Stock Market Basics–Part 2

#primary market

The primary market, that is, the issuance market, is a market where companies issue securities, contact institutions through underwriters, and then institutional investors purchase corporate securities.

Now, investment in companies before listing, such as VC, PE and other private equity investments, is also generally referred to as primary market investment.

#Secondary market

The secondary market is the market for investors and investors to trade, the most typical is the stock market.

Due to the large number of participants in the secondary market, the liquidity is of course also good.

What is liquidity? You can search for “mobility” on this site

#Direct Listing (DPO)
Direct listing, Direct Public Offering, referred to as DPO, is a new listing method relative to IPO.

The difference between DOP and IPO is:

Instead of contacting primary market players through underwriters, the company sells directly on the secondary market.
There are no new shares issued, and there is no so-called lock-up period. Assuming that the original stock registered by the company is 10,000 shares, after listing on the secondary market, the 10,000 shares held by the original shareholders can theoretically be traded immediately. (but still subject to SEC’s rule144).

The main advantages of DPO are:

Enterprises don’t need to spend money to hire underwriters, which is not a small amount.
The IPO process is relatively long, because it takes 1 to 2 years to contact underwriters, underwriters, and then contact institutional roadshows.
It is more friendly to the original shareholders of the enterprise, for example, the employees of the enterprise can cash out quickly.
It is fairer for all traders in the market. If it is an IPO, traders in the secondary market can only wait for investors in the primary market to buy.

The disadvantages of DPO are mainly:

In the way of DPO, the company does not issue new shares, but in the way of IPO, the new shares issued by the company can immediately obtain a huge amount of funds from the market.
Since there is no participation of underwriters and institutional investors in the primary market, the stock price volatility after DPO may be relatively large. This volatility is one of the reasons why some companies have been hesitant to go public directly.
Without a lock-up period, employees and early-stage investment capitalists could theoretically sell their shares quickly, and a sharp drop in stock prices may cause employees and investors to lose confidence in the company. This kind of impact is relatively large, so some companies try to set a lock-up period internally.

In the history of the US stock market, the DPO method of listing is relatively rare, and only a few well-known companies have adopted this method, such as music streaming media Spotify and instant messaging software Slack.

#Enterprise delisting (Unlisted)
After a company goes public, after a period of time, if it no longer meets the conditions for listing on the exchange, it will be required to delist. At this time, the company must ask to repurchase the stock at a certain price and return the money to the shareholders. After delisting, the company becomes a stock exchange. A private company, not a public company.

Some companies also choose to delist because they believe that disclosure must be disclosed, which will lead to large stock price fluctuations, which will affect corporate decision-making or employee confidence, or have other reasons.

#stock code (Symbol)

To go public, a company must apply to the exchange for a unique number that is not used by other companies. This number is used to identify the company’s stock. Traders always enter the number to locate and trade stocks. This number is related to the exchange, and the numbering methods of different exchanges are different. For example, Apple’s number is AAPL, and Moutai’s number is 600519.

Note that a company can be listed on two exchanges, thus using two different numbers. For example, Ali is also listed on the NASDAQ stock exchange in the United States with the code BABA, and it is also listed on the Hong Kong Stock Exchange with the Hong Kong stock code 09988.

#Price and Volume

After the stock is issued, there will be an initial pricing, which is mainly determined by institutions in the primary market.

Investors judge whether they need to buy stocks based on the company’s prospects, etc. Some people buy stocks and choose to sell them when the price rises. Therefore, there are people buying and selling in the market, and the stock price is constantly changing, mainly due to the relationship between supply and demand.

In addition, the exchange will also count the cumulative number of daily transactions of a stock, which is called the trading volume. The trading volume data can also show the activity level of traders of a stock.

#Quotation (bid and ask), 5 files, 10 files
When the buyer and the seller make a quotation, use the quotation queue. Taking Apple as an example, assuming that the current Apple stock price is 400, then:
The left side shows the buyer’s quotation, also called bid

(Buy 1) Buy price 399.5, quantity 100
(Buy 2) Buy offer 399.2, quantity 300
(Buy 3) Buy price 398.5, quantity 200
(Buy 4) Buy price 397.4, quantity 1000
(Buy 5) Buy price 397.0, quantity 500

The seller’s quotation is displayed on the right, also called ask

(Sell 1) Buy offer 400.3, quantity 300
(Sell 2) Bid offer 401.2, quantity 200
(Sell 3) Buy offer 402.5, quantity 100
(Sell 4) Bid offer 404.0, quantity 600
(Sell 5) Buy offer 404.5, quantity 400

In other words, the transaction must be either the seller’s compromise, or the buyer’s compromise, or the two parties just agree on a certain price to complete the transaction, and the transaction will be traded after the transaction.

