What Is Stock market?

 WHAT IS A STOCK MARKET INDEX?

When people speak about market going up and down, referring to a performance that is strong or weak or turning bull or bear, this indicates the market as it’s seen through lens of indexes.

The various indexes of the different segments of the market do not move in parallel hence multiple indexes develop.

A stock market index is a measurement of the value of a section of the stock market and is calculated from the prices of selected shares. It is a tool used by investors to describe the market and to compare the return on specific investments. For example, KSE-100 index is a measurement of the value of 100 selected stocks listed on the Karachi Stock Exchange.

WHAT ARE SHARES?

A share stands as a unit of possession in a corporation or financial asset.

However, owning shares in a business doesn’t render a shareholder to have direct control over the business’s day-to-day operations nor makes him entitled to an equal distribution in the profits if they are in the form of dividends.

Each share signifies a proportionate stake in the equity of a company. You can select from buying large or small shares to match the amount of money you want to invest. A company's share price can accelerate or decrease as a result of its own performance or market conditions.

TYPES OF SHARES

Shares can be widely divided into two categories namely, ordinary shares and preference shares.

1. Ordinary Shares

   Ordinary shares carry no exceptional or preferred rights. Ordinary shareholders are entitled to share in the earnings of the company.  They can vote at the company’s general meeting as well as other official meetings. They are also eligible to participate in any dividends or any distribution of assets on winding up of the company.

2. Preference Shares

   Preference shareholders usually get a significance or 'priority' over ordinary shareholders in terms of payments of dividends or on winding up of the company. There are varying degrees of preference shares having different rights and characteristics. Holders of preference shares are entitled to having a fixed periodic income and have restricted voting rights liable to particular circumstances or particular resolutions; however this is strictly dependent on the terms of the shares. 

WHY DO COMPANIES ISSUE SHARES?

Companies issue shares to raise money from investors who tend to invest their money. This money is then used by companies for the development and growth of their businesses.

Company issues different types of shares namely; preference shares, ordinary shares, shares without voting rights or any other shares as are approved under the law. These allow the shareholders a stake in the company's equity as well as a share in its profits, in the form of dividends, and the aptitude to vote at general meetings of shareholders.

HOW SHARES ARE MADE PUBLIC FOR THE FIRST TIME?

Shares are made public through an initial public offering using a book building process.

Initial Public Offering (IPO)

Initial public offering (IPO) is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to increase, but can also be done by large privately-owned companies looking to become publicly traded.

In an IPO, the issuer gets the assistance of an underwriting firm, which helps in determining what type of security is to be issued (common or preferred), the most suitable offering price and the proper time to bring it into the market.

IPOs are a risky investment as it is tough to predict what the share will do on the trading day as well as in near future because, there is no substantial historical data to analyze the company’s standing. In addition to that the companies up for an IPO undergo a transitory growth period which is subjected to uncertainty for future values.

Book Building Process

In order to raise money, a company plans on offering its stock to the public and this process is called Book building process. This process is used either by an IPO (Initial public offering) or FPO (follow-on public offers) for effective price discovery. It is a mechanism where, during the tenure for which the IPO is open, bids are collected and compiled from investors at various prices, which are higher or equal to the floor price (lowest price at which bids can be made). The offer price is decided after the bid closing date. As soon as the cost of the stock is determined, the issuing company can then decide upon the division of its stock to its bidders.