Introduction to Finance
From cryptocurrency to stock exchanges, we’ll go over what you need to know before entering the stock market. You will be a more informed stock market investor after reading this.
⚠️Disclaimer⚠️
I am not an expert on the subject. This is NOT a financial recommendation. Please conduct your own investigation. Know yourself and your risk tolerance so that your money does not ruin your health or finances. Take it easy, don’t rush, and don’t put in any more money unless you’re willing to lose it all. Back up your judgments with reasoning so that you are investing rather than gambling.
What is finance?
The system or study of money creation, circulation, and management.
What is financial markets?
Any marketplace where securities are traded, such as the stock market, bond market, FX market, and derivatives market, among others.
Stock Exchange and Its History
What is the Stock Exchange?
The stock exchange, also known as the capital market, is an organized market in which tradable assets, stocks, shares, commodities, foreign exchange, loans, futures contracts, and options contracts are traded or purchased openly.
The stock market is not a place for gambling; it is a place for everyday buy and sell transactions, and it is not a place for little investors. Small investors invest for the medium and long term in order to profit.
History of the Stock Exchange
Exchanges occurred at every trading station where buying and selling occurred and are thus very old. Because of government borrowings, modern organized stock exchanges were born. In 1409, Bruges founded the first stock exchange.
What is the NYSE / Wall Street Stock Exchange?
The New York Equities Exchange (NYSE) is the world’s largest marketplace for investors to purchase and sell equities.
What is Nasdaq?
Nasdaq is a global electronic marketplace where investors can buy and sell assets. Its first name was an abbreviation for the National Association of Securities Dealers Automated Quotations.
Stock Exchange Transactions
What are financial markets?
It is the process by which a buyer and seller reach an agreement on a financial transaction. A secure institution connects the buyer and vendor.
What is the difference between a spot and a futures market?
Buying and selling occur in real-time on the spot market. Forex is the most well-known spot market. A forward market is an agreement for a specific price and quantity at a future date. Futures markets include forward and futures markets.
What is the difference between over-the-counter and organized market?
Over-the-counter markets are markets that do not have established norms and where the regulation and supervision on which buying and selling are based on negotiating are weak. Bazaars are one example.
Organized marketplaces have rules and are strictly regulated. Stock exchanges and banks are two examples. There is less risk than in over-the-counter marketplaces. The New York Stock Exchange is an example of an organized market.
What is a security?
These are negotiable instruments with partnership rights that have been approved by Capital Markets Boards. These documents are bought and sold as an investment. Stocks and bonds are the most commonly traded securities.
What is securitization?
It is the transformation of illiquid assets into liquid assets. The financial assets created as a result of this transaction are referred to as “asset-backed securities.” The goal here is to boost the business’s liquidity and develop an alternate finance source.
What is a Bond?
Bonds are issued by governments and enterprises to raise funds. By purchasing a bond, you are making a loan to the issuer, who agrees to repay the face value of the loan on a particular date and to pay you periodic interest payments along the way, usually twice a year.
What is a Forex?
Foreign exchange, or Forex, is the global exchange of one currency for another, such as yen for USD.
What is a Derivative in Finance?
A derivative is a two-party contract whose value is determined by an underlying asset, group of assets, or benchmark. Futures, options, forwards, and swaps are the most prevalent types of derivatives.
What is a Stock (Share)?
A stock is a security that is issued in exchange for shares that a corporation offers to the public. In theory, if you purchase even one share of a corporation, you become a partner in that company.
What are the types of stocks?
Ordinary shares: These are shares that give their owners equal rights but no special treatment.
Preferred shares: These are shares that provide benefits such as the opportunity to vote, a portion of profits, and the right to liquidation balance.
Non-voting shares: These are shares that have all rights save voting rights and are commonly seen in family businesses.
What are the rights of the shareholder?
Dividend right: Listed firms have the right to transfer a portion of their annual profits to their shareholders.
Preemption right (to buy new shares): When a corporation seeks to grow its capital, it gives the existing investor first dibs. The benefit of this is that it permits you to purchase new shares at a lesser cost. In general, the value of the share rises once the paid-in capital rises.
Participation in the liquidation balance: If a company is closing, the debts are paid off first, and if any remain, the partners’ shares are dispersed. In other words, the investor’s portion of the bondholder is paid, and if he survives, the shareholder is also paid.
The right to participate in corporate management: Technically, even if you just purchase one share, you are considered a partner of that company and are entitled to attend the general assembly.
The right to vote: Giving each shareholder voting power.
Right to information: Listed firms are required to make all types of information available to the public as soon as feasible. The right of the investor to receive information cannot be prevented or curtailed.
What should be considered when choosing a brokerage firm to trade in the stock market?
Commission prices: Because huge bank brokers charge high commission rates, customers who will make large or continuous transactions do not choose these giant banks.
Adaptation to technology advancements: Real-time data should be given fast, and mobile monitoring should be possible. Fundamental and technical analysis reports, for example, should be provided.
Who is the dealer and broker?
These two authorities, who operate as stock market mediators, are sometimes mistaken for one another. The dealer is the one who conducts deals on his or her own behalf, whereas the broker is an employee of the intermediate organization. Brokers provide customer orders to the system, and dealers collect them.
What does it mean to give an order?
An application for the transaction is made by putting an order on the stock exchange at a certain price for the share you want to purchase or sell. For example, if you make an order to purchase a share at a certain price and quantity, and another order system enters an order to sell it at the same price and amount, the orders are matched and executed. So the transaction is completed. Transactions go place at the agreed-upon price, but the buyers and sellers are unaware of one other.
What are the order types?
It merely makes use of a few of the smaller sections.
Limit price orders are also known as straight orders. These are price and quantity orders for purchasing and selling. All or some of the orders are carried out.
Orders placed on the market: The price is only entered in quantity. The goal of the match is to trade at the highest price for buying and the lowest price for selling until the whole amount submitted is reached. There are 5000 A sensations, for example. This order type is used when we want the price to be traded at whatever price it is that day and we want the amount to be sold until the total amount is consumed.
Limit orders differ from market orders in that they are turned into orders at the last transaction prices when a portion of the entered amount is inoperative.
Conditional orders are used when the orders entered must meet certain criteria. There may be conditions, such as the transaction must be completed if the total sum entered is realized.
Orders with a minimum of $5,000 and a maximum of $1,000,000 are considered midpoint orders.
Orders for 0.3 shares are known as fraction orders.
How are orders executed?
Priority is given to greater prices for buying and lower prices for selling, and if the prices are equal, the one that is earlier in time is given priority. When the prices of the buyer and seller are equal, a price is produced.
Can orders be canceled?
Orders that have not yet been processed can be canceled at any time. The number of orders that are entered into the system can also be modified. It is illegal to cancel orders with extremely high prices in order to manipulate the market.
What does improved order mean?
Order enhancement entails increasing the price of the buy order while decreasing the price of the sell order. Making the order worse is the exact opposite.
How long is the validity period of orders?
Orders placed on the stock market have a maximum validity period of one business day. Growth orders are valid for the session in which they are made in all markets unless otherwise noted, and if they are not processed, they are canceled at the end of the session.
What is the settlement period in the share market?
T+2 clearing transactions are carried out on the stock exchange. The purchase and sale are closed and the cash transfer occurs on the second business day following the transaction day, T+2.
What is netting?
It is the process of balancing financial asset receivables and payables.
What is value?
The date on which securities are settled is referred to as the value date. T+1 denotes that the value day is the next business day.
What does base price mean in stocks?
The base price is the price at which the stock’s lower and higher price limits for a trading day are defined. It is calculated using the previous trading day’s closing price. The base and bottom values of the shares are established by the margins to be applied to the previous trading day’s closing price.
What is the price range for stocks?
As stock prices fluctuate, so do price levels. A price tick is the smallest price change that can occur for each share price at the same moment. For example, there are 0.01 steps between $0.01 and $20, 0.02 steps between $20 and $50, and 0.1 steps between $100 and above.
What is a circuit breaker?
It is the temporary suspension of stock exchange transactions when the price change surpasses a certain threshold value. Pending transactions are moved to the order-collecting phase, where the single pricing technique is used. When the process is finished, the stock is returned to the continuous transaction section and operations resume as usual.
The circuit breaker trip rate varies by market, although it is typically between 5 and 10%.
Order collection time following the circuit breaker varies according to market but is typically between 5 and 15 minutes.
The post-circuit breaker pairing time varies by market but is typically between 2 and 15 minutes.
What are the stock market trading hours?
