workings of the equity market.
What Is an Equity Market?
An Equity Market is a place where companies issue and trade their shares. This is done via exchanges or over-the-counter markets. An equity market is also known as a stock market or a share market. It is one of the most important parts of a market economy. They help companies gain capital for the growth and expansion of their businesses. It also gives the investor a piece of the ownership in the company. They may or may not get monetary gains from this investment. This depends solely on the company’s performance in future.
The equity trades can either be public stocks or privately traded stocks. Public stocks are the ones that are listed on the stock exchange whereas private stock is traded through dealers. The stock traded through dealers is called the over-the-counter market.
Equity Market Examples
Some of the most famous stock exchanges are listed below.
- Nasdaq (NASDAQ) – United States
- Hong Kong Stock Exchange (HKEX) – Hong Kong
- London Stock Exchange (LSE) – United Kingdom
- Toronto Stock Exchange – Canada
- New York Stock Exchange (NYSE) – United States
- Euronext – European Union
- Shanghai Stock Exchange (SSE) – China
- Bombay Stock Exchange – India
- Japan Exchange Group (JPX) – Japan
How Does Equity Market Work?
The job of the Equity market is to connect buyers and sellers who do have the same expectations when it comes to the price. The companies become private players in the corporate sector as soon as they are established. Then they issue their shares as an Initial Public Offering (IPO). Their assets will be accessible to the public investor after this issuance. They will be noticed by public investors who always keep an eye out for the best stock deals for the day on the stock exchange. Companies in their early stages of growth trade the shares to accumulate capital and use that money for the growth of the firm.
Now we have to look from the point of view of the investor. The investor who provided the fund gets a stake in the company. They get partial ownership rights. They keep on observing the growth of the company through a period to determine whether it is capable of making a profit. According to their inferences, they will make the decisions regarding continuing the collaboration or rising their share in the company.
When firms enter the global equity market, they will list their shares via an IPO and hence get listed in the stock exchanges. The buyers and sellers will then connect based on budget. What we have to understand is that the trade will happen only if the price requirements match.
Types of Equity market
It is divided into two, the primary market and the secondary market.
The primary market is also known as the issue market. Companies introduce i.e. issue their shares for the first time. They introduce the share via an IPO or a Follow on Public offer (FPO). They can also do it as rights issues. This lets their existing shareholders maintain their earlier ratios in the shares. This will also let the firm sell securities at prices lower than the current market prices.
Once the securities are put on to be traded for the first time, the company is said to have entered the secondary market. After that, they are exchanged from one investor to another. Institutions such as government organizations, semi-government bodies and joint-stock companies conduct their trades under the secondary market category. This is the market preferred by investors who are into daily trading.
Features of Equity Market
- Raising Capital: The Equity market helps firms raise capital in exchange or partial ownership to investors. This is crucial in the initial stages of the companies,’
- Liquidity: It provides liquidity in the market which means the ease of conversion of assets into cash.
- Investment Options: The equity market gives investors the chance to make their own choices. Investors can customize their risk profile. They have total freedom to choose the firms or share that think might be productive.
Advantages of Equity Shares
- Opportunity to make huge profits.
- Ease of entrance and exit from a stock.
- Lower taxes
Disadvantages of Investing in Equities
- Investing in stocks without proper research may result in losses.
- Volatility (sudden ups and downs) of the equity market.
- Risk of capital erosion.
Difference between Debt Market and Equity Market
Given below are the differences between the debt market and the equity market.
|Assets are traded||Securities are traded|
|Consist of bonds and mortgages||Consist of stocks or shares|
|Increases company’s debt liability||Never makes companies indebted|
|Funds are borrowed and have to be repaid in full along with interest.||Funds are gained in exchange for partial ownership to investors.|
|Less preference is give even though less risk is involved||more preference is give even though more risk is involved|
Equity Market FAQs
1. Name a stock exchange in India.
Bombay Stock Exchange – India
2. What are the types of the Equity market?
They are the Primary Market and the Secondary market.