The Stock Market is part of the financial markets, which in turn make up the Financial System. As such, in this market resources are intermediated to finance those who require it, offering advantages in relation to other financing alternatives. In this logic functions such as:
- Contact suppliers and sellers of securities
- Represent pricing mechanisms
- Provide liquidity to the securities
Let us know and review the related concepts in order to identify the actors or participants of the stock market.
The Financial System Covers: Financial markets, financial instruments and financial institutions. All of which interact under norms or rules established by specialized regulatory bodies.
The financial instruments, which are traded in the financial markets, consist of financial assets that can be direct (basically bank credits) and indirect (basically securities), depending on the form of intermediation to which they are linked.
To understand the different forms of intermediation, take the very common case of companies that need to finance their projects or activities; They have two ways to do it: one through commercial or bank credit (indirect intermediation), and the other through the stock market (direct intermediation).
Indirect Intermediation Market: As the name implies, it is that market where an intermediary participates (commonly the banking sector, including associated and private commercial banks, which provide short-term loans), attracting resources from the public and then placing them in Loan form, charging the second a predetermined interest rate. In this way, the capital offeror and the claimant are indirectly linked through the intermediary.
The loans placed by a bank represent its main asset, which by virtue of the process described are indirect in nature. Collective investment vehicles, such as investment funds and pension funds, are usually classified as indirect intermediaries, because people indirectly access the market through these vehicles.
Direct Intermediation Market: When people need money to finance their projects (deficit agents) and do not find it convenient to take them from the banking sector, then they can resort to issuing securities (example: shares or obligations) and thus capture the resources they need, directly of the capital bidders. These bidders are none other than investors who acquire securities based on the expected return and the risk they are willing to assume.
Financial markets are those where financial assets are bought and sold. These assets include obligations and rights of a financial nature.
The financial asset market arises and develops because capital is a scarce asset that is not in possession or within everyone’s reach. The lack of capital necessary to carry out normal or planned activities is the essential premise for the existence of this market.
The financial market is born in the concurrence, on the one hand, of the surplus agents that after having satisfied their financial needs have surpluses that wish to invest them properly; and, on the other, deficit agents, those whose financial needs are greater than their availability of resources, and need to cover their deficit to normally carry out productive investment activities.
The money market is characterized by accommodating the negotiation of very short-lived financial assets (usually less than a year), which are usually substitutes for money because of their high liquidity because they are very easy to negotiate. This segment includes: promissory notes, commercial papers, Central Bank certificates (issued to control the mass of money in the economy), etc.
In the futures and derivatives markets, contracts of a financial nature are negotiated with conditions set at the time of the agreement, which must be executed on a specific date or at a defined time interval. These markets originate from the need to reduce the risks of the uncertainty of the occurrence of future events. To date, the most common derivatives are: forward, futures, swaps, options and indices. The combination of these gives rise to another series of more complex derivatives.
An important component of the financial market is the stock market. This market is one in which securities are traded; We include the money and capital markets within the stock market.
Stock Market Segments
The stock market is usually classified based on an element that serves as a distinction, which results in various segmentations.
The Most Important Differentiating Criteria are:
- By the type of placements divided: The market in primary and secondary.
- By the trading mechanisms used divide: The market in stock and over-the-counter.
By the Type of Placement
Primary market or emission market is one that is related to the initial placement of securities, which is carried out at a certain price. In the case of a public offering of securities, prior authorization from ASFI is required, and the corresponding registration in the Stock Market Registry. This type of offer is open to all the public interested in acquiring a value. Alternatively, placement can happen by private offer; that is to say by sale directed only to certain people or institutions not being of access to the rest of the public.
The secondary or transaction market is the one that includes the negotiations and transfers of securities issued and previously placed. The stock exchange negotiation and the other centralized negotiation mechanisms constitute a secondary market par excellence.
It is that segment of the market that, taking as a differentiating element the form of negotiation of the securities, is located on the Stock Exchange, not as an enclosure, but as a mechanism, called the Stock Market. The wheel participates in the Stock Exchange Agencies.
The over-the-counter market is one in which securities are placed and traded, but outside the Exchange as a trading mechanism. The over-the-counter market can be centralized or not, although it is usually a market that is not organized with specific trading rules. This market can also be divided into primary and secondary market segments.
In a Succinct way we can Describe the Functions of each of these Participants:
- Investor: Who has resources that he does not need for himself at the moment, and offers them to finance the savings or investment opportunities offered to him. It constitutes the axis of attention of the market. Investors representing joint or collective investment vehicles are called institutional investors.
- Intermediaries: Act as facilitators to bring those who offer resources (investors) with those who need to capture those resources (issuers or other investors). The typical intermediary is the Stock Exchange Agency, who provides its services for a commission.
- Stock Exchange: Provides the necessary means and conditions for carrying out transactions (purchase and sale) of securities. Its members participate, which are usually intermediaries.
- Deposit Entity: It is an entity that covers two essential functions. On the one hand, it is in charge of allowing the liquidation (payment and delivery of the securities) in an orderly manner of the transactions that are carried out in the market, especially on the Stock Exchange and on the other hand, it protects the securities that are traded in this market.
- Risk Rating Agency: Is responsible for assessing with specialized methods the risk that the issuers of securities fail to meet the obligations they assume when placing their securities. The rating is usually carried out on securities representing debt or credit content.
- Issuer: It is who needs to have additional resources to those that it is generating, in order to apply them to their projects or activities. For this purpose, it issues values to capture those resources.
- Regulator: This has the function of establishing the rules that order the operation of the market, and also verifying that they are complied with. In practice there is more than one entity, of different specialization, with regulatory tasks that maintain interference in the Financial System.
Transparency and Stock Market
The stock market is a market that bases its development on the confidence it inspires, which in turn depends on the protection it designs in favor of the investor. Investor Protection is therefore essential and for this it is important that the investor does not make random decisions. He must properly evaluate his decision, and to contribute to it he needs to access the information that is required.
Transparency is a fundamental principle of the capital market, which makes it possible for all investors to have and enjoy equal conditions in the market, with sufficient, reliable and timely information, giving investors sufficient elements for decision-making that can be Somehow affect your assets.
Under the principle of transparency, the entities involved in the capital market are exposed to the observation of the general public. As an example, in the case of issuers, they also adhere to the observation of their own partners, of their creditors, and of their potential investors. In this way, their operations and activities must be public, obviously with the limitations that the regulations themselves indicate.
In contrast, when the information is insufficient or inappropriate, uncertainty is generated and the decisions of individuals or institutions are affected. For example, individuals become less inclined to invest in long terms; or the banks decrease the granting of loans. Even the so-called “bubbles” or price jumps, occur due to incorrect expectations that in turn originate from information that was not correct.
The RMV is in charge of the ASFI and all the information contained in it is freely available to the public. In this register, companies that make a public offer of securities – stocks, bonds, etc., as well as the other market participants, such as the Stock Exchanges, Stock Agencies, Investment Funds, etc…
The obligation to inform is continuous and permanent, that is to say, it is not enough, for example, for the issuer to periodically submit to the ASFI or the Stock Exchange its financial statements, annual report, etc., so that they in turn transmit them to the investors, but also those facts that could influence the decision making of investors (relevant facts).