Orders are gathered between 9:40 and 9:55 when the stock market first opens, after which price determination and transactions are completed. Continuous transaction management begins about 10:00 a.m. and continues until 18:00 p.m. At 18:00, the closing margin is broadcast for one minute, and the last orders are received for four minutes. The price has been decided and final transactions have been completed as of 18:05. Transactions at the final price may take up to 18:10 to complete.
What are the Borsa Istanbul Market Types?
Borsa Istanbul has seven different market kinds.
The Yıldz Market is where shares with a market value of 300 million TL or more are exchanged.
The primary market is where shares with a market value of 300 million to 75 million TL are exchanged.
The submarket is where initial public offerings (IPOs) are traded for between 75 million and 40 million TL.
The close watch market trades companies that are expected to be removed from the star, main, and sub-markets.
The structured products and fund market is where exchange-traded fund participation certificates, warrants, certificates, ownership-based lease certificates, real estate certificates, real estate investment funds, and venture capital investment funds can be exchanged.
The qualified investor transaction market is the market in which partnership shares granted to qualified investors but not offered to the general public are traded. Those who are not qualified investors are not permitted to trade in this market.
Shares of firms whose pre-market trading platform is open to the public but not traded on the stock exchange, and whose shares are decided to be exchanged on this platform by the Stock Exchange, can be traded on this platform.
Which investment instruments are traded on Borsa Istanbul?
When we think of Borsa Istanbul, we think of the stock market, but it trades more than just stocks.
Stocks, exchange-traded funds, warrants, investment company certificates, real estate investment funds and venture capital investment fund participation shares, and real estate certificates are examples of share market instruments.
Government domestic debt securities, CBRT liquidity bonds, revenue-sharing bonds, income-indexed bonds, private sector bonds, financing bills, asset and mortgage-backed securities, lease certificates, repo transactions, and Eurobonds are examples of debt market instruments.
Futures and options trading instruments include futures contracts and options.
Market instruments for precious metals and valuable stones include gold, silver, platinum, palladium, diamonds, and precious stones.
What does market-making mean?
Market-making refers to the process of increasing liquidity through the trading activity of brokerage companies regulated by the stock exchange. The goal here is to guarantee that the processes run on a regular and effective basis. In certain ways, the market has shifted. Double-sided trading in stocks with no depth prevents excessive volatility and manipulative trades. The exchange determines all terms in advance.
Fundamental Financial Concepts
What is the transaction volume?
Transaction volume is the amount obtained by multiplying the number of transactions made by the unit price, which is the sum of buying and selling transactions of a share or other investment instrument. In other words, a greater transaction volume investment instrument may offer the option to buy and sell at the appropriate price faster than a lower transaction volume investment instrument.
What does transaction amount mean?
It refers to the total number of purchases and sales transactions made in an investment instrument within a certain period of time. It is important not to confuse transaction amount with transaction volume. For example, if a stock’s transaction volume is high but its price is low, the total transaction volume may be lower than the volume of a stock whose price is higher but its quantity is lower. While the transaction amount only provides information about the speed at which the stock changes hands, the transaction volume measures the size of the entire transaction.
What is an index?
An index is a metric used to assess the performance of a certain financial product. Stock exchanges generate a large portion of the indices. Stock exchanges can sometimes calculate a company’s index. As a result, customers may monitor the overall performance of the basket of stocks they created based on their own criteria on a daily basis. Garanti BBVA Financial Subsidiaries Index, for example, consists of Garanti A and its subsidiary firms’ shares traded on Borsa Istanbul, hence Garanti uses this index to assess the performance of the companies in its group.
Indices are significant because they provide investors with easy and quick information on the general direction of the market. Commentaries on the market or the investment instruments included in the index are made based on the direction of these indices. The average price direction of firms distributing dividends in the stock market, for example, can be examined by looking at the BIST dividend index. Indices serve as a type of signaling instrument in this regard.
What is the weighted average price?
Throughout the day, an investment instrument is bought and sold at different prices. When calculating the average price of all transactions, a weighted method must be used because the same amount cannot be bought and sold at every price. This estimated weight average price is used in the next session’s base price computation.
Weighted average price = (Transaction price x Transaction amount) / total transaction amount
For example, if a stock is traded in 300 shares at price 3, 400 shares at price 4, and 500 shares at price 5, the weighted average will be 900 + 1600 + 2500/1200 = 4.16.
What are the indices traded on Borsa Istanbul?
Borsa Istanbul trades a wide range of indexes.
- The BIST 100 index is made up of 100 stocks chosen from the Stars Market and comprises the BIST 30 and BIST 50.
- BIST 50 Index is comprised of 50 stocks chosen from the Stars Market and includes BIST 30.
- The BIST 30 Index is made up of 30 equities chosen from the companies trading on the Stars Market.
- The BIST 50–30 Index is made up of 20 stocks that are part of the BIST 50 index but not the BIST 30 index.
- The BIST 100–30 Index is comprised of 70 stocks that are part of the BIST 100 but not the BIST 30.
- BIST Liquid Bank Index is made up of bank shares with a high daily average transaction volume that is chosen from firms traded on the Yldz Market.
- The BIST Non-Bank Liquid 10 Index is made up of the shares of ten non-bank companies with a high daily average transaction volume that was chosen from among those traded on the Star Market.
- BIST Corporate Governance Index is made up of shares of firms that are traded in the star market, main market, and sub-market and have a minimum corporate governance rating score of at least 3.
- BIST All Index comprises stocks traded in the star market, main market, and sub-market.
And the remaining 10 indices.
What are the world’s leading stock market indices?
Every country’s stock exchange has indices, although some indices are closely monitored by investors due to high transaction volume.
- Dow Jones 30 Index: This index represents the market value of the 30 largest firms in America.
- The S&P500 is an index that measures the market value of America’s 500 largest corporations.
- The NASDAQ100/US Stock Market Index is a calculation of 100 non-financial American companies trading on the NASDAQ stock market.
- The DAX30 index measures the performance of 30 major German corporations listed on the Frankfurt Stock Exchange. This is the most prominent stock index in Germany.
- CAC40: This is the index that assesses the first 40 businesses on the French stock exchange with the largest market value.
- The IBEX35 index computes the 35 largest companies trading on the Madrid Stock Exchange.
- The FTSE100 is an index that covers the top 100 firms by market capitalization on the London Stock Exchange.
- NIKKEI 225: This index is made up of 225 of the most traded businesses on the Tokyo Stock Exchange, chosen from diverse sectors.
- The RUSSELL 2000 Index is an index that tracks the performance of 2000 SMEs traded in the United States.
- SMI: This is the index that contains the 20 businesses with the highest market capitalizations that are traded on the Swiss stock exchange.
- S&P/MIB40: This is an index that contains the 40 firms with the highest market capitalizations that are quoted on the Italian stock exchange.
In 2021, the United States will account for 56% of the total global stock market transaction volume. Japan, China, England, France, Switzerland, Germany, Canada, Australia, South Korea, and Taiwan follow.
What are Bear and Bull markets?
A bear market is a market condition in which pessimism dominates in the economy and price decreases are projected. The name bear comes from the fact that bears stand up and attack from top to bottom, and traveling from top to bottom represents a decline in value. Investors who believe the market is in a bear market sell their investments in the hope of acquiring them at a lower price later. Not every drop marks the start of a bear market.
When the major trend is downward, the market is said to be in a bear market. It is impossible to predict when the bear market will conclude with a few upticks. A sustained upward trend in both prices and transaction volume indicates that the bear market has ended. Investor perception is one of the most critical aspects. Prices rise as a result of investors’ optimism.
A bull market is one in which the environment is upbeat and stock values are projected to grow. Current macro indices such as inflation, unemployment, and growth must be stated positively in order to determine whether or not there is a bull market. Risk appetite rises during a bull market, but there is a risk of bubble development.
What is the primary and secondary market?
The primary market is where an investment product is first made available for trading. The most obvious example is a public offering of a company’s stock. The secondary market is where investment instruments traded on the primary market are exchanged. While the issuer and buyer set prices in the primary market, the balance of buyers and sellers determines prices in the secondary market.
What are long and short positions?
A long position is taken by an investor who expects the price of an investment to rise in the future. A short position occurs when an investor sells an investment that he expects to lose value in the future.
The buyer of futures contracts takes a long position, while the seller has a short position.
Thank you for sticking with me until the finish; I hope you found it useful.
Resources
[1] Investopedia.com, (2023), Investopedia:
[https://www.investopedia.com/]
[2] Fool.com, (2023), Motley Fool:
