Equity Market

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Equity Market

The equity market is an entity in which shares of company stock, including derivatives, are bought and sold. Also referred to as a stock market, an equity market facilitates the economic process of trading a company's shares by bringing buyers and sellers together in one locale.

At its core, the primary purpose of an equity market is to allow either public or private companies to raise money by selling a percentage of the company to the public. The small percentages of the company are called shares, and the share owners become partial owners of the company in accordance with the number of shares they own.

Based on their need for money, a company may place either a large or a small portion of their company up for sale through publicly traded shares. If the company?s founders believe the company has a high growth potential, they will offer only as many shares to the public as is necessary.

Companies offer ownership shares in the equity market to the public for a variety of reasons, although it is typically for an investment that the company believes will hope it grow. For example, money may be raised to purchase an under-priced competitor, with the belief that such an investment will help it grow more quickly in the future. Or there may be a new product or service the company wishes to create, although cash is needed to develop that product or service.

The equity market facilitates the process of a company selling its shares by providing a venue in which those shares can be bought or sold at a price agreed upon by both parties. While the shares are initially sold by the company itself, those shares can then subsequently be traded from one individual to another, again at an agreed upon price. Based on how well the company is performing, that price may go up or down from its initial share price. Share owners, including the company itself, naturally hope the share price goes up. However, poor company performance can lead to a decrease in share price.

Stock exchanges are the largest form of equity markets, and they may offer derivatives of the company shares. For example, put or call options allow a trader to purchase an option to buy or sell a company?s shares at a specified time in the future, at a pre-determined price. Because an option contract has no underlying value in itself, it can be purchased at a relatively low price. And while it can provide the owner with a highly profitable ability to purchase a company's shares at a good price when that future date is reached, it also has the potential to become worthless if the option price is not as profitable as the general market price when the future date is reached. Very few option contract are exercised, meaning very few are actually used to buy and sell the underlying company shares. Thus, option contracts have become a market in themselves, separate from the trading of company shares.

Identifying when to buy and sell shares of a company at a profit is a skill used by investors and short-term traders. While investors tend to look at a company's fundamentals, such as its earnings and growth rate, short-term traders tend to look more for patterns in historical prices. A large number of software packages are now available to help short-term traders find patterns in the equity market. For example, StrataSearch is a high-end software package that uses artificial intelligence to help traders identify price patterns that can be used to create profitable buy and sell signals.

There are many equity markets worldwide, and a great deal of overlap in the companies they trade. For example, a company's shares might be traded on multiple exchanges throughout the world. In the United States, the most common exchanges are the New York Stock Exchange, the Nasdaq Exchange, and the American Stock Exchange. At these exchanges, traders initially bought and sold company shares manually in trading pits. With the availability of the internet, however, most trades are now made electronically. The BATS Exchange, for example, is an entirely electronic exchange and currently handles about 10% of all U.S. stock trades. It is now the third largest stock exchange in the United States. To remain competitive, the older stock exchanges now offer electronic trading as well.