Question

Discuss the mechanics of selling a share of stock in the secondary market. Explain how the market works and discuss the variables that cause stock values to fluctuate. Be sure to discuss market factors as well as those specific to the company being sold. Lastly, how do stock values interact with bond values and interest rates.

Answer 1

A.The secondary market is where investors buy and sell securities from other investors (think of stock exchanges). For example, if you go to buy Apple stock, you would purchase the stock from investors who already own the stock rather than Apple. Apple would not be involved in the transaction.

B.Stock prices change everyday by market forces. By this we mean that share prices change because of supply and demand. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Understanding supply and demand is easy.

C.It is difficult to identify specific factors that influence the market as a whole. The stock market is a complex, interrelated system of large and small investors making uncoordinated decisions about a huge variety of investments. "The market," so to speak, is not a living entity. Instead, it is just shorthand for the collective values of individual companies. Four factors which affected to markets as follows:

1.Government

Government holds much sway over the free markets. The fiscal and monetary policies that governments and their central banks put in place have a profound effect on the financial marketplace. By increasing and decreasing interest rates, the U.S. Federal Reserve can effectively slow or attempt to speed up growth within the country. This is called monetary policy. If government spending increases or contracts, this is known as fiscal policy and can be used to help ease unemployment and/or stabilize prices. By altering interest rates and the amount of dollars available on the open market, governments can change how much investment flows into and out of the country.

2.International Transactions

The flow of funds between countries effects the strength of a country's economy and its currency. The more money that is leaving a country, the weaker the country's economy and currency. Countries that predominantly export, whether physical goods or services, are continually bringing money into their countries. This money can then be reinvested and can stimulate the financial markets within those countries.

3.Speculation and Expectation

Speculation and expectation are integral parts of the financial system. Consumers, investors and politicians all hold different views about where they think the economy will go in the future and that effects how they act today. Expectation of future action is dependent on current acts and shapes both current and future trends. Sentiment indicators are commonly used to gauge how certain groups are feeling about the current economy. Analysis of these indicators as well as other forms of fundamental and technical analysis can create a bias or expectation of future price rates and trend direction.

4.Supply and Demand

Supply and demand for products, services, currencies and other investments creates a push-pull dynamic in prices. Prices and rates change as supply or demand changes. If something is in demand and supply begins to shrink, prices will rise. If supply increases beyond current demand, prices will fall. If supply is relatively stable, prices can fluctuate higher and lower as demand increases or decreases.

These factors can cause both short- and long-term fluctuations in the market, but it is also important to understand how all these elements come together to create trends. While all of these major factors are categorically different, they are closely linked to one another. Government mandates can effect international transactions, which play a role in speculation and changes in supply and demand can play a role in each of these other factors.

D.As with all bonds, when the value rises, interest rates fall. Lower interest rates put upward pressure on stock prices for two reasons. First, bond buyers receive a lower interest rate and less return on their investments. It forces them to consider buying higher-risk stocks to get a better return.