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Stockmarket
FromWikipedia,thefreeencyclopedia

Astockmarketorequitymarketorsharemarketistheaggregationofbuyersandsellers(aloose
networkofeconomictransactions,notaphysicalfacilityordiscreteentity)ofstocks(alsocalledshares)
thesemayincludesecuritieslistedonastockexchangeaswellasthoseonlytradedprivately.

Contents
1 Sizeofthemarket
2 Stockexchange
3 Trade
4 Marketparticipant
4.1 Trendsinmarketparticipation
4.1.1 Indirectvs.directinvestment
4.1.2 Participationbyincomeandwealthstrata
4.1.3 Participationbyheadofhouseholdraceandgender[12]
4.1.4 Determinantsandpossibleexplanationsofstockmarketparticipation
5 History
6 Importanceofstockmarket
6.1 Functionandpurpose
6.2 Relationofthestockmarkettothemodernfinancialsystem
6.3 UnitedStatesS&Pstockmarketreturns
6.4 Behaviorofthestockmarket
6.5 Irrationalbehavior
6.6 Crashes
6.7 Stockmarketprediction
7 Stockmarketindex
8 Derivativeinstruments
9 Leveragedstrategies
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9 Leveragedstrategies
9.1 Shortselling
9.2 Marginbuying
10 Newissuance
11 ASXShareMarketGame
12 Investmentstrategies
13 Taxation
14 Seealso
15 References
16 Furtherreading
17 Externallinks

Sizeofthemarket
Stockscanbecategorizedinvariousways.Onecommonwayisbythecountrywherethecompanyis
domiciled.Forexample,NestlandNovartisaredomiciledinSwitzerland,sotheymaybeconsideredas
partoftheSwissstockmarket,althoughtheirstockmayalsobetradedatexchangesinothercountries.
Atthecloseof2012,thesizeoftheworldstockmarket(totalmarketcapitalisation)wasaboutUS$55
trillion.[1]Bycountry,thelargestmarketwastheUnitedStates(about34%),followedbyJapan(about6%)
andtheUnitedKingdom(about6%).[2]Thiswentupmorein2013.[3]

Stockexchange
Astockexchangeisaplaceororganizationbywhichstocktraders(peopleandcompanies)cantrade
stocks.Companiesmaywanttogettheirstocklistedonastockexchange.Otherstocksmaybetraded"over
thecounter",thatis,throughadealer.Alargecompanywillusuallyhaveitsstocklistedonmany
exchangesacrosstheworld.[4]
Exchangesmayalsocoverothertypesofsecuritysuchasfixedinterestsecuritiesorinterestderivatives.

Trade
Tradeinstockmarketsmeansthetransferformoneyofastockorsecurityfromasellertoabuyer.This
requiresthesetwopartiestoagreeonaprice.Equities(stocksorshares)conferanownershipinterestina
particularcompany.
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Participantsinthestockmarketrangefromsmallindividualstockinvestorstolargertradersinvestors,who
canbebasedanywhereintheworld,andmayincludebanks,insurancecompaniesorpensionfunds,and
hedgefunds.Theirbuyorsellordersmaybeexecutedontheirbehalfbyastockexchangetrader.

TheNewYorkStockExchange

Someexchangesarephysicallocationswheretransactionsare
carriedoutonatradingfloor,byamethodknownasopenoutcry.
Thismethodisusedinsomestockexchangesandcommodity
exchanges,andinvolvestradersenteringoralbidsandoffers
simultaneously.AnexampleofsuchanexchangeistheNewYork
StockExchange.Theothertypeofstockexchangeisavirtualkind,
composedofanetworkofcomputerswheretradesaremade
electronicallybytraders.Anexampleofsuchanexchangeisthe
NASDAQ.
Apotentialbuyerbidsaspecificpriceforastock,andapotential
sellerasksaspecificpriceforthesamestock.Buyingorsellingat
marketmeansyouwillacceptanyaskpriceorbidpriceforthe
stock,respectively.Whenthebidandaskpricesmatch,asaletakes
place,onafirstcomefirstservedbasisiftherearemultiplebidders
oraskersatagivenprice.

TheLondonStockExchange

Thepurposeofastockexchangeistofacilitatetheexchangeof
securitiesbetweenbuyersandsellers,thusprovidingamarketplace
(virtualorreal).Theexchangesproviderealtimetrading
informationonthelistedsecurities,facilitatingpricediscovery.

