Everything you need to know about stocks

What is the difference between stocks, equities, and shares?

The terms stocks and shares are often used interchangeably to describe a fraction of ownership in a specific company. However, there are subtle differences in the meanings between the two terms that are worth keeping in mind.

When people talk about stocks, they are usually referring to what is known as common stock: shares of ownership in a company that can be purchased. When someone purchases common stock, they can also have a say in company matters through voting rights, as well as a potential right to profits, which can come as dividends. We’ll explain more about dividends further down, so keep reading.

Meanwhile, shares is a more technical term that describes the smallest possible denomination of a company's stock. When you invest in a company, you are actually purchasing a specific number of shares, through which you can say you have stock in the company. This is a minor difference, which is why you will usually see both terms used in the same context.

Equities usually refers to how much total ownership one may have in a company—for example, if a company had 1,000 shares and you owned 100 of those shares, you could say you held a 10% equity stake in that company.

How much is a share worth?

Ultimately, the current value of a share is dictated by supply and demand in the marketplace; it is essentially only worth the price that someone is willing to pay and that someone else is willing to sell.

However, there are several ways to compute the value of a share to try to make sense of where that market value should be and whether that price is too low or too high.

One popular (but complex) method among investment analysts is a DCF (discounted cash flow) valuation, where analysts forecast all future cash flows of a company, compute a present value for them, and then divide by the number of shares in circulation to give a fair value per share. The resulting value is clearly subject to a wide range of outcomes, depending on the assumptions used in the forecasts.

Another method to determine the stock price is fundamental analysis, which involves comparing the company to its peers with financial metrics (or multiples) such as price/earnings or EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortisation ratio). There are many sources for this kind of analysis, so you don't necessarily need to calculate them yourself. Just know that the valuations are subject to assumptions, so the outcome will vary. However, they can be a helpful guide as to whether the current market price is fair or not.

How does the stock market work?

A stock market is an exchange or venue where shares of public companies can be bought and sold. To be listed (or made available to trade) on a stock market, the issuance of shares typically begins through a process called an initial public offering (IPO) in what is known as the primary market—you can read more about that process further down.

Following the IPO, shares of a given company will be available for purchase or sale on the stock market. When you buy shares of stock on the stock market, you are buying from existing shareholders, not from the company itself. This is known as the secondary market.

In modern times, stock exchanges are largely electronic venues, a sharp contrast to the hectic physical venues of history. Each stock will have its own order book, an electronic list of buy and sell orders for that specific stock. The orders to buy are known as bids, and the orders to sell are known as offers.

For a trade to execute, a buyer and a seller must match each other in price. Overall, the order book provides real-time visibility of the amount of stock available to buy and sell at various prices, allowing market participants to gauge activity and make informed decisions. If there is a lot of demand for a stock, the bid side of the order book will likely grow quickly, and the price will move higher, whereas if there is more supply, the offer side will grow more quickly, and the price will move lower.

As a buyer, you have two choices. If you are patient and want to wait to buy at a specific price, you can specify the price at which you wish to buy and become part of the order book bids, which would be known as a limit order. If someone wishes to sell to you at your limit price, then your order will be executed. Of course, the price might start to move higher, in which case your order would go unfilled. The second choice, if you are less price-sensitive and want to buy quickly, is to buy at the current best price at which securities are being offered by sellers, which would be known as a market order (or an aggressive limit order).

In summary, when a company lists on the stock market, it will be bought and sold—not directly from the company—but from an investor who already owns the stock and wants to sell it. And then, of course, when and if you wish to sell a stock, you’ll sell to another investor who wants to buy it. All of this takes place electronically, with prices being set via the individual order books of each stock.

Types of stocks

If you hear the phrase stock types, this refers to either preferred stock or common stock.

Here is a simple breakdown of both:

Preferred stock is a type of stock that does not typically carry voting rights, and because of this, it usually receives a lower valuation. However, when dividends are paid, preferred stock has priority on the income of a company. That means that dividends are often higher for preferred stock. Another advantage of owning preferred stock is that in the event of bankruptcy, preferred stockholders rank higher than common stockholders.

Common stock is a type of stock that typically does carry voting rights. Take note that common stocks can be issued with multiple classes. This will be seen when different voting rights are to be assigned—for example, Alphabet (Google) has A, B, and C shares, but only A and C trade publicly on exchanges.

What are small, mid, and large-cap stocks?

Equities in the stock market are usually grouped based on their market capitalisation.

Market cap is a useful metric for determining the value of a listed company, and it is essentially the total number of available shares in a company multiplied by the value of each share.

Since not all companies on the stock market have the same value, market participants place companies into different clusters based on the range of market values observed.

For the US market (as an example):

• Large-cap: Typically refers to companies with a market cap of over USD 10 billion.
• Mid-cap: Refers to companies with a market cap between USD 2 billion and USD 10 billion.
• Small-cap: Refers to companies with a market cap between USD 300 million and USD 2 billion.

So let’s explore the differences between small, mid, and large-cap stocks and look at a few examples of well-known equities that fit each category.

What makes a large-cap stock?

Large-cap stocks are viewed as the biggest listed companies in the world. While some large-cap companies have long histories and have been in operation for many years, there are also newer companies that have experienced rapid growth and achieved large market capitalisations in a relatively short period of time. Therefore, the classification of large-cap is primarily based on market capitalisation rather than the age of the company.

The S&P 500—an index of the top 500 listed companies on American stock exchanges by market cap—is a good starting point to find the biggest large-cap stocks. These equities are more likely to generate consistent yet modest growth in investment terms. That’s because large-cap stocks have already experienced significant levels of growth to reach their current market cap status.

Examples of large-cap stocks: Apple (AAPL), Microsoft (MSFT), Tesla (TSLA), AstraZeneca (AZN).

What makes a mid-cap stock?

Mid-cap stocks are those with more modest market capitalisations than large-cap equities.

They are usually in the range of USD 2–10 billion when looking at the US market. However, they also tend to have more headroom for growth in the context of the ceiling of their respective share prices.

Mid-cap stocks are often more sensitive to volatility in the market, which gives patient traders the ability to go long on a mid-cap stock at discounted prices on occasion. This is particularly attractive for those looking to add a mid-cap stock to their investment portfolio with the potential to grow into a large-cap equity in the long term.

Another reason to invest in a mid-cap stock is the potential for the company to be involved in mergers and acquisitions (M&A) with bigger firms. In this scenario, existing shareholders of the mid-cap stock are often given a preferential price for their shares to accept the buyout.

Examples of mid-cap stocks: Avis Budget Group (CAR), Mattel (MAT), The Wendy’s Co (WEN), Greggs (GRG).

What makes a small-cap stock?

A small-cap stock differentiates substantially from large- and even mid-cap stocks. First and foremost, small-cap stocks are more likely to post faster and higher returns in share price, as the value of their stocks has not fully matured like a large-cap stock. But small-cap stocks are just as likely to post significant losses, as the volatility of small-cap equities is more susceptible to industry and macroeconomic headwinds.

Small-cap stocks are also lesser-known corporations, meaning investors need to conduct more detailed research on these equities to determine their growth prospects.

On a stock-by-stock basis, small-cap equities tend to carry greater risk than mid- and large-cap stocks. However, they can be a smart choice when combined with a diversified portfolio of large- and mid-cap equities.

For a listed company to be considered a small-cap stock, its market cap should be valued in the region of USD 300 million to USD 2 billion when looking at the US market.

Keep in mind that small caps may also be split into small, micro, or nano. Micro-cap refers to companies with a market cap below USD 300 million. Nano-cap refers to companies with a market cap below USD 50 million.

What are value and growth stocks?

Value and growth represent two opposite sides of the investing spectrum.

Value investors look for undervalued stocks. They use fundamental analysis to detect undervalued companies. Warren Buffet is perhaps one of the most famous value investors, making his fortune buying undervalued companies and holding them for long periods of time.

Growth investors are more interested in potential. They look to invest in the companies of tomorrow—companies that will grow tremendously in the coming years. Growth investors look for companies that are seeing earnings grow at above-average rates, and these typically would be smaller or younger companies operating in rapidly expanding industries. Valuations of such companies will often look expensive, and the risks associated with them are typically higher than for the value segment.

What are blue-chip stocks?

Taking inspiration from the casino world, where blue chips are the most valued, these shares reflect the same worth in the global financial market. Although there isn’t a textbook definition, blue-chip stocks are universally recognised as the giants of the corporate world.

These are the brands that resonate worldwide—the pioneers that have established a distinct position for themselves. Think of big names like Coca-Cola, Microsoft, Apple, Amazon and Google.

What are penny stocks?

