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Comprehensive Guide to Economy & Financial Systems
/The Financial Landscape
/Market Structures
/Equity Markets

Equity Markets

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Equity Markets

Equity markets facilitate the trading of ownership interests in corporations, connecting businesses needing capital with investors seeking returns. These markets play a crucial role in economic development by enabling companies to finance growth while providing investment opportunities.

Primary Markets: When companies first issue shares to the public through Initial Public Offerings (IPOs), they operate in the primary market. This process transforms private companies into public entities, raising capital directly from investors. For example, when Facebook went public in 2012, it raised $16 billion by selling shares directly to initial investors.

Secondary Markets: After initial issuance, shares trade between investors on exchanges like the New York Stock Exchange (NYSE) and NASDAQ in the US, or the London Stock Exchange (LSE) and Tokyo Stock Exchange internationally. These venues provide the liquidity and price discovery mechanisms that make equities valuable as investments.

Market Participants: Equity markets involve diverse actors including retail investors (individuals), institutional investors (pension funds, mutual funds, insurance companies), market makers (providing liquidity by continuously offering to buy and sell), high-frequency traders (using algorithms for rapid trading), and broker-dealers (facilitating transactions for clients).

Market Metrics: Performance is tracked through indices like the S&P 500 (representing 500 large US companies), the Dow Jones Industrial Average (30 significant US stocks), the NASDAQ Composite (technology-heavy), and international equivalents like the FTSE 100 (UK), Nikkei 225 (Japan), and DAX (Germany). These indices serve as barometers for economic health and investor sentiment.

Trading Mechanisms: Modern equity markets operate primarily through electronic order books that match buyers and sellers, with transactions occurring in microseconds. Market orders execute immediately at prevailing prices, while limit orders specify price constraints. Dark pools provide venues for large block trades without revealing intentions to the broader market.

Valuation Approaches: Equity valuation typically involves metrics like price-to-earnings ratios (P/E), price-to-book ratios (P/B), dividend yields, and discounted cash flow analysis. These fundamentals compete with technical analysis approaches that examine price patterns and trading volumes.