What is the stock market?
The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place.
Investopedia (source)
The stock market is the overall “thing” that consists of buyers, sellers, stock exchange marketplace, etc… that allows to trade companies’ stocks. The stock market provides in addition a secure and regulated environment when people can trade with zero to low-risk.
On the other side the stock market allows public traded companies to issue and sells their shares in order to raise capitals from investors.
Why do companies issue stocks
There are two main reason for companies to issue stocks:
- raising capitals
- employees retention
Reason 1: Raising capital
While only a small fraction of companies manage to stay private, such as Ikea, most large companies at one point take this root to expand. Issuing stocks allow companies to raise rapidly money that is needed for their expansion. It could be related to developing their products, services, doing new R&D works, boosting sales, etc…
Issuing stock is part of the 4 main ways for companies to raise capital which are:
- bank loan
- issuing bonds
- issuing stocks
- private equity funds taking a stake in their company
While bank loans and issuing bonds can be more complex and slow for companies to implement due to the regulatory restriction, issues stocks provide a simpler and fastest way for companies to raise capital from a large pool of investors. Private equity funds can be also an alternative solution but usually don’t go beyond a certain capital since of several hundreds of millions.
Reason 2: Employee retention
The other reason why companies issue stocks is for employee retention. Stocks can be used as a reward to employees, giving them an extra reason to stay until the vesting time is reached (it’s the time when they can dispose of their stocks)
What are the main stock market sectors?
Let look at the different market segments you will be able to invest when looking at the stock market. To take a more concrete case, we will look at the US stock market.
These sectors are useful when investing because you will be able to diversify your portfolio by isolating stocks in different categories.
Here are the main 11 market segments of the US stock market (see figure below).
They are also displayed in the following page based on their size compared to the total market.
| Sectors | Companies types and examples |
|---|---|
| Information Technology | Companies that develop or distribute technological items or services, and includes internet companies. Technology products include computers, microprocessors, and operating systems (e.g. Microsoft, Oracle) |
| Health Care | Medical supply companies, pharmaceutical companies, and scientific-based operations or services that aim to improve the human body or mind (e.g. Johnson & Johnson) |
| Financials | Companies involved in finance, investing, and the movement or storage of money. It includes banks, credit card issuers, credit unions, insurance companies, and mortgage real estate investment trusts (REITs). (e.g. JPMorgan Chase & Co., Goldman Sachs, American Express) |
| Consumer Discretionary | Companies of luxury items or services that are not necessary for survival such as cars, sporting goods, trips, hotels, restaurants (e.g. Amazon, Starbucks) |
| Communication Services | Companies that keep people connected such as internet providers, phone plan providers, media, entertainment (e.g. Netflix, Walt Disney, AT&T, Facebook) |
| Industrials | Companies from airlines, aerospace & Defense, Construction & Engineering, military weapon manufacturers, railroad companies (e.g. Delta Air Lines, Boeing, FedEx) |
| Consumer Staples | Companies providing all the necessities of life such as food & beverage, personal products, household products (e.g. Procter & Gamble) |
| Energy | Companies related to oil, gas, and consumable fuels business. It includes companies that find, drill, extract, refine, provide manufacturing equipment (e.g. Exxon Mobil, Chevron) |
| Utilities | Companies that provide or generate electricity, water, and gas to buildings and households (e.g. Duke Energy, Southern Company) |
| Real Estate | Companies and investment trusts related to real esate (e.g. American Tower Corp., Boston Properties) |
| Materials | Companies providing the raw material needed for other sectors to function such as mining (gold, zinc, copper), forestry (wood) and container and packaging companies (e.g. Intertape Polymer Group) |
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