Introducing the financial markets

Lesson 4 of 10

Trading equities

How are equities traded?

Most major equities are traded on the stock market. This is a general term for a global network of specific exchanges where equities are bought and sold.

For example, the majority of US equities can be found on the New York Stock Exchange (NYSE) or NASDAQ, while most UK equities are traded on the London Stock Exchange (LSE).

These exchanges are highly-regulated marketplaces where buyers and sellers come together to negotiate the transaction of equities. Only certain qualified individuals are allowed to trade physically on the exchange itself, so investors generally need a stockbroker to act as a middleman.

Question

Select right country for the following exchange:

LSE?
  • a USA
  • b Spain
  • c UK
  • d Canada

Correct

Incorrect

LSE = London Stock Exchange → UK
Reveal answer

Question

Select right country for the following exchange:

BME?
  • a USA
  • b Spain
  • c UK
  • d Canada

Correct

Incorrect

BME = Bolsa de Madrid → Spain
Reveal answer

Question

Select right country for the following exchange:

NYSE?
  • a USA
  • b Spain
  • c UK
  • d Canada

Correct

Incorrect

NYSE = New York Stock Exchange → USA
Reveal answer

Question

Select right country for the following exchange:

TSX?
  • a USA
  • b Spain
  • c UK
  • d Canada

Correct

Incorrect

TSX = Toronto Stock Exchange → Canada
Reveal answer

What is a stockbroker?

The role of the stockbroker is to buy and sell stocks on their clients' behalf. Traditionally, an individual investor would need to call up their broker, who would then relay the trading instructions to a qualified dealer on the exchange. Nowadays, however, this process is almost always conducted online.

There are three main types of broker:

Full-service

Create and execute a strategy based on the investment goals of the client - trading on their behalf.
High commission

Advisory

Provide investment advice and recommend specific trades, but leave the final decision to the client.
Medium commission

Execution-only

Simply carry out the client's trading instructions, usually via an online platform. No advice given.
Low commission

When choosing a broker it's important to consider your knowledge of the markets as well as the amount of time you're prepared to commit to watching your portfolio.

Trading times

Equities are only traded during the opening hours of their designated stock exchange. Here are the opening and closing times of a few major exchanges (Eastern time, April - October. Opening times will be different throughout the rest of the year due to local daylight saving time changes):

How do equities become listed on an exchange?

Companies are either privately owned or public.

A private company isn't listed on a major stock exchange, so you would usually have to contact the owners directly to buy equities. Even then, they are under no obligation to sell them.

However, if the owners want to 'go public' to raise some capital or boost the company's reputation, they must carry out an initial public offering, or IPO. Following an IPO, the company's equities are listed on a stock exchange and ordinary investors can buy and sell them.

Publically-listed companies often have many more shareholders than private ones, and are subject to much tighter regulations. The exact rules tend to differ depending on the exchange, but generally a public business needs to appoint a board of directors and disclose detailed financial information at least twice a year.

Dividends

A key advantage to investing in shares is the potential for dividends.

A dividend is an amount of money paid to shareholders, representing a portion of the company's profits.

When a company makes a profit, the management get to decide how much to put back into the business and how much to pay to the shareholders as a dividend.

Dividends can compensate for an equity price that isn't moving much, giving shareholders an income instead. Companies that are expanding rapidly usually don't offer dividends, choosing instead to reinvest all their profits to sustain growth. The reward for shareholders in this case is a higher expected equity price in the long run.

Lesson summary

  • Most equities are traded on major stock exchanges
  • Investors generally need to act through a stockbroker to trade them
  • An IPO is the first time a private company offers its equities for sale to the public
  • A dividend is a portion of the company's profits
Lesson complete