TheNewYorkStockExchange(NYSE)isaphysicalexchange,
withahybridmarketforplacingordersbothelectronicallyandmanuallyonthetradingfloor.Orders
executedonthetradingfloorenterbywayofexchangemembersandflowdowntoafloorbroker,who
goestothefloortradingpostspecialistforthatstocktotradetheorder.Thespecialist'sjobistomatchbuy
andsellordersusingopenoutcry.Ifaspreadexists,notradeimmediatelytakesplaceinthiscasethe
specialistshouldusehis/herownresources(moneyorstock)toclosethedifferenceafterhis/herjudged
time.Onceatradehasbeenmadethedetailsarereportedonthe"tape"andsentbacktothebrokeragefirm,
whichthennotifiestheinvestorwhoplacedtheorder.Althoughthereisasignificantamountofhuman
contactinthisprocess,computersplayanimportantrole,especiallyforsocalled"programtrading".
TheNASDAQisavirtuallistedexchange,whereallofthetradingisdoneoveracomputernetwork.The
processissimilartotheNewYorkStockExchange.However,buyersandsellersareelectronically
matched.OneormoreNASDAQmarketmakerswillalwaysprovideabidandaskpriceatwhichtheywill
alwayspurchaseorsell'their'stock.[5]
TheParisBourse,nowpartofEuronext,isanorderdriven,electronicstockexchange.Itwasautomatedin
thelate1980s.Priortothe1980s,itconsistedofanopenoutcryexchange.Stockbrokersmetonthetrading
floororthePalaisBrongniart.In1986,theCATStradingsystemwasintroduced,andtheordermatching
processwasfullyautomated.
Peopletradingstockwillprefertotradeonthemostpopularexchangesincethisgivesthelargestnumberof
potentialcounterparties(buyersforaseller,sellersforabuyer)andprobablythebestprice.However,there
havealwaysbeenalternativessuchasbrokerstryingtobringpartiestogethertotradeoutsidetheexchange.
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SomethirdmarketsthatwerepopularareInstinet,andlaterIslandandArchipelago.Oneadvantageisthat
thisavoidsthecommissionsoftheexchange.However,italsohasproblemssuchasadverseselection.[6]
Financialregulatorsareprobingdarkpools.[7][8]

Marketparticipant
Marketparticipantsincludeindividualretailinvestors,institutional
investorssuchasmutualfunds,banks,insurancecompaniesandhedge
funds,andalsopubliclytradedcorporationstradingintheirownshares.
Somestudieshavesuggestedthatinstitutionalinvestorsand
corporationstradingintheirownsharesgenerallyreceivehigherrisk
adjustedreturnsthanretailinvestors.[9]
Afewdecadesago,worldwide,buyersandsellerswereindividual
investors,suchaswealthybusinessmen,usuallywithlongfamily
historiestoparticularcorporations.Overtime,marketshavebecome
more"institutionalized"buyersandsellersarelargelyinstitutions(e.g.,
pensionfunds,insurancecompanies,mutualfunds,indexfunds,
exchangetradedfunds,hedgefunds,investorgroups,banksand
variousotherfinancialinstitutions).

TheofficesofBursaMalaysia,
Malaysia'snationalstock
exchange(knownbefore
demutualizationasKualaLumpur
StockExchange)

Theriseoftheinstitutionalinvestorhasbroughtwithitsomeimprovementsinmarketoperations.Therehas
beenagradualtendencyfor"fixed"(andexorbitant)feesbeingreducedforallinvestors,partlyfromfalling
administrationcostsbutalsoassistedbylargeinstitutionschallengingbrokers'oligopolisticapproachto
settingstandardisedfees.

