Your Guide To the Equity Market: Definition, Function, Types and Examples

Summary:

An equity market provides investors access to the stocks of publicly traded companies. It is an excellent way for companies to raise capital and for investors to generate substantial wealth. There are a variety of equity markets serving different categories of companies and investors.

If you have not heard of equity market I am sure you must have heard of the stock market or vice versa. This is because they are often used interchangeably. An equity market is an integral part of the global financial system. These markets offer a myriad of benefits like enabling wealth creation for investors, allocating capital and facilitating investment in businesses.

This blog will be very useful for those looking to enter the world of equity markets. We will explore what they are, how they work and the different types of equity markets. We will also take a sneak peek into some examples equity markets.

Definition of equity market

Simply put, an equity market is a platform that lets you buy or sell shares of publicly traded companies. These shares, termed as stocks or equities, provide ownership in a firm. These markets are often used by companies to boost capital by issuing shares to the public. Over the past few years, equity investments have peaked in terms of popularity. This can be largely credited to the high-return investment choices they offer.

How does an equity market work?

Here we will focus on the function of the equity market, which is very important for both investors, companies and new market participants. Let’s take a simplified approach:

Initial public offering (IPO)

Conducting an IPO is the first thing a private company does if they want to go public and offer shares. In this process, they issue shares to investors in exchange for capital. After the IPO is complete, the company’s shares are listed on a stock exchange.

Secondary market

Following the IPO, the shares can be traded on the secondary market, which is basically ground zero for majority of the activities within an equity market. A secondary market is a tool that helps investors buy and sell shares among themselves without any interventions from the issuing company.

Stock exchanges

Equity markets rely on stock exchanges around the world for operation. These exchanges support the equity markets by providing the required infrastructure and regulatory framework to trade stocks. If you want to learn about stock exchange in India, click here.

Market participants

A broad range of participants are involve in equity markets right from investors and traders to market makers. These markets also consist of institutional investors such as pension funds and mutual funds. The market makers play a key role in facilitating trading by offering to buy and sell shares at a fixed price.

Price discovery

Price discovery is one of the most important aspects of equity/stock trading. Stock prices are typically estimated on the basis of supply and demand trends. So for example, if the willingness or the demand for a stock increases among investors, the price will automatically rise. Similarly, if more investors are looking to sell a stock, representing abundance of supply, the price of that stock will reduce.

Regulation

Equity markets are regulated strictly to maintain fairness, ensure transparency and protect investors. Different regulatory bodies across the global oversee the functioning of these markets in respective regions. For instance, the Securities and Exchange Board of India (SEBI) is the primary regulatory authority that looks after India’s stock market.

Types of equity markets

1. Primary market – Companies use this market to issue new shares through an IPO. It enables them to raise capital by selling ownership stakes to the public for the first time.
2. Secondary market – It also commonly referred to as the stock market where previously issued shares are bought and sold among investors.
3. Public market – It is open to the general public, which means literally anyone can buy and sell shares.
4. Private markets – Unlike public markets, these involve trading of shares in private companies that are not publicly listed. The National Stock Exchange (NSE) is the largest private networks in India.

Examples of equity markets

1. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE): These are the two of the largest, well-established stock exchanges in India, listing a wide range of Indian companies.
2. New York Stock Exchange (NYSE): The NYSE is a major stock exchange platform in the world, located in New York City, U.S. featuring several U.S. and international companies.
3. NASDAQ: Another major U.S. stock exchange known for its technology-focused listings also including companies from various other sectors.
4. London Stock Exchange (LSE): One of the world’s oldest stock exchanges based in London, UK.
5. Tokyo Stock Exchange (TSE): One of the largest stock exchanges in Asia and Japan’s primary stock exchange. It lists major Japanese companies.
6. Shanghai Stok Exchange (SSE): One of the major stock exchanges in APAC. It lists Chinese companies.
7. Euronext: Operates multiple stock exchanges across Europe including Milan, Paris, Brussels, Dublin, Amsterdam and Lisbon. It involves European stocks.

These are just a few examples of equity markets from around the world. Each stock exchange has a set of rules and regulations unique to the region and types of companies they list.

Wrapping up:

Equity markets are the most dynamic component of the global financial system. They offer opportunities to raise capital and build wealth. Anyone interested in exploring equity markets needs to have at the least a basic idea of what it is and the different types of equity markets. There are plenty of stock exchanges that are enabling equity markets, helping investors target, reach and invest in stocks best suitable for them.