Stock Market Basics–Part 1

Stock Basics
You don’t need to play stocks, but you should understand the basic gameplay of stocks, because your company is likely to equip you with stocks. In addition, many of the following terms, such as long, short, position, etc., are also applicable to securities such as futures contracts, so familiarity with stock trading is the basis for understanding how other more complex financial products are traded.

#stock market

The stock market, that is, the market where stocks are traded, is a virtual concept. A market can be composed of multiple exchanges. There are currently more than 60 exchanges in the world, of which 16 are large stock markets, 8 are located in Asia Pacific (including Australia), 3 are located in the Americas (United States and Canada), and the other 5 are located in Europe . Despite the small number of U.S. and Canadian exchanges, they account for about 50% of the total global equity market capitalization.

For example, when we mention the Chinese stock market, we actually imply China’s Shanghai Stock Exchange and China’s stock exchange. When we mention the U.S. stock market, we imply the NASDAQ, NYSE and the American Stock Exchange (AMEX).

#Enterprise Listing
The main purpose of a company going public is to issue stocks to obtain funds from the stock market. Investors in the stock market buy stocks, and then the company can distribute the stocks as compensation to employees, and the employees can sell the stocks in the market to cash out. Therefore, companies actually use money from the stock market to pay salaries, support employees, and recruit more employees to help the company grow.

However, if a company wants to be listed, it must meet the listing conditions. Different exchanges have different listing conditions.

In addition, once a company goes public, it must disclose its profitability on a regular basis, such as quarterly financial reports, annual financial reports, etc., as well as information such as changes in the company’s top management, stock trading, etc., must also be disclosed in a timely manner.

Enterprises generally use the IPO method to go public. In some exchanges in some countries, they can use the DPO method to go public.

#Initial Public Offering (IPO)

Initial Public Offering, Initial Public Offering, abbreviated as IPO. It refers to the process in which a company issues new shares to raise funds from the market on the basis of the original shares. For example, if a company registers 10,000 shares and chooses to issue 1,000 new shares, the company will spend money to hire an underwriter. The underwriter is usually an investment bank. The underwriter will contact other investment institutions to conduct roadshow inquiries on the issue price, time, and scale. Finally, the issue price is finalized, and then the 1,000 new shares issued by the company are first sold on the primary market. Investors in the primary market include investment institutions previously contacted. In addition, ordinary investors are now allowed to participate in primary listing transactions, that is, to issue new shares. Players in the primary market buy stocks and then trade them in the secondary market, which is the standard stock market. The final market value of a company is the stock price multiplied by 11,000 shares (10,000 original shares + 1,000 new shares).

When a company goes public through an IPO, the original shareholders generally have a certain lock-up period. In other words, the original 10,000 shares cannot be sold off. This lock-up period is agreed with the underwriters and institutions before the sale on the primary market, otherwise the institutions will worry that the original shareholders of the company will cash out quickly. The lock-up period is generally 180 days.

In addition to the agreed lock-up period, there may also be some legal lock-up restrictions. For example, in the United States, the SEC’s rule 144 also restricts the sale of stocks. The rules in it are not for IPOs, but must be followed at any time.
https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html

IPO issue price determination mechanism:

The fixed-price issuance mechanism means that before the company’s stock is publicly issued, the company and the underwriter determine a fixed issue price to sell the stock, and the price is often determined using relative valuation methods such as the price-earnings ratio. The fixed-price issuance mechanism is simple, direct and low-cost, but the entire process lacks an interactive game between underwriters and investors, resulting in a low degree of marketization of the determined issuance price.
Accumulated bidding inquiry system, underwriters determine the initial price range based on the valuation of the company to be issued, and then promote the issuing company to potential investors through roadshows and other means, allowing institutional investors to declare subscription quantities at different issue prices within the price range, After that, the underwriter collects the information to calculate the total subscription amount, and based on this, determines the IPO issue price and allocates to investors according to the predetermined allocation rules. The main reference for pricing new shares is the share purchase applications submitted by institutional investors during the cumulative bidding period. The cumulative bid inquiry system has a high degree of marketization and can effectively reduce the degree of information asymmetry between issuers and investors. It is currently one of the most commonly used IPO pricing mechanisms in the world, especially in the United Kingdom, the United States and other institutional investors. higher country.
The auction mechanism means that the underwriter first collects the price and quantity demand information of investors, and then determines the issue price of the stock according to the bidding results of investors. The auction pricing mechanism can maximize the investment value of the company’s stocks, make the issue price close to the fair value of the market, and allocate stocks according to the price of investors. At present, it is mainly used in European countries, Japan and Taiwan.
The mixed issuance mechanism refers to the adoption of different pricing mechanisms for different shares during an IPO process. The use of a mixed issuance mechanism can not only give play to the leading role of institutional investors in issuing pricing, but also protect the interests of small and medium investors to a certain extent.

In practice, the mixed application of the cumulative bidding inquiry mechanism and the fixed price issuance mechanism is the most common. The former is aimed at institutional investors to make the IPO pricing reflect market demand, and the latter is mainly issued to small investors to protect their interests in the subscription of new shares. , do not participate in IPO pricing. The hybrid issuance mechanism is widely used in Hong Kong stocks and other markets with a high degree of internationalization and a high proportion of retail investors.

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