The stock market allows companies to raise capital and investors to participate in the growth of businesses. It is one of the most important components of modern financial markets and serves as a platform where shares are issued, bought, and sold.
Understanding how the stock market operates is essential for investors. Before evaluating companies or analyzing investment opportunities, it is important to understand what shares represent, how stock exchanges function, and the key concepts used to measure and compare listed companies.
What You Will Learn
By the end of this chapter, you will understand:
- What a share represents
- The rights of shareholders
- How stock exchanges operate
- How companies become publicly listed
- What market capitalization measures
- The purpose of stock market indices
- Why trading volume matters
- Common order types used by investors
Shares and Shareholder Ownership
A share represents a unit of ownership in a company. When investors purchase shares, they become shareholders and acquire a proportional ownership interest in the business.
Shareholders may benefit from capital appreciation if the share price increases and may also receive dividend payments when a company distributes part of its profits. In addition, shareholders are often granted certain rights, including the ability to vote on key corporate matters such as the appointment of directors and major strategic decisions.
The extent of these rights depends on the type of shares issued by the company. Ordinary shares are the most common type and generally provide voting rights as well as the potential to participate in future profits.
Key Definition
Share: A unit of ownership in a company.
How Stock Exchanges Work
Stock exchanges provide regulated marketplaces where investors can buy and sell shares. They facilitate trading by matching buyers and sellers and ensuring transactions are completed in a transparent and orderly manner.
Companies become publicly traded by listing their shares on a stock exchange. Once listed, investors can trade those shares during market hours. Prices change continuously based on supply and demand, as investors react to company performance, economic developments, and market expectations.
Examples of major stock exchanges include NASDAQ (USA), the New York Stock Exchange (NYSE), Euronext and the London Stock Exchange (LSE).
Initial Public Offerings (IPOs)
Before a company’s shares can be traded on a stock exchange, it must first offer them to investors through an Initial Public Offering (IPO).
An IPO is the process by which a private company becomes publicly listed by issuing shares to investors for the first time. The capital raised can be used to support growth, expansion, acquisitions, or other corporate objectives.
Once the IPO is completed, the shares begin trading on the stock exchange, where their market price is determined by investor demand.
Key Definition
IPO (Initial Public Offering): The first public sale of shares by a company.
Measuring Company Size and Market Performance
Investors often compare companies using market capitalization, indices, and trading volume.
Market Capitalization
Market capitalization measures the total market value of a company’s outstanding shares and is commonly used to assess company size.
Market Capitalization = Share Price × Shares Outstanding
For example, a company with 10 million shares outstanding and a share price of €5 would have a market capitalization of €50 million.
Indices and Benchmarks
A stock market index measures the performance of a group of shares and provides an indication of overall market performance.
Examples include:
- Malta Stock Exchange Index
- FTSE 100
- S&P 500
- Euro Stoxx 50
Investors often use indices as benchmarks to evaluate investment performance and monitor market trends.
Trading Value
Trading volume represents the number of shares traded during a given period. Higher trading volume generally indicates greater market activity and liquidity, while lower volume may indicate reduced investor interest.
Understanding Order Type
When investors buy or sell shares, they submit orders through a broker or trading platform.
The most common order types are:
| Order Type | Description |
| Market Order | Executes immediately at the best available market price |
| Limit Order | Executes only at a specified price or better |
| Stop Order | Becomes active once a predetermined price is reached |
Market orders prioritize execution speed, while limit orders prioritize price control. Understanding these order types helps investors manage how their trades are executed.
Key Takeaways
- A share represents ownership in a company.
- Shareholders may benefit from dividends, capital appreciation, and voting rights.
- Stock exchanges provide regulated marketplaces for trading shares.
- Companies become publicly traded through Initial Public Offerings (IPOs).
- Market capitalization measures company size.
- Indices track the performance of groups of shares.
- Trading volume indicates market activity and liquidity.
- Different order types allow investors to control how trades are executed.
Next Chapter
Chapter 4 | Equities (Stocks)
The next chapter explores different types of equities, including growth shares, value shares, dividend shares, and the key metrics investors use to evaluate listed companies.