Trading on the Stock Markets Essay

Background

A stock market can be defined as a “public entity for trading of company stock and derivatives at an agreed price; these are securities listed on stock exchange as well as those traded privately” (Anonymous: “Capital and derivatives Market” Para 2). At the beginning of the month of October, the year 2008, the global stock market size was determined to be approximately 37 trillion US dollars.

More so, estimation that has been carried out of the “total world derivatives market” has shown that the value of the derivatives market is about 790 trillion US dollars; a value which is more than ten times the whole global economy size. On the stock market, there is listing of the stocks and trading them. Both the buyers and sellers are brought together on this market (Anonymous: “Capital and derivatives Market” Para 3).

In the United States, the biggest stock market, basing on the market capitalization, is the NYSE – “New York Stock Exchange”. In addition to this, in the United States, we also have other stock exchange markets such as the Dow Jones Stock Market and NASDAQ. In Britain, we have the “London Stock Exchange’.

In Japan, there is the Tokyo Stock Exchange (TSE). TSE is number three in size by “aggregate market capitalization of its listed companies…it had 2,414 listed companies with a combined market capitalization of $3.1 trillion as of May 2010” (“China becomes the world’s third largest stock market” Para 7). In the United Kingdom, we have the London Stock exchange market.

It is located in the city of London, According to “Market Highlights for the first half –year 2010” (Para 3), by the month of August last year (2010), “the exchange had a market capitalization of US$ 2.63 trillion, making it to be the forth largest stock exchange in the world by this measurement and it is the largest in Europe” (“Market Highlights for the first half –year 2010” 1).

In Saudi Arabia, we have the Saudi Stock Exchange, also referred to as “Tadawul”. It is under the control of the “Saudi Arabian Monetary agency””. This is the largest stock exchange market in the region.

As it is pointed out by the “Saudi Stock Exchange”, it has “a market capitalization amounting to much more than US55 billion” (Para 1). This market has been increasing over the years beginning from the time it was set up in the year 1954. This stock exchange, being the only major stock exchange in the country, used to operate informally up to the middle of the 1980s.

Trading on the stock market

Those traders who take part in the stock exchange market may be either just small individuals who wish to invest in stocks or they can be very big “hedge fund traders”. Among the exchanges that are carried out, there are those in which transactions are entered in to on a “trading floor” (physically).

This is done by a method referred to as “open outcry”. Such form of sale is employed in both “stock exchanges” as well as “commodity exchanges” in which those engaging in trade make bids and offers by word of mouth.

However, with advancing technology, there has emerged another form exchange in which trading is carried out in a virtual manner. In this, there is use of computers and transactions are carried out electronically without necessarily having the traders interacting physically.

Basically, the trades carried out are on the basis of an “auction market model”. Under this, the buyer engages in bidding for a definite price he is ready to pay and then the prospective seller asks for his or her desirable price from the buyer.

This may go on for sometime until the buyer and the seller meet at a common price that is deemed to be desirable for both parties; the buyer and the seller. At this point, a sale occurs. In a situation where we have two or more bidders (buyers) or askers (seller), one who comes first is the one who is sold to.

A stock exchange is meant to make it possible for the buyers and sellers to interact in order to exchange securities and by doing this, a marketplace is provided. Considering the New York Stock Exchange, this market is a “physical exchange” where the traders interact with one another physically, face to face and it is also a “listed exchange”. Unlike the NYSE, NASDAQ is a “virtual listed exchange” (Anonymous: “NASDAQ” Para 2).

In this particular market, all the trading activities are carried out electronically, over a “computer network. The trading process is the same as that followed by the New York Stock exchange market. The only difference between the two is that, in this market, the buyers and sellers interact electronically rather than physically.

Time and again, there has been deviation of active trading from “active exchange” (Ortega and Yalman Para 1). Ortega and Yalman point out that, “Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S security trades away from the exchanges to their internal systems” (Para 2).

They further projected that, there was even a probability of the level of that share going up (to eighteen percent) by the year 2010 “as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to the data compiled by Boston-based Aite Group LLC, a brokerage consultant” (Ortega and Yalman Para 3).

Other than NASDAQ and the NYSE, in the United States’ stock market, there is the Dow Jones stock market. This was set up in the year 1896 and its founder was Charles Dow. This exchange is “an icon in the trading industry” (“Dow Jones Stock Market” Para 1). It is further pointed out that, basically “the Dow commercial average is a market index that provides a fast method to get to an understanding of how the exchange is fairing on any given day” (“Dow Jones Stock Market” Para 2).