Trendsinmarketparticipation
Stockmarketparticipationreferstothenumberofagentswhobuyandsellequitybackedsecuritieseither
directlyorindirectlyinafinancialexchange.Participantsaregenerallysubdividedintothreedistinct
sectorshouseholds,institutions,andforeigntraders.Directparticipationoccurswhenanyoftheabove
entitiesbuysorsellssecuritiesonitsownbehalfonanexchange.Indirectparticipationoccurswhenan
institutionalinvestorexchangesastockonbehalfofanindividualorhousehold.Indirectinvestmentoccurs
intheformofpooledinvestmentaccounts,retirementaccounts,andothermanagedfinancialaccounts.
Indirectvs.directinvestment
ThetotalvalueofequitybackedsecuritiesintheUnitedStatesroseover600%inthe25yearsbetween
1989and2012asmarketcapitalizationexpandedfrom$2,789,999,902,720to$18,668,333,210,000.[10]The
demographiccompositionofstockmarketparticipation,accordingly,isthemaindeterminantofthe
distributionofgainsfromthisgrowth.Directownershipofstockbyhouseholdsroseslightlyfrom17.8%in
1992to17.9%in2007withthemedianvalueoftheseholdingsrisingfrom$14,778to$17,000.[11][12]
Indirectparticipationintheformofretirementaccountsrosefrom39.3%in1992to52.6%in2007withthe
medianvalueoftheseaccountsmorethandoublingfrom$22,000to$45,000inthattime.[11][12]Rydqvist,
Spizman,andStrebulaevattributethedifferentialgrowthindirectandindirectholdingstodifferencesinthe
wayeacharetaxed.Investmentsinpensionfundsand401ks,thetwomostcommonvehiclesofindirect
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participation,aretaxedonlywhenfundsarewithdrawnfromtheaccounts.Conversely,themoneyusedto
directlypurchasestockissubjecttotaxationasareanydividendsorcapitalgainstheygenerateforthe
holder.Inthiswaycurrenttaxcodeincentivizeshouseholdstoinvestindirectlyatgreaterrates.[13]
Participationbyincomeandwealthstrata
Ratesofparticipationandthevalueofholdingsdifferssignificantlyacrossstrataofincome.Inthebottom
quintileofincome,5.5%ofhouseholdsdirectlyownstockand10.7%holdstocksindirectlyintheformof
retirementaccounts.[12]Thetopdecileofincomehasadirectparticipationrateof47.5%andanindirect
participationrateintheformofretirementaccountsof89.6%.[12]Themedianvalueofdirectlyownedstock
inthebottomquintileofincomeis$4,000andis$78,600inthetopdecileofincomeasof2007.[14]The
medianvalueofindirectlyheldstockintheformofretirementaccountsforthesametwogroupsinthe
sameyearis$6,300and$214,800respectively.[14]SincetheGreatRecessionof2008householdsinthe
bottomhalfoftheincomedistributionhavelessenedtheirparticipationratebothdirectlyandindirectly
from53.2%in2007to48.8%in2013,whileoverthesametimeperiodhouseholdsinthetopdecileofthe
incomedistributionslightlyincreasedparticipation91.7%to92.1%.[15]Themeanvalueofdirectand
indirectholdingsatthebottomhalfoftheincomedistributionmovedslightlydownwardfrom$53,800in
2007to$53,600in2013.[15]Inthetopdecile,meanvalueofallholdingsfellfrom$982,000to$969,300in
thesametime.[15]Themeanvalueofallstockholdingsacrosstheentireincomedistributionisvaluedat
$269,900asof2013.[15]
Participationbyheadofhouseholdraceandgender[12]
Theracialcompositionofstockmarketownershipshowshouseholdsheadedbywhitesarenearlyfourand
sixtimesaslikelytodirectlyownstocksthanhouseholdsheadedbyblacksandHispanicsrespectively.As
of2011thenationalrateofdirectparticipationwas19.6%,forwhitehouseholdstheparticipationratewas
24.5%,forblackhouseholdsitwas6.4%andforHispanichouseholdsitwas4.3%Indirectparticipationin
theformof401kownershipshowsasimilarpatternwithanationalparticipationrateof42.1%,arateof
46.4%forwhitehouseholds,31.7%forblackhouseholds,and25.8%forHispanichouseholds.Households
headedbymarriedcouplesparticipatedatratesabovethenationalaverageswith25.6%participating
directlyand53.4%participatingindirectlythrougharetirementaccount.14.7%ofhouseholdsheadedby
menparticipatedinthemarketdirectlyand33.4%ownedstockthrougharetirementaccount.12.6%of
femaleheadedhouseholdsdirectlyownedstockand28.7%ownedstockindirectly.
Determinantsandpossibleexplanationsofstockmarketparticipation
Ina2002paperAnntteVissingJorgensenfromtheUniversityofChicagoattemptstoexplain
disproportionateratesofparticipationalongwealthandincomegroupsasafunctionoffixedcosts
associatedwithinvesting.Herresearchconcludesthatafixedcostof$200peryearissufficienttoexplain
whynearlyhalfofallU.S.householdsdonotparticipateinthemarket.[16]Participationrateshavebeen
showntostronglycorrelatewitheducationlevels,promotingthehypothesisthatinformationand
transactioncostsofmarketparticipationarebetterabsorbedbymoreeducatedhouseholds.Behavioral
economistsHarrisonHong,JeffreyKubikandJeremySteinsuggestthatsociabilityandparticipationrates
ofcommunitieshaveastatisticallysignificantimpactonanindividualsdecisiontoparticipateinthe
market.Theirresearchindicatesthatsocialindividualslivinginstateswithhigherthanaverage
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participationratesare5%morelikelytoparticipatethanindividualsthatdonotsharethose
characteristics.[17]Thisphenomenaalsoexplainedincostterms.Knowledgeofmarketfunctioningdiffuses
throughcommunitiesandconsequentlylowerstransactioncostsassociatedwithinvesting.

History
In12thcenturyFrance,thecourretiersdechangewereconcernedwith
managingandregulatingthedebtsofagriculturalcommunitieson
behalfofthebanks.Becausethesemenalsotradedwithdebts,they
couldbecalledthefirstbrokers.Acommonmisbeliefisthatinlate
13thcenturyBrugescommoditytradersgatheredinsidethehouseofa
mancalledVanderBeurze,andin1409theybecamethe"Brugse
Beurse",institutionalizingwhathadbeen,untilthen,aninformal
meeting,butactually,thefamilyVanderBeurzehadabuildingin
Antwerpwherethosegatheringsoccurred[18]theVanderBeurzehad
Antwerp,asmostofthemerchantsofthatperiod,astheirprimaryplace
fortrading.TheideaquicklyspreadaroundFlandersandneighboring
countriesand"Beurzen"soonopenedinGhentandRotterdam.
Inthemiddleofthe13thcentury,Venetianbankersbegantotradein
governmentsecurities.In1351theVenetiangovernmentoutlawed
Establishedin1875,theBombay
spreadingrumorsintendedtolowerthepriceofgovernmentfunds.
StockExchangeisAsia'sfirst
BankersinPisa,Verona,GenoaandFlorencealsobegantradingin
stockexchange
governmentsecuritiesduringthe14thcentury.Thiswasonlypossible
becausethesewereindependentcitystatesnotruledbyadukebuta
councilofinfluentialcitizens.Italiancompanieswerealsothefirsttoissueshares.CompaniesinEngland
andtheLowCountriesfollowedinthe16thcentury.
TheDutchEastIndiaCompany(foundedin1602)wasthefirstjointstockcompanytogetafixedcapital
stockandasaresult,continuoustradeincompanystockoccurredontheAmsterdamExchange.Soon
thereafter,alivelytradeinvariousderivatives,amongwhichoptionsandrepos,emergedontheAmsterdam
market.DutchtradersalsopioneeredshortsellingapracticewhichwasbannedbytheDutchauthorities
asearlyas1610.[19]
Therearenowstockmarketsinvirtuallyeverydevelopedandmostdevelopingeconomies,withtheworld's
largestmarketsbeingintheUnitedStates,UnitedKingdom,Japan,India,Pakistan,China,Canada,
Germany(FrankfurtStockExchange),France,SouthKoreaandtheNetherlands.[20]