A penny stock usually refers to a company’s stock that trades for less than USD 5 per share. They usually trade on over-the-counter transactions through the privately owned OTC Markets Group (an American financial market that provides liquidity and price information for nearly 10,000 over-the-counter securities). While not as common, some penny stocks do trade on large exchanges such as the New York Stock Exchange (NYSE).

There was a time when penny stocks were simply considered to be any stock that traded for less than USD 1 per share; however, the US Securities and Exchange Commission (SEC) modified this definition to include all shares traded for less than USD 5.

It’s good to be aware that penny stocks are often associated with companies with a lack of liquidity, which in simple terms means that entering or exiting a position can be challenging because large amounts of buyers and sellers are non-existent. Low liquidity also means that, as an investor, there is a chance you may have trouble finding a price that accurately reflects the market value of a penny stock.

How to invest in stocks

If you’re new to investing in stocks, here are a few things to consider:

Before you start investing in stocks, you need to think about your time horizon. By “time horizon” we mean that you should ask yourself: if you invest your money today, when would you need the money again? Next, consider what your personal goals are when investing. Do you want to invest for a long-term goal, like retirement? If so, you may feel more comfortable with risk, as a long time horizon means you’ll have more time to recover from any losses. If you think you may need this money again soon (perhaps for a short-term goal, like saving for a holiday), that’s good to keep in mind too, as you may want to invest in more conservative, low-risk stocks. To learn more about risk tolerance and how it can affect the way you invest, keep reading.

As previously mentioned, before you start investing, think carefully about your time horizon, your goals, and how comfortable you are losing the money you have set aside to invest. All of this will determine your risk tolerance. If you have a high tolerance for risk, you may choose to invest in stocks that are more exciting and less certain but perhaps have the potential to give you some big gains. If you feel more conservative with investing and have less tolerance for risk, you may want to consider choosing stocks in companies that are more stable and have a history of lower volatility.

Always read up on any company you are considering investing in so that you can make a truly informed decision. Bookmark your favourite financial news sites, listen (and subscribe) to investing podcasts (like Saxo’s Market Call), and subscribe to trading newsletters. Never stop learning, and always stay curious.

Instead of only buying one stock, try to buy stocks from many different companies and sectors, rather than hoping one stock will perform well. This is called diversification, and this strategy will help reduce your overall risk because asset classes generally perform differently.

It is impossible to time the market, as it will always go up and down. Volatility is inevitable. If you wait until the perfect day to invest, you may never start investing because the perfect day doesn’t exist. The best time to get started is now.

Take the time to read the small print on any shares you plan on purchasing, so that you know exactly what you are owning and if you can expect any extras, such as dividends or voting rights. Usually, you can find this information on the company's investor centre page, which will host this information along with other data like annual performance reports.

How to know which stocks to choose

When considering which stocks to choose, we recommend the following ‘top-down’ approach. Note: In this approach, you are making the choice not to invest in baskets of shares (like ETFs or mutual funds). You are picking the stocks individually that will be part of your portfolio.

• Consider the market.  How is the overall stock market performing, and how is it valued? Looking at the price/earnings ratio (or other indicators) will help you see things in perspective. Also, look at the state of the economy. Is it growing slowly or rapidly, or is it not growing at all? Another consideration is the availability of alternative investments (like bonds) that offer an acceptable return with acceptable risk. For some investors, the bond market offers a more suitable solution for their investment needs.
• Identify a sector.  When identifying the sector you want to invest in, be aware that there are cyclical and defensive sectors. Some examples of cyclical sectors are industrials, automotive, semiconductors, steel, airlines, and leisure. Some examples of defensive sectors are food grain industries, medical industries, and water service industries. Why is this important? Because selecting the appropriate sector will determine the risk of your entire portfolio. By selecting more defensive sectors (like utilities, consumer staples, and healthcare), you reduce the risk. Of course, personal preferences also play a significant role when selecting sectors.
• Use screener tools. The next step—once you know which sectors you are interested in—is to use the screener within the investing platform you are using. A screener is a tool within a platform that helps you find the most promising stocks. It can be thought of as a filtering tool that helps you find stocks of interest (within the sector you have chosen). There are several criteria available that you can apply, and by using those filters, you can 'slice and dice' that universe down to a more comprehensible overview. For example, one of the column filters you can use is distance towards the analyst's price target.
• Do your research.  The screened list of stocks is not an immediate buy. No, that list shows the stocks that meet your criteria and will therefore help you narrow down the number of stocks to do your research on. We cannot emphasise this enough: you must do your research before hitting the buy button. This can entail visiting the company's website, reading the annual report, and looking for analysis of that stock on the internet.
• Look at the stock’s trend lines.  Once you have determined the stocks you are interested in buying, you can have a look at the charts. You know what you want to buy, and the chart can help you determine when to buy it. If you do this, you will have combined fundamental analysis with technical analysis. This does not mean that you will only buy winners; there will be stocks in your portfolio that will behave differently than you expected. This underlines the importance of risk management. If you are bullish on a stock and you buy it, how comfortable (or uncomfortable) are you with being wrong? Will you take your loss at minus 10%? Minus 20%? Make sure you answer these questions upfront and use stop-loss orders to protect your capital.

What is sector investing?

Sector investing is an investing strategy in which an investor focuses on a specific industry sector or segment of the economy. A sector fund can be active (when an investor actively decides which sectors and shares should be in their portfolio) or passive (which usually tracks an index).

Sector investing is a strategy in which an investor focuses on a specific sector or segment of the economy. This can be achieved by selecting several individual stocks in that specific sector. Another way is by a fund: either an ETF (exchange-traded fund) that tracks an index of that sector, or a mutual fund. A mutual fund will try to generate extra return via actively managing the portfolio (which invests in the sector of your choice).

Sector funds are often recommended to be part of your asset allocation—not your entire portfolio—as they focus on only one sector and therefore offer no diversification. This means they are extremely vulnerable to the volatility of the stock market, which is important to keep in mind if you decide to try sector investing.

Why do people buy and sell stocks?

Millions of investors and traders around the world buy and sell stocks every day. Here are a few reasons why:

By purchasing stocks and holding onto them for months, or even years, investors aim to capitalise on long-term growth in the value of their assets and their overall wealth and net worth.

If you look closely at various major stock indices, which measure the performance of certain stocks grouped by market cap or a specific industry, you can see that, historically, growing wealth is often achieved with a long time horizon.

One index you’ll hear a lot about as an investor is the S&P 500, which tracks the stock performance of 500 major listed companies in the US. Over the past 30 years, the S&P 500 has delivered a compound average annual growth rate of 10.7%.

Of course, this does not mean that the S&P 500 has consistently grown over the decades. There have been many notable slumps and declines in this index. For example, in the 2008 crash following the financial crisis, and the 2020 crash following the global COVID-19 outbreak, the S&P lost over 25% of its value in just a few days, highlighting how even the most popular indices are not immune to downturns.

These ups and downs remind us that, while equities can form an important part of any portfolio, they are also riskier than many other asset classes, such as bonds.

Some people buy and sell stocks with shorter-term goals in mind. You could buy shares in a company while hoping to sell them again soon at a profit, provided that the price of those shares increases in the meantime.

For example, let's say you bought 10 shares of a certain stock at USD 900 per share on 20 December 2021, and then sold those shares on 27 December, at which point the share price had hit USD 1,093 per share. At a 21.4% price increase of USD 193 x 10, you would have made a gross profit of USD 1,930.

An investor can also earn money without selling the stock outright. Some companies offer dividends to shareholders, in which a certain monetary payment is given per share owned. The amount of the dividend is usually decided on a quarterly or annual basis, according to how well a company has performed during the preceding period.

For example, Apple offered a 2021 dividend of 22 cents per share for the third quarter of the financial year. This means that a shareholder who owns 100 shares in Apple would have received a dividend of USD 22 from the company at USD 0.22 x 100, with no effort required.

The more a company's share price appreciates over time, the greater the cumulative returns can be for investors. Let's say you invest USD 10,000 in a particular company. In the first 12 months, the share value rises by 10%, meaning that your shares are now worth USD 11,000, as USD 10,000 x 0.1 = USD 1,000.

If you hold on to these shares and they appreciate by 10% again the next year, that USD 10,000 investment is now worth USD 12,100, since USD 11,000 x 0.1 = USD 1,100. This increasing appreciation is known as compound returns, as the increase gets larger with each subsequent price rise. This is a primary motivation that many people have for buying stocks.

When to sell stocks

Timing the market is extremely difficult, so picking the best time to sell is equally difficult. Unless you are a trader looking to profit from swings in the market, it’s usually better to stay invested.