Assuming that a seller suddenly decides to sell 200 shares at 399 at this time, he will give priority to the transaction of 100 shares of buy 1 and 100 shares of buy 2. At this time, there are still 200 shares of buy 2 that have not been traded, and his quotation has also become The highest bidder made an offer, so buy 2 becomes buy 1 and the quantity is 200. The buyer’s quotation queue collectively moved up one space:

(buy 1) buy offer 399.2, quantity 200
(Buy 2) Buy offer 398.5, quantity 200
(Buy 3) Buy offer 397.4, quantity 1000
(Buy 4) Bid offer 397.0, quantity 500
(buy 5) buy offer xxx, quantity xxx

At this time, suddenly someone is willing to buy 400 shares at 399, that is, the person with the second highest bid, and the buyer’s quotation queue becomes

(buy 1) buy offer 399.2, quantity 200
(Buy 2) Bid offer 399.0, quantity 400 –> new buyer
(Buy 3) Buy offer 398.5, quantity 200
(Buy 4) Bid offer 397.4, quantity 1000
(buy 5) buy offer 397.0, quantity 500

Therefore, the quotations are sorted according to the price, not the time, which is the same as buying vegetables in the vegetable market. As a buyer, the higher the quotation, the higher the transaction priority; as a seller, the lower the quotation, the higher the transaction priority.

If you can see all the quotation queues of buyers and sellers in the market, then you have a clear picture of the strength of buyers and sellers in the market, but the exchange will not give all the quotation information in the queue, and generally only give the 5 most reliable quotations. The previous buyer’s quotation and seller’s quotation, this is 5 grades, then sometimes you can get 10 grades of quotations by paying.

In addition, some exchanges can even provide more market quotations, as long as you pay.

#Market Cap and tradable shares

The stocks issued by a company after listing can be divided into tradable and non-tradable. Those traded on the secondary market are called tradable shares, and some are held by insiders and cannot be traded temporarily.

A company’s market capitalization is the stock price multiplied by the number of shares outstanding.

#Trading Hours

Stock trading is not carried out 24 hours a day. It starts at a certain time point of the day and ends at a certain time point. The starting time point is called opening and the ending time point is called closing market. Stock markets in some countries, such as US stocks, allow trading for a period of time before the market opens and after the market closes, so the trading time is divided into three parts:

Regular time
Premarket session
After hours

#K line (OHLCV)

For investors, there are 4 important prices for stocks in a day:

Opening price: Open Price
The highest price of the day: High Price
The lowest price of the day: Low Price
Closing price: Close Price

Coupled with the volume of trading volume, referred to as ohlcv, if the v volume is not counted, the daily ohlc can be drawn as a column or called a candle, and then the columns of the sky are connected to form a k-line.
The k-line can be calculated by day, or by week, month, or year. The k-lines drawn according to time are called daily lines, weekly lines, monthly lines, and annual lines. For example, the weekly line is to count the ohclv within a week.

K-line charts are also called candlestick charts, Japanese lines, Yin-Yang lines, bar lines, etc. The commonly used term is “K-line”. It originated from the rice market transactions in the Tokugawa shogunate era (1603-1867) in Japan in the 18th century, and was used to calculate the daily rise and fall of rice prices. Because of the uniqueness of the marking method, people introduce it into the analysis of stock market price trends. After more than 300 years of development, it has been widely used in stock, futures, foreign exchange, options and other securities markets.

The so-called technical analysis of stocks, or chart analysis, is actually analyzing K-line charts to judge the next trend of stocks.


#Financing and Leverage

Financing means borrowing money. For stock traders, financing means borrowing money to speculate in stocks. For example, if you have a principal of 100, you can borrow 200, so the total is 300, and you have used triple leverage. In this era of low interest rates, leverage can sometimes make you rich quickly. Of course, leverage is also a double-edged sword, and your risk is also magnified. Once leverage is tripled, once it falls by 33%, your principal will almost be lost. Leverage will increase your margin. In addition to the difference in the margin of each brokerage, the type of securities you hold also has an impact on the margin. For example, some ETFs with leverage themselves will take up more margin.

#Long Stock, Short Stock and Short Cover

Buying stocks (or other securities such as futures contracts) is also called long. The purpose of long is of course to sell low and buy high, so there will be selling operations later.

Short selling is also called securities lending. Simply put, it is to borrow a stock from others first, then sell it at the current price, and then buy it back after the stock price falls (Short Cover), so that you can earn the price difference.

Therefore, to be long stocks is to buy low first and then sell high, while to be short is to sell high first and then buy low.

Short selling is only allowed in the stock markets of some countries.

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