This stock market does not provide “specifics” but instead allows the public to have the knowledge about the overall trends that are being followed by it. Several criticisms have been directed towards the “Dow Jones Stock Market” and these criticisms have been coming form the researchers.

They have criticized this stock market’s move not to include a large number of firms to carry out the representation of the general “market performance”. More criticisms have also arisen in which there has been disagreeing that “trading on all thirty stocks included in the Dow Jones stock market doesn’t always open at the same time each morning, thus skewing the day’s average” ((“Dow Jones Stock Market” Para 2).

However, despite these criticisms, the “Dow Jones Stock market Business average”, in the course of time, has determinedly performed similarly to the broader United States market and this is the reason why this stock market remains to be preferred by many people to the present day.

Considering the case in Saudi Arabia, in March 2010, it was reported in the “All Headline News” that the stock exchange of this country “had opened its doors to foreign investors as a leading investment firm announced that foreign investment in the country was expected to grow by 20 percent in the coming year” (“Saudi Stock Market” Para 1).

This move was taken to enable the foreigners to “invest in ‘Exchange Traded Funds’, an index fund traded on an exchange like a stock so as to offer foreign investors the opportunity to obtain broad-based exposure to the Saudi equity market” (” (“Saudi Stock Market” Para 2).

In the year 2008, FDI to Saudi Arabia was twenty four million US dollars. This country has also realized “stable improvement in its ranking in the World Bank’s Doing Business index” (“Saudi Stock Market” Para 11).

It moved to position 13 in the year 2010 from position 15 in the previous year and this makes this country to be “the highest ranked country in the Middle East ….the index measures ten different variables ranging from the ease of sharing a business and enforcing contracts to paying taxes and cross border trading”(“Saudi Stock Market” Para 11).

There are some occasions on which trading of particular shares is stopped; sometimes for a few hours or days or even longer. On an individual level, stopping to trade on a stock can take place during a drop.

This step assists in enabling people trading in stock to avoid losing their money. The simplest way to do this is to set “a stop-loss order on one’s brokerage on each of one’s holding to protect oneself against massive drops in the value of holdings” (Hewitt Para).

However, on other occasions, the capital market authority can stop trading a particular stock. It does this for several reasons and among these reasons is that, it may intent to punish inside trading and to regulate the market.

This is clearly evident on the Saudi stock exchange market where it is reported that the stock market has “cleaned up” following the actions taken by the Capital market Authority (“Saudi Stock Market” Para 5).

Lacoma (Para) points out that the most well-known stock market is the NYSE. However, all the stock markets work in the same way, the NYSE works. In these markets, the Capital Market Authorities can stop trading of a particular stock but this occurs in just some specific cases for certain organizations.

This can be carried out in the form of a suspension of a stock market. This implies that those who want to invest shall not have any influence in line with the “suspended stock”. Those people who are owners of this security have no power to sell it and those ready to buy it can not be able to do so.

In addition, the company is prevented from carrying out any adjustments on this stock. Suspensions take place at once and may remain effective, going on for a number of days but not beyond ten days in total (Lacoma Para 2). It is also important to note that suspension is applicable to a single company’s securities and stock and not on the securities and stock of the whole stock market.

Closing down the whole stock market can not be easy. The suspension is not aimed at paralyzing the economy in its entirety in whatever way. Those who wish to invest can go on trading on the stock market; buying and selling stocks from other companies on the market.

Suspensions are meant to make the companies to engage in reviewing their financial records. This in most cases follows suspicion of existence of fraud in a company or in the cases where big flaws have been committed in regard to making records. In some cases, suspension may occur following the need to make clarification of certain legislation. The suspension of stock is carried out in order to safeguard the investors against any uncertainties while all-inclusive investigation on the company’s activities is carried out.

A suspension may have a negative effect on the company’s stock on the stock market. After being suspended, in most cases the stock starts trading at a greatly decreased price. This comes about as a result of the investors being filled with uneasiness in regard to the suspension and look at the company in a suspicious manner even if findings after the suspension were not negative.

It is important to draw a distinction between a suspension and “halts and delays”. A halt takes place when the suspension of the stock is carried out by the company itself and it does this with an intention of sharing some important information with investors. This is always brief and may not go on for even more than an hour. A delay is just like a halt.

However, the difference is that it occurs at beginning of the trading day. In whichever the case; whether it is a suspension, a halt or a delay, all of them involve stopping of trading on the stock market.

Most of the people who invest have come to learn that the stock market is a quite volatile market for one to put his or her money in it. However, it is this market characteristic (volatility) that brings in returns which the investors obtain. Wagner defines volatility as “a measure of dispersion around the mean or average return of a security…….and Standard deviation can be used to measure volatility” (Para 2). This method of measuring volatility gives out information on “how tightly the price of a stock is grouped around the mean or moving average” (Wagner Para 2).

Wagner further points out that, in considering securities, “the higher the standard deviation, the greater the dispersion of returns and the higher the risk associated with the investment” (Para 3). Apart from this using this method in measuring volatility, it can also be measured by taking the mean range to every period, “from the low price value to the high price value” Wagner Para 3).

Basing on this, there is expressing of “the value obtained as a percentage of the starting point of the period….larger movements in the price creating a higher price range result in higher volatility and the lower price ranges result in lower volatility’ (Wagner Para 5).

It is important to note that, there exists a very powerful correlation between “volatility and market performance”. There is a tendency for the level of volatility to come down while there is an increase in the stock market and the level of volatility goes up while the stock market declines. The risk level moves up with the level of volatility and at the same time the level of returns goes down.

To illustrate this clearly, Wagner cites a research that was conducted in 2007 by “Crestmont Research” which was aimed at evaluating the past records of the relationship that exists between the “stock market performance” and the “market volatility”. This research utilized the “average range for each day to measure the volatility of the Standard & Poor’s 500 Index” (Wagner Para 6).

The results that were presented from the research report gave out an indication that higher volatility matches up with higher likelihood of a decreasing market and lower volatility matches up with a higher likelihood of an increasing market (Wagner Para 6).

Considering, the volatility ratio, according to “Investopedia”, volatility ratio is defined as “a technical indicator used to identify price ranges and breakouts” (Para). It utilizes a “true price range” to carry out the determination of a “true trading range” of a stock and is capable of identifying “situations where price has moved out of this true range” (Investopedia Para 1).

By being familiar with stock volatility as well as the volatility ratio, the investors are in a better position to trade wisely on any stock exchange market.

Conclusion

The stock exchange market brings together buyers and sellers in order for them to engage in stock trading. The traders on this market may be small individual investors or large business corporations. Most of these traders who have been in this business long enough, have come to learn that the stock market is a quite volatile market for one to put money in.

However, in whichever the stock exchange market, it is this market characteristic (volatility) that brings in returns which the investors obtain.

Among the major stock exchange markets in the world that have been looked at include; the New York Stock Exchange, NASDAQ, Dow Jones Stock exchange (all the three found in the U.S), the Tokyo Stock Exchange, The London Stock Exchange and the Saudi Stock Exchange.

There comes a time when the capital market authority may stop trading a particular stock. This may lead to the suspension of the stock. This occurs for several reasons and among these reasons is that, the company involved may not be having right records or there is likelihood of having fraud in the company.

More so, there might be some legal obligations that are supposed to be met by the company involved. However, not all the trading is stopped on the market but it is only one company’s stock and trading will always go on as usual with stocks of other companies that are not affected with the suspension.

Works Cited

Anonymous. “Capital and derivatives Market”. 2010. Web.

“China becomes the world’s third largest stock market”. Economic Times. 2010. Web.

“Dow Jones Stock market”. Cheap Stock Trading. 2009. Web.

Investopedia, “Volatility Ratio”. 2011. Web.

Lacoma, Tyler. “When does the stock market suspend trading?” 2010. Web.

“Market Highlights for the first half –year 2010”. World Federation of Exchanges. 2010. Web.

“NASDAQ – What is NASDAQ? All about NASDAQ stock market”. Hubpages Incl. 2011. Web.

Ortega, Edgar, and Yalman Onaran. “UBS, Goldman threaten NYSE, Nasdaq with rival stock markets”. Bloomberg, 2006. Web.

“Saudi Stock Exchange”. Economy Watch. Web.

“Saudi Stock Market Opens to foreigners”. All headline News. Web.

Wagner, Hans. “Volatility’s impact on market returns”. 2010. Web.