The saying "time in the market beats timing the market" means that staying invested throughout the market cycle typically ends up more profitable than trying to time the lows and highs. If a life event, such as a wedding, dictates that you need to sell some shares to free up cash, then that would make sense. However, in the long term, it is better to stay invested.

What affects the price of stocks?

Stocks are freely bought and sold on the open market. A vast range of market factors affect the price of any stock, so it is important to stay informed to put together an achievable investment strategy.

Key factors to look out for include:

• Company performance

  How a company performs has a direct and profound impact on its share price. If a company posts a positive earnings report or an optimistic outlook for the year ahead, its share price may rise. The reverse is also true. For example, if a company reports a lower-than-expected earnings outlook for Q3 of a given year, its stock price may fall once investors hear this news.

  It's worth noting that a ”good" performance is usually relative to expectations, rather than to the company's bottom line. That's why a healthy profits report from a company could still cause the stock price to dip if those profits are lower than what was expected.

• Industry performance

  It is not just the individual company's performance that affects the share price, but also the wider industry that it is part of. For example, the share price of an oil company, such as ExxonMobil, will fall if there are wider problems in the oil industry, such as demand shortages or supply bottlenecks.

• Market sentiment

  It is important to remember that often a stock price will be influenced by simply how people feel. This is what is broadly meant by market sentiment. If the general sentiment is that a particular company or industry is going to do well in the future, more people will buy shares in that sector. As a result, the share price may rise, becoming a sort of self-fulfilling prophecy. 

  We've seen this play out with green transition companies such as Tesla, which saw its share price increase 900% between the end of 2019 and the end of 2020, as optimism about the future of low-emission vehicles rose across the market.

• Economic indicators

  The broader economy of a country, or the world, will always play a role in the share price of a company. This is why, for example, during the Great Recession in 2008, stock indices around the world declined massively, with many companies seeing their share prices wiped out.

  Conversely, in better economic times, share prices tend to perform well as a whole. Of course, this is not always the case, and share prices can rise despite wider economic gloom. We saw this throughout the pandemic in 2020 when stock indices surged to near-record levels despite historic economic disruption.

What are the risks of investing in stocks?

Buying and selling stocks always comes with risk. There is no guarantee that you will make a profit, nor is there a guarantee that you will ever recoup your initial investment. As an investor, it is crucial that you are aware of the risks surrounding every share transaction. Even if a share seems like a “sure thing” to you, there are always risks involved.

Some important risks to consider include:

Some stocks are riskier than others by nature of the industry they represent, and the geographies that the companies are tied to. For example, commodities companies, such as oil or metals producers, are exposed to risks that other types of stocks are not, particularly related to geopolitical volatility. Oil prices might go down because of conflict or crisis in a specific country or region, while certain tech stocks will not suffer a price drop for the same reason.

It is impossible to know exactly what will happen to a company's share price over time. Your stock might go up, but it could just as easily go down. Meanwhile, unexpected events, such as market crashes or company troubles, could reduce the stock price, negatively affecting your investment at the same time. Diversification across stocks and asset classes can help to mitigate this risk.

Companies succeed, and companies fail. This is another inevitable risk for you to keep in mind. If a company goes bankrupt and enters liquidation, the shares in that company may cease to exist. If this happens, your investment in that company becomes completely worthless. Investors can mitigate this risk by reducing their stock holdings in troubled companies ahead of time. They can also opt to invest in company bonds since bondholders are entitled to proceeds from the sale of a company's assets in the event of bankruptcy.

Inflation is an ever-present risk that investors must factor into their decisions. Inflation can hurt businesses in several ways. When inflation goes up, operating costs for businesses go up. Meanwhile, government policies to tackle inflation, such as rate hikes and fiscal tightening, can also make it more difficult and costly for companies to operate in some industries.

This often causes the value of shares to decline, which is why inflationary periods can be bad for a stock portfolio. You may hear seasoned investors speak about the need to have a "hedge" against inflation in a portfolio. This term describes investments that can protect an investor's wealth against the erosion of the purchasing power of money caused by inflation. Conversely, zero inflation is also bad for share prices, since healthy levels of inflation are vital for stimulating the economy.

Businesses must always balance their bottom line with the law and the needs of the government. There are many ways that legislative actions can affect your stock investments. A company might be fined as part of an antitrust suit, which could negatively impact share prices. The government might seize the assets of a company or subject it to an audit, which can further erode share value. This is worth remembering because it is one of many risks investors have no control over.

What are the benefits of investing in stocks?

While there are risks when you invest in stocks, there are also some great benefits. These may include:

You can easily buy a huge number of company shares and sell them because they are so accessible. Other assets, such as bonds or metals, can often be quite complicated to learn how to trade for new investors.

The possibility of dividends is a powerful motivator for some investors. By buying dividend stocks, you can build up a passive income, provided the company does not slash your dividend payout (this happened during the COVID-19 crisis). The more shares you own, the more the company will pay you when dividend time arrives..

Inflation erodes the value of cash. If you leave your money sitting in a bank account for years, chances are that money will lose a significant chunk of its value over time. As we have seen, major indices, such as the S&P 500, have shown annualised average returns exceeding 10% over the decades. With inflation reaching 8.4% in March 2022, it may be wise to buy assets that can stay ahead of this.

Stocks offer superior returns over the interest rates offered by banks, but they also offer better returns over the long term than many other assets. For example, assets such as gold and bonds usually offer much lower returns than blue-chip stocks. If you are seeking better returns over many years, stocks can often be the most effective way to do that.

What is extended hours trading?

Extended hours trading refers to any trading conducted by electronic networks that takes place either before or after the regular trading hours of the listing exchange, such as the London Stock Exchange (LSE). The LSE is regularly open from 8:00 am to 4:30 pm GMT, but their extended hours trading includes a pre-trading session from 5:05 am to 7:50 am and a post-trading session from 4:40 pm to 5:15 pm.

It’s important to keep in mind that most brokers require traders and investors to limit orders during extended hours. While one benefit of extended hours trading is that investors can react quickly to any market events that occur after an exchange has closed, there is also less liquidity available during extended hours, which can sometimes compromise the execution of trades.

What is leverage in stocks?

Trading stocks with leverage essentially means that you are putting down a deposit of money—also known as margin—to give yourself more exposure to an asset. When you use a fraction of the full value of your trade, your broker will provide the rest. While you’re only paying a reduced amount of the full trade value, your total profit or loss will be calculated on the full position size.

Let’s say you want to buy 1,000 shares of a company at a share price of USD 10. The collateral value of that specific share is 70%. This means that after buying these shares, you can get a credit of 70% of the value of your stock holding. It enables you to increase your exposure to more than the original investment of USD 10,000.

With a collateral value of 70%, you can create leverage of 3.33 (1/0.30). In this example, you could buy 3,333 shares (valued at USD 33,330) and only put down USD 10,000. This results in a leveraged position. If the stock rises 10% in value, the value of your holdings increases to USD 36,660. This means a profit (before costs) of USD 3,333. If this profit is related to the original investment of USD 10,000, it means a 33.3% profit, whereas the shares only rose 10%.

What is a ticker symbol?

A ticker symbol is a unique combination of a few letters used to identify a company on the stock market. For example, MSFT is the ticker for Microsoft. It is a heritage of the old days when stock trades were transmitted via telegraph lines. It was simply faster to use the ticker instead of the full name.

What are stock dividends?

A dividend is the mechanism by which a shareholder gets a distributed part of the company’s profit or income. This is defined in the dividend policy.

The dividend policy also describes how the dividend will be made available to shareholders. It can be in the form of cash or shares. In most cases, the investor can choose the type of dividend that suits them best. Depending on the jurisdiction, sometimes there can be tax implications that might influence an investor’s preference for cash or a stock dividend.

What is a stock split?

A stock split is processed by a corporate action event where the ratio is one of the most relevant details. It is based on the decision of the company to increase the number of outstanding shares while reducing the price per share. It is usually seen when stocks trade at excessive prices that are deemed unattractive to retail investors.

For example, if a company did a 3:1 stock split, this means that every shareholder would receive three shares in place of every one that they held.

Why do companies list on the stock market?

Companies resort to an IPO as a way to raise capital to expand their business because it gives the company better access to capital. Another reason is to get more brand recognition from a broader public, attracting both more customers and potential employees. If early investors in the company (like venture capitalists, private equity, or the founders of the company) are seeking liquidity, going public is also a way to increase liquidity for the company’s stock, which can satisfy those early investors.

What is the secondary market?

The secondary market is where public shares change hands on a daily basis. A regular investor will know it as the stock market: the market investors use to buy shares in companies they are interested in, or to sell existing positions. The opposite of the secondary market is the primary market. Good to know: an initial public offering is made in the primary market.