Importanceofstockmarket
Functionandpurpose
Thestockmarketisoneofthemostimportantwaysforcompaniestoraisemoney,alongwithdebt
marketswhicharegenerallymoreimposingbutdonottradepublicly.[21]Thisallowsbusinessestobe
publiclytraded,andraiseadditionalfinancialcapitalforexpansionbysellingsharesofownershipofthe
companyinapublicmarket.Theliquiditythatanexchangeaffordstheinvestorsenablestheirholdersto
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quicklyandeasilysellsecurities.Thisisanattractivefeatureofinvestinginstocks,comparedtootherless
liquidinvestmentssuchaspropertyandotherimmoveableassets.Somecompaniesactivelyincrease
liquiditybytradingintheirownshares.[22][23]
Historyhasshownthatthepriceofstocksandotherassetsisanimportant
partofthedynamicsofeconomicactivity,andcaninfluenceorbean
indicatorofsocialmood.Aneconomywherethestockmarketisontherise
isconsideredtobeanupandcomingeconomy.Infact,thestockmarketis
oftenconsideredtheprimaryindicatorofacountry'seconomicstrengthand
development.[24]
Risingshareprices,forinstance,tendtobeassociatedwithincreased
businessinvestmentandviceversa.Sharepricesalsoaffectthewealthof
householdsandtheirconsumption.Therefore,centralbankstendtokeepan
eyeonthecontrolandbehaviorofthestockmarketand,ingeneral,onthe
smoothoperationoffinancialsystemfunctions.Financialstabilityisthe
raisond'treofcentralbanks.[25]
Exchangesalsoactastheclearinghouseforeachtransaction,meaningthat
theycollectanddelivertheshares,andguaranteepaymenttothesellerofa
security.Thiseliminatestherisktoanindividualbuyerorsellerthatthe
counterpartycoulddefaultonthetransaction.[26]

Themaintradingroomof
theTokyoStock
Exchange,wheretradingis
currentlycompletedthrough
computers.

Thesmoothfunctioningofalltheseactivitiesfacilitateseconomicgrowthinthatlowercostsandenterprise
riskspromotetheproductionofgoodsandservicesaswellaspossiblyemployment.Inthiswaythe
financialsystemisassumedtocontributetoincreasedprosperity,althoughsomecontroversyexistsasto
whethertheoptimalfinancialsystemisbankbasedormarketbased.[27]
RecenteventssuchastheGlobalFinancialCrisishavepromptedaheighteneddegreeofscrutinyofthe
impactofthestructureofstockmarkets[28][29](calledmarketmicrostructure),inparticulartothestabilityof
thefinancialsystemandthetransmissionofsystemicrisk.[30]

Relationofthestockmarkettothemodernfinancialsystem
Thefinancialsysteminmostwesterncountrieshasundergonearemarkabletransformation.Onefeatureof
thisdevelopmentisdisintermediation.Aportionofthefundsinvolvedinsavingandfinancing,flows
directlytothefinancialmarketsinsteadofbeingroutedviathetraditionalbanklendinganddeposit
operations.Thegeneralpublicinterestininvestinginthestockmarket,eitherdirectlyorthroughmutual
funds,hasbeenanimportantcomponentofthisprocess.
Statisticsshowthatinrecentdecades,shareshavemadeupanincreasinglylargeproportionofhouseholds'
financialassetsinmanycountries.Inthe1970s,inSweden,depositaccountsandotherveryliquidassets
withlittleriskmadeupalmost60percentofhouseholds'financialwealth,comparedtolessthan20percent
inthe2000s.Themajorpartofthisadjustmentisthatfinancialportfolioshavegonedirectlytosharesbuta
gooddealnowtakestheformofvariouskindsofinstitutionalinvestmentforgroupsofindividuals,e.g.,
pensionfunds,mutualfunds,hedgefunds,insuranceinvestmentofpremiums,etc.
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Thetrendtowardsformsofsavingwithahigherriskhasbeenaccentuatedbynewrulesformostfundsand
insurance,permittingahigherproportionofsharestobonds.Similartendenciesaretobefoundinother
developedcountries.Inalldevelopedeconomicsystems,suchastheEuropeanUnion,theUnitedStates,
Japanandotherdevelopednations,thetrendhasbeenthesame:savinghasmovedawayfromtraditional
(governmentinsured)"bankdepositstomoreriskysecuritiesofonesortoranother".
Asecondtransformationisthemovetoelectronictradingtoreplacehumantradingoflistedsecurities.[29]

UnitedStatesS&Pstockmarketreturns
(assumes2%annualdividend)
AverageAnnualReturn
YearstoDecember31,2012
%

AverageCompounded
AnnualReturn
%

15.5

15.5

10.9

11.6

4.3

10.1

10

8.8

7.3

15

6.5

5.9

20

10.0

6.4

30

11.6

7.3

40

10.1

8.0

50

10.0

8.1

60

10.5

8.2

ComparedtoOtherAssetClassesOverthelongterm,investinginawelldiversifiedportfolioofstocks
suchasanS&P500IndexoutperformsotherinvestmentvehiclessuchasTreasuryBillsandBonds,with
theS&P500havingageometricannualaverageof9.55%from19282013.[31]

Behaviorofthestockmarket
Fromexperienceitisknownthatinvestorsmay'temporarily'movefinancialpricesawayfromtheirlong
termaggregateprice'trends'.Overreactionsmayoccursothatexcessiveoptimism(euphoria)maydrive
pricesundulyhighorexcessivepessimismmaydrivepricesundulylow.Economistscontinuetodebate
whetherfinancialmarketsare'generally'efficient.[32]
Accordingtooneinterpretationoftheefficientmarkethypothesis(EMH),onlychangesinfundamental
factors,suchastheoutlookformargins,profitsordividends,oughttoaffectsharepricesbeyondtheshort
term,whererandom'noise'inthesystemmayprevail.(Butthislargelytheoreticacademicviewpoint
knownas'hard'EMHalsopredictsthatlittleornotradingshouldtakeplace,contrarytofact,sinceprices
arealreadyatornearequilibrium,havingpricedinallpublicknowledge.)The'hard'efficientmarket

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hypothesisissorelytestedanddoesnotexplainthecauseofeventssuchasthecrashin1987,whenthe
DowJonesIndustrialAverageplummeted22.6percentthelargesteveronedayfallintheUnited
States.[33]
Thiseventdemonstratedthatsharepricescanfalldramaticallyeventhough,tothisday,itisimpossibleto
fixagenerallyagreedupondefinitecause:athoroughsearchfailedtodetectany'reasonable'development
thatmighthaveaccountedforthecrash.(Butnotethatsucheventsarepredictedtooccurstrictlybychance,
althoughveryrarely.)Itseemsalsotobethecasemoregenerallythatmanypricemovements(beyondthat
whicharepredictedtooccur'randomly')arenotoccasionedbynewinformationastudyofthefiftylargest
onedaysharepricemovementsintheUnitedStatesinthepostwarperiodseemstoconfirmthis.[33]
A'soft'EMHhasemergedwhichdoesnotrequirethatpricesremainatornearequilibrium,butonlythat
marketparticipantsnotbeabletosystematicallyprofitfromanymomentary
market'inefficiencies'.Moreover,whileEMHpredictsthatallprice
movement(intheabsenceofchangeinfundamentalinformation)israndom
(i.e.,nontrending),manystudieshaveshownamarkedtendencyforthe
stockmarkettotrendovertimeperiodsofweeksorlonger.Various
explanationsforsuchlargeandapparentlynonrandompricemovements
havebeenpromulgated.Forinstance,someresearchhasshownthatchanges
inestimatedrisk,andtheuseofcertainstrategies,suchasstoplosslimits
andvalueatrisklimits,theoreticallycouldcausefinancialmarketsto
overreact.Butthebestexplanationseemstobethatthedistributionofstock
marketpricesisnonGaussian(http://cnx.org/content/m11318/latest/)(in
whichcaseEMH,inanyofitscurrentforms,wouldnotbestrictly
applicable).[34][35]
Otherresearchhasshownthatpsychologicalfactorsmayresultin
NASDAQinTimesSquare,
exaggerated(statisticallyanomalous)stockpricemovements(contraryto
NewYorkCity
EMHwhichassumessuchbehaviors'cancelout').Psychologicalresearch
hasdemonstratedthatpeoplearepredisposedto'seeing'patterns,andoften
willperceiveapatterninwhatis,infact,justnoise.(Somethinglikeseeingfamiliarshapesincloudsorink
blots.)Inthepresentcontextthismeansthatasuccessionofgoodnewsitemsaboutacompanymaylead
investorstooverreactpositively(unjustifiablydrivingthepriceup).Aperiodofgoodreturnsalsoboosts
theinvestors'selfconfidence,reducingtheir(psychological)riskthreshold.[36]
Anotherphenomenonalsofrompsychologythatworksagainstanobjectiveassessmentisgroup
thinking.Associalanimals,itisnoteasytosticktoanopinionthatdiffersmarkedlyfromthatofamajority
ofthegroup.Anexamplewithwhichonemaybefamiliaristhereluctancetoenterarestaurantthatis
emptypeoplegenerallyprefertohavetheiropinionvalidatedbythoseofothersinthegroup.
Inonepapertheauthorsdrawananalogywithgambling.[37]Innormaltimesthemarketbehaveslikea
gameofroulettetheprobabilitiesareknownandlargelyindependentoftheinvestmentdecisionsofthe
differentplayers.Intimesofmarketstress,however,thegamebecomesmorelikepoker(herdingbehavior
takesover).Theplayersnowmustgiveheavyweighttothepsychologyofotherinvestorsandhowtheyare
likelytoreactpsychologically.

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Thestockmarket,aswithanyotherbusiness,isquiteunforgivingofamateurs.Inexperiencedinvestors
rarelygettheassistanceandsupporttheyneed.Intheperiodrunninguptothe1987crash,lessthan1
percentoftheanalyst'srecommendationshadbeentosell(andevenduringthe20002002bearmarket,the
averagedidnotriseabove5%).Intherunupto2000,themediaamplifiedthegeneraleuphoria,with
reportsofrapidlyrisingsharepricesandthenotionthatlargesumsofmoneycouldbequicklyearnedinthe
socalledneweconomystockmarket.(Andlateramplifiedthegloomwhichdescendedduringthe2000
2002bearmarket,sothatbysummerof2002,predictionsofaDOWaveragebelow5000werequite
common)
Ontheotherhand,Stockmarketsplayanessentialroleingrowingindustriesthatultimatelyaffectthe
economythroughtransferringavailablefundsfromunitsthathaveexcessfunds(savings)tothosewhoare
sufferingfromfundsdeficit(borrowings)(PadhiandNaik,2012).Inotherwords,capitalmarketsfacilitate
fundsmovementbetweentheabovementionedunits.Thisprocessleadstotheenhancementofavailable
financialresourceswhichinturnaffectstheeconomicgrowthpositively.Moreover,bothofeconomicand
financialtheoriesarguethatstockspricesareaffectedbytheperformanceofmainmacroeconomic
variables,seeAlMajaliandAlAssaf(2014)(http://eujournal.org/index.php/esj/article/view/3129).[38]
ManydifferentacademicresearchershavestatedcompanieswithlowP/Eratiosandsmallersized
companieshaveatendencytooutperformthemarket.Researchcarriedoutstatesmidsizedcompanies
outperformlargecapcompaniesandsmallercompanieshaveevenhigherreturnshistorically.

