SURAYBLOG: Considering the Movement of the Stock Market

In the bond markets the volume of new issues is large relative to the amount of secondary trading. There reverse is true of the markets for common stocks. Daily trading on the stock exchanges can exceed 10 billion dollars, while new common-stocks issues run to only few billion dollars per year. Indeed, in some years, the value of stock retirements (when companies buy back their own stock) has exceeded the value of new issues. The importance of the stock market cannot be judged by the volume of funds raised through stock issues. Though most corporations obtain equity capital by the retention of earnings, the opportunity to raise equity capital may be vitally important to a limited number of rapidly growing firms. Without the opportunity to sell equities they would have to sell out to some larger firm. The survival of independent, growing firms strengthens the competitive process.

Moreover, the stock market values the performance of managements and exerts pressure for efficiency and innovation. When a firm’s management does not appear to be exploiting the opportunities available to it, the company’s stock will be priced at a level that encourages a takeover bid by another firm.

Finally, the stock market provides capital indirectly. Stockholders are willing to forgo dividends so that firms can retain earnings and reinvest. The stockholders hope that successful investment of retained earnings will produce higher earning with increased dividends later on, and ultimately a higher price for the stock. They are prepared to forgo dividends in the hope of a capital gain. An active stock market makes it possible for investors to realize their capital gains at any time by selling some of their stock. If it were not for the fact that the stock markets permit investors to sell their stocks, many of them would not be so willing to hold as much stock as they now do.

New common stock issues are usually sold through underwriters as in the case of bonds. Secondary trading in existing stocks is carried on through the New York Exchange, the American Stock Exchange, and several regional exchanges. The Shares of smaller unlisted corporations are traded through brokers in the so-called over-the-counter (OTC) market.

Other related information, click on below links: