Equity Markets
July 8, 2021
What are “Equity Markets”?
The terms “equity market” and “stock market” are synonymous. Both refer to the purchase and sale of ownership in public companies via shares through any of the many stock exchanges and over-the-counter markets around the world. The equity market has become one of the most important and vital areas of a market economy. It gives companies access to capital to grow their business, and offers investors a piece of ownership in companies with the potential to realize gains in their investment based on the company’s future performance. A share of stock represents an equity interest in the underlying company. Equity market investors buy ownership stakes in the listed 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 Learning Points
- Equity markets are public meeting points for issuers and buyers of stocks
- The liquidity in equity markets is crucial for a market economy
- Equity markets are a method for companies to raise capital and investors to own a piece of a company benefiting from dividends and/or stock price growth
- Most equity markets utilize so-called stock exchanges that can be found around the world, such as the New York Stock Exchange, the London Stock Exchange, the Tokyo Stock Exchange etc
- Stocks can be issued in public markets or private markets
- Contrary to public stocks, private stocks are traded through dealers, which is the definition of an over-the-counter market
Equity Markets Explained
The securities traded in the equity market can either be public stocks, which are those listed on the stock exchange, or privately traded stocks. Often, private stocks are traded through dealers, which is the definition of an over-the-counter market. Hence, the equity market, one of the most important markets in the world, is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets.
When start-ups are born or created, they tend to operate as private companies until they have predictable revenues and EBITDA, at which point these companies become interesting for mainstream equity market investors. Nowadays, many companies reach Unicorn status, i.e. a valuation above US$1 billion, before they pursue a public listing and go through an initial public offering (IPO). However smaller companies can still list on the stock market. Companies list their stocks on an exchange as a way to obtain capital to grow their business, attract new investors and to make their holdings more liquid for trading.
The company sells (via stock) a certain percentage of ownership in exchange for capital from the investors. That capital is then used for a variety of business needs including growing the company, making acquisitions or simply returning cash to the original founders. Hence, financing in the equity market is the opposite of debt financing, which utilizes loans and other forms of borrowing to obtain capital.
Private stocks operate slightly differently to publicly listed and traded stocks, as they are typically only offered to employees and certain investors OTC. Companies that have publicly traded shares on a stock exchange can decide to exit the public equity markets via a so-called Public to Private (P2P deal), essentially a de-listing from the stock market.
Size of the Global Equity Market
The total market capitalization of all publicly traded equity securities (all stocks worldwide) rose from US$2.5 trillion in 1980 to US$68.65 trillion at the end of 2018 and just under US$100 trillion today. Thus the global equity markets have seen significant growth during the last 30 years.
Example
Given below are equity market sizes (in US$ trillion) of the currently leading equity markets in the world. Please try to allocate the correct market size to the correct stock exchange.
Conclusion
The equity or stock market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets. The global equity markets have grown at a phenomenal growth rate since the 1980s and the global market cap is now at around US$100 trillion with US equities accounting for more than 50% of the global market.