How Financial Markets Work

Posted: September 9th, 2013

How Financial Markets Work

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How Financial Markets Work

Financial markets include debt, equity, and derivative security markets. The financial markets enable the transfer and marketing of assets and claims among different buyers and sellers. Companies get a chance to raise the capital they need and trade their securities in the financial market. Through the financial markets, people get the opportunities to invest their money by buying stocks and shares of different companies. Companies intending to raise a lot of capital at once sell some of its shares to interested investors in the financial market. Investors seek to benefit when the company becomes profitable. This increases the stock prices, and it gives the investors a chance to earn dividends if the company increases its earnings and becomes profitable. The financial market determines the stock prices. There are many factors, which can affect the company stock prices. They include the current economic status, the political situation in the country, the performance of the company, and the decisions and reputation of the company among others. Some companies have seen the prices of their stock go down due to breach in ethics, which has affected the people’s perception of the company. Other companies have seen their stock prices rise because of the financial decisions they have made, such as the purchase of profitable investments.

Publicly traded companies have a specified number of outstanding shares in the stock market. They can increase the number of shares by issuing more shares using a stock split. A 2:1 stock split means that for every stock held, a shareholder is given an additional share, doubling the number of outstanding shares. The stock price reduces after a stock split because of the increased shares. Trading in the stocks can take place in physical location exchanges such as the New York Stock Exchange, or through electronic dealer based markets such as the NASDAQ. Many large companies trade in the NYSE ensuring a high market capitalization, although many companies are listed on the NASDQ, where there is a higher volume of traded shares. Some small companies are privately owned by few people, as their common stocks are not actively traded. However, many large companies are publicly owned, and they have many investors. Other than stocks, companies and governments can also sell bonds as a way of raising capital. Investors earn interest when their bonds mature.

Walmart is the largest American retailer, running large warehouse and discount department stores. It operates in 28 countries and has more than nine thousand retail stores. The company began in 1962 and it began trading in over the counter market in 1970. It offered 300,000 shares to the public, with each share selling at $16.50. The company share prices increased substantially over the years as the company expanded, and it has had eleven 2:1 stock splits. Companies split their stocks when the stock prices have increased substantially to make them more affordable to investors. This increases the company’s liquidity. it listed in the New York stock exchange in 1972.

In 1974, the company declared an annual dividend of $0.05 per share, and it has increased this amount since then with the annual dividend in 2012 standing at $1.45 per share. This reflects the continued growth and profitability of the company (Walmart, 2012). The company shares are currently trