Equity Market
Equity market is a general term referring to a place were corporate stocks are sold. There are many equity markets such as the New York Stock Exchange, NASDAQ, and the London Stock Exchange. Most developed countries, and some less developed countries, have an equity market.Many of these markets have a physical location where traders meet on a trading floor to buy and sell stocks on behalf of their clients. Others, like the NASDAQ, are virtual markets with no physical location. All trades are placed electronically in a central, virtual marketplace.
These types of equity markets are considered secondary markets because the shares are purchased from other shareholders.
Equity market also refers to the general market for raising capital by issuing and then selling equity securities to the public. In this regard, the equity market is not a physical, or virtual marketplace, but rather the overall general market for newly issued shares. The sale is facilitated by underwriters, which consist of a group of investment banks. This is usually referred to as an initial public offering (IPO). Once the securities are sold in the IPO they are then traded in secondary equity markets.
Equity markets are a cornerstone of a capitalistic economy because they help facilitate capital formation and liquidity for entrepreneurs and businesses.
Reviewed by Thomas J. CatalanoFact checked by Suzanne KvilhaugReviewed by Thomas J. CatalanoFact checked by Suzanne Kvilhaug
The terms equity market and stock market are synonymous. Both refer to the purchase and sale of ownership shares in public companies through any of the many stock exchanges and over-the-counter markets in the U.S. and around the world.
A share of stock represents an equity interest in a company. That is, the investor is buying an ownership stake in the company in the expectation of receiving a share of the profits in the form of dividends, or benefiting from the growth of its stock price, or both.
Key Takeaways
- The buyer of a share of stock is buying an ownership or equity interest in a company.
- Stock owners share in a company’s success via dividend payments or price growth or both.
- Equity market is a broad term for many stock exchanges around the world that match buyers and sellers of stocks.
Equity Capital
To a company, selling shares is a way to raise cash to expand the business. In order to do so, it lists its stock on one of the stock exchanges, such as the New York Stock Exchange, the Nasdaq, or the London Stock Exchange. The process of listing a new stock issue in the U.S. is long and arduous, as it includes detailed financial filings that meet the regulations of the Securities and Exchange Commission.
An alternative for a company in search of financing is issuing bonds. A bond is a form of debt that is repaid over time with interest. Most public companies over time issue both stock shares and bonds.
Generally, the stock exchanges are referred to as the equity markets, while the trade in bonds is referred to as the debt market.
Types of Stock
There are two primary types of stock that companies issue: common stock and preferred stock. The trade in common stock is far more active, and when a stock price is quoted it always refers to the price of a single share of common stock.
Owners of common stock shares usually are entitled to exercise their voting rights regarding a company’s board of directors and other important company decisions. They may or may not get regular dividends. The board decides at least annually whether it will pay a dividend and how much it will pay based on the company’s latest revenue.
Preferred Shares: Guaranteed Dividends
Preferred stock owners do not usually have voting rights. However, preferred stock shares are issued with a guaranteed payment at regular intervals of larger dividends than common stockholders receive. Shares of preferred stocks do not tend to rise or fall in price as sharply as common shares over time. Investors value them for their dividends, not for their potential for growth. It is important to note, however, that dividends in preferred shares can be suspended, but only in the case that it is suspended for common shares. In other words, the preferred shareholders must get paid first, before a common dividend is considered.
That makes preferred stock shares a kind of hybrid of a stock and a bond. Preferred stock shares are sometimes convertible into common stock shares under specific conditions.
The equity interest of preferred stockholders takes precedence over the interest of common stockholders in the event that the company goes into liquidation.
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