Irrationalbehavior
Sometimes,themarketseemstoreactirrationallytoeconomicorfinancialnews,evenifthatnewsislikely
tohavenorealeffectonthefundamentalvalueofsecuritiesitself.[39]But,thismaybemoreapparentthan
real,sinceoftensuchnewshasbeenanticipated,andacounterreactionmayoccurifthenewsisbetter(or
worse)thanexpected.Therefore,thestockmarketmaybeswayedineitherdirectionbypressreleases,
rumors,euphoriaandmasspanic.
Overtheshortterm,stocksandothersecuritiescanbebatteredorbuoyedbyanynumberoffastmarket
changingevents,makingthestockmarketbehaviordifficulttopredict.Emotionscandrivepricesupand
down,peoplearegenerallynotasrationalastheythink,andthereasonsforbuyingandsellingaregenerally
obscure.Behavioristsarguethatinvestorsoftenbehave'irrationally'whenmakinginvestmentdecisions
therebyincorrectlypricingsecurities,whichcausesmarketinefficiencies,which,inturn,areopportunities
tomakemoney.[40]However,thewholenotionofEMHisthatthesenonrationalreactionstoinformation
cancelout,leavingthepricesofstocksrationallydetermined.
TheDowJonesIndustrialAveragebiggestgaininonedaywas936.42pointsor11percent,thisoccurred
onOctober13,2008.[41]

Crashes
Astockmarketcrashisoftendefinedasasharpdipinsharepricesofstockslistedonthestockexchanges.
Inparallelwithvariouseconomicfactors,areasonforstockmarketcrashesisalsoduetopanicand
investingpublic'slossofconfidence.Often,stockmarketcrashesendspeculativeeconomicbubbles.

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Therehavebeenfamousstockmarketcrashesthathaveendedinthelossofbillionsofdollarsandwealth
destructiononamassivescale.Anincreasingnumberofpeopleareinvolvedinthestockmarket,especially
sincethesocialsecurityandretirementplansarebeingincreasinglyprivatizedandlinkedtostocksand
bondsandotherelementsofthemarket.Therehavebeenanumberoffamousstockmarketcrasheslikethe
WallStreetCrashof1929,thestockmarketcrashof19734,theBlackMondayof1987,theDotcom
bubbleof2000,andtheStockMarket
Crashof2008.
Oneofthemostfamousstockmarket
crashesstartedOctober24,1929onBlack
Thursday.TheDowJonesIndustrial
Averagelost50%duringthisstockmarket
crash.ItwasthebeginningoftheGreat
Depression.Anotherfamouscrashtook
placeonOctober19,1987Black
Monday.ThecrashbeganinHongKong
andquicklyspreadaroundtheworld.
BytheendofOctober,stockmarketsin
HongKonghadfallen45.5%,Australia
41.8%,Spain31%,theUnitedKingdom
26.4%,theUnitedStates22.68%,and
Canada22.5%.BlackMondayitselfwas
thelargestonedaypercentagedeclinein
stockmarkethistorytheDowJonesfell
by22.6%inaday.Thenames"Black
Monday"and"BlackTuesday"arealso
usedforOctober2829,1929,which
followedTerribleThursdaythestarting
dayofthestockmarketcrashin1929.

RobertShiller'splotoftheS&PCompositeRealPriceIndex,
Earnings,Dividends,andInterestRates,fromIrrational
Exuberance,2ded. [42]Intheprefacetothisedition,Shiller
warns,"Thestockmarkethasnotcomedowntohistoricallevels:
thepriceearningsratioasIdefineitinthisbookisstill,atthis
writing[2005],inthemid20s,farhigherthanthehistorical
average...Peoplestillplacetoomuchconfidenceinthemarkets
andhavetoostrongabeliefthatpayingattentiontothegyrations
intheirinvestmentswillsomedaymakethemrich,andsotheydo
notmakeconservativepreparationsforpossiblebadoutcomes."

Thecrashin1987raisedsomepuzzlesmainnewsandeventsdidnotpredictthecatastropheandvisible
reasonsforthecollapsewerenotidentified.Thiseventraisedquestionsaboutmanyimportantassumptions
ofmoderneconomics,namely,thetheoryofrationalhumanconduct,thetheoryofmarketequilibriumand
theefficientmarkethypothesis.Forsometimeafterthecrash,tradinginstockexchangesworldwidewas
halted,sincetheexchangecomputersdidnotperformwellowingtoenormousquantityoftradesbeing
receivedatonetime.ThishaltintradingallowedtheFederalReserveSystemandcentralbanksofother
countriestotakemeasurestocontrolthespreadingofworldwidefinancialcrisis.IntheUnitedStatesthe
SECintroducedseveralnewmeasuresofcontrolintothestockmarketinanattempttopreventare
occurrenceoftheeventsofBlackMonday.
Sincetheearly1990s,manyofthelargestexchangeshaveadoptedelectronic'matchingengines'tobring
togetherbuyersandsellers,replacingtheopenoutcrysystem.Electronictradingnowaccountsforthe
majorityoftradinginmanydevelopedcountries.Computersystemswereupgradedinthestockexchanges
tohandlelargertradingvolumesinamoreaccurateandcontrolledmanner.TheSECmodifiedthemargin
requirementsinanattempttolowerthevolatilityofcommonstocks,stockoptionsandthefuturesmarket.
TheNewYorkStockExchangeandtheChicagoMercantileExchangeintroducedtheconceptofacircuit
breaker.ThecircuitbreakerhaltstradingiftheDowdeclinesaprescribednumberofpointsforaprescribed
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amountoftime.InFebruary2012,the
InvestmentIndustryRegulatory
OrganizationofCanada(IIROC)
introducedsinglestockcircuitbreakers.[43]
NewYorkStockExchange(NYSE)
circuitbreakers[44]
%
drop

timeofdrop

closetrading
for

10

before2pm

onehourhalt

10

2pm2:30pm halfhourhalt

10

after2:30pm

marketstays
open

20

before1pm

haltfortwo
hours

20

1pm2pm

haltforone
hour

20

after2pm

closeforthe
day

30

anytimeduring closeforthe
day
day

Stockmarketprediction

PriceEarningsratiosasapredictoroftwentyyearreturnsbased
upontheplotbyRobertShiller(Figure10.1, [42] source
(http://irrationalexuberance.com/shiller_downloads/ie_data.xls)).The
horizontalaxisshowstherealpriceearningsratiooftheS&P
CompositeStockPriceIndexascomputedinIrrational
Exuberance(inflationadjustedpricedividedbythepriortenyear
meanofinflationadjustedearnings).Theverticalaxisshowsthe
geometricaveragerealannualreturnoninvestingintheS&P
CompositeStockPriceIndex,reinvestingdividends,andselling
twentyyearslater.Datafromdifferenttwentyyearperiodsis
colorcodedasshowninthekey.Seealsotenyearreturns.Shiller
statesthatthisplot"confirmsthatlongterminvestorsinvestors
whocommittheirmoneytoaninvestmentfortenfullyearsdid
dowellwhenpriceswerelowrelativetoearningsatthebeginning
ofthetenyears.Longterminvestorswouldbewelladvised,
individually,tolowertheirexposuretothestockmarketwhenit
ishigh,asithasbeenrecently,andgetintothemarketwhenitis

TobiasPreisandhiscolleaguesHelen
SusannahMoatandH.EugeneStanley
introducedamethodtoidentifyonline
precursorsforstockmarketmoves,using
tradingstrategiesbasedonsearchvolume
dataprovidedbyGoogleTrends.[45]Their
analysisofGooglesearchvolumefor98
low."[42]
termsofvaryingfinancialrelevance,
publishedinScientificReports,[46]suggests
thatincreasesinsearchvolumeforfinanciallyrelevantsearchtermstendtoprecedelargelossesinfinancial
markets.[47][48][49][50][51][52]

Stockmarketindex
Themovementsofthepricesinamarketorsectionofamarketarecapturedinpriceindicescalledstock
marketindices,ofwhichtherearemany,e.g.,theS&P,theFTSEandtheEuronextindices.Suchindices
areusuallymarketcapitalizationweighted,withtheweightsreflectingthecontributionofthestocktothe
index.Theconstituentsoftheindexarereviewedfrequentlytoinclude/excludestocksinordertoreflectthe
changingbusinessenvironment.
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Derivativeinstruments
Financialinnovationhasbroughtmanynewfinancialinstrumentswhosepayoffsorvaluesdependonthe
pricesofstocks.Someexamplesareexchangetradedfunds(ETFs),stockindexandstockoptions,equity
swaps,singlestockfutures,andstockindexfutures.Theselasttwomaybetradedonfuturesexchanges
(whicharedistinctfromstockexchangestheirhistorytracesbacktocommodityfuturesexchanges),or
tradedoverthecounter.Asalloftheseproductsareonlyderivedfromstocks,theyaresometimes
consideredtobetradedina(hypothetical)derivativesmarket,ratherthanthe(hypothetical)stockmarket.

Leveragedstrategies
Stockthatatraderdoesnotactuallyownmaybetradedusingshortsellingmarginbuyingmaybeusedto
purchasestockwithborrowedfundsor,derivativesmaybeusedtocontrollargeblocksofstocksfora
muchsmalleramountofmoneythanwouldberequiredbyoutrightpurchaseorsales.

Shortselling
Inshortselling,thetraderborrowsstock(usuallyfromhisbrokeragewhichholdsitsclients'sharesorits
ownsharesonaccounttolendtoshortsellers)thensellsitonthemarket,bettingthatthepricewillfall.The
tradereventuallybuysbackthestock,makingmoneyifthepricefellinthemeantimeandlosingmoneyifit
rose.Exitingashortpositionbybuyingbackthestockiscalled"covering."Thisstrategymayalsobeused
byunscrupuloustradersinilliquidorthinlytradedmarketstoartificiallylowerthepriceofastock.Hence
mostmarketseitherpreventshortsellingorplacerestrictionsonwhenandhowashortsalecanoccur.The
practiceofnakedshortingisillegalinmost(butnotall)stockmarkets.

Marginbuying
Inmarginbuying,thetraderborrowsmoney(atinterest)tobuyastockandhopesforittorise.Most
industrializedcountrieshaveregulationsthatrequirethatiftheborrowingisbasedoncollateralfromother
stocksthetraderownsoutright,itcanbeamaximumofacertainpercentageofthoseotherstocks'value.In
theUnitedStates,themarginrequirementshavebeen50%formanyyears(thatis,ifyouwanttomakea
$1000investment,youneedtoputup$500,andthereisoftenamaintenancemarginbelowthe$500).
Amargincallismadeifthetotalvalueoftheinvestor'saccountcannotsupportthelossofthetrade.(Upon
adeclineinthevalueofthemarginedsecuritiesadditionalfundsmayberequiredtomaintaintheaccount's
equity,andwithorwithoutnoticethemarginedsecurityoranyotherswithintheaccountmaybesoldby
thebrokeragetoprotectitsloanposition.Theinvestorisresponsibleforanyshortfallfollowingsuchforced
sales.)
Regulationofmarginrequirements(bytheFederalReserve)wasimplementedaftertheCrashof1929.
Beforethat,speculatorstypicallyonlyneededtoputupaslittleas10percent(orevenless)ofthetotal
investmentrepresentedbythestockspurchased.Otherrulesmayincludetheprohibitionoffreeriding:
puttinginanordertobuystockswithoutpayinginitially(thereisnormallyathreedaygraceperiodfor
deliveryofthestock),butthensellingthem(beforethethreedaysareup)andusingpartoftheproceedsto
maketheoriginalpayment(assumingthatthevalueofthestockshasnotdeclinedintheinterim).

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Newissuance
Globalissuanceofequityandequityrelatedinstrumentstotaled$505billionin2004,a29.8%increaseover
the$389billionraisedin2003.Initialpublicofferings(IPOs)byUSissuersincreased221%with233
offeringsthatraised$45billion,andIPOsinEurope,MiddleEastandAfrica(EMEA)increasedby333%,
from$9billionto$39billion.

ASXShareMarketGame
ASXShareMarketGameisaplatformforAustralianschoolstudentsandbeginnerstolearnabouttrading
stocks.ThegameisafreeservicehostedonASX(AustralianSecuritiesExchange)website.[53]Eachyear
morethan70,000studentsenrollinthegame.Forvastmajority,thisisanintroductiontoStockMarket
investing.Studentsonceenrolled,aregiven$50,000virtualmoneyandcanbuyandsellupto20timesa
day.Thegamerunsfor10weeks.Thisridiculouslyshorttimeframeturnsthegameintoalottery,
encouragingpeopletotakehugeriskswiththeirvirtual$50,000,breakingthelawsofcommonsense
investingintheprocess.[54]Manysimilarprogramsarefoundinsecondaryeducationalinstitutionsacross
theworld.

Investmentstrategies
Oneofthemanythingspeoplealwayswanttoknowaboutthestockmarketis,"HowdoImakemoney
investing?"Therearemanydifferentapproachestwobasicmethodsareclassifiedbyeitherfundamental
analysisortechnicalanalysis.Fundamentalanalysisreferstoanalyzingcompaniesbytheirfinancial
statementsfoundinSECfilings,businesstrends,generaleconomicconditions,etc.Technicalanalysis
studiespriceactionsinmarketsthroughtheuseofchartsandquantitativetechniquestoattempttoforecast
pricetrendsregardlessofthecompany'sfinancialprospects.Oneexampleofatechnicalstrategyisthe
Trendfollowingmethod,usedbyJohnW.HenryandEdSeykota,whichusespricepatterns,utilizesstrict
moneymanagementandisalsorootedinriskcontrolanddiversification.
Additionally,manychoosetoinvestviatheindexmethod.Inthismethod,oneholdsaweightedor
unweightedportfolioconsistingoftheentirestockmarketorsomesegmentofthestockmarket(suchasthe
S&P500orWilshire5000).Theprincipalaimofthisstrategyistomaximizediversification,minimize
taxesfromtoofrequenttrading,andridethegeneraltrendofthestockmarket(which,intheU.S.,has
averagednearly10%peryear,compoundedannually,sinceWorldWarII).

Taxation
Accordingtomuchnationalorstatelegislation,alargearrayoffiscalobligationsaretaxedforcapitalgains.
Taxesarechargedbythestateoverthetransactions,dividendsandcapitalgainsonthestockmarket,in
particularinthestockexchanges.However,thesefiscalobligationsmayvaryfromjurisdictionsto
jurisdictionsbecause,amongotherreasons,itcouldbeassumedthattaxationisalreadyincorporatedinto
thestockpricethroughthedifferenttaxescompaniespaytothestate,orthattaxfreestockmarket
operationsareusefultoboosteconomicgrowth.

Seealso
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Balancesheet
Deadcatbounce
Listofmarketopeningtimes
Listofrecessions
Listofstockexchanges
Listofstockmarketindices
Modelingandanalysisoffinancialmarkets
NASDAQ100
SecuritiesregulationintheUnitedStates
Slippage(finance)
Stockmarketbubble
Stockmarketcycles
Stockmarketdatasystems
Mr.Market
Stockfund

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Furtherreading
Hamilton,W.P.(1922).TheStockMarketBaraometer.NewYork:JohnWiley&SonsInc(1998reprint).
ISBN0471247642.
Preda,Alex(2009).FramingFinance:TheBoundariesofMarketsandModernCapitalism.Universityof
ChicagoPress.ISBN9780226679327.
Siegel,JeremyJ.(2008)."StockMarket".InDavidR.Henderson(ed.).ConciseEncyclopediaofEconomics
(2nded.).Indianapolis:LibraryofEconomicsandLiberty.ISBN9780865976658.OCLC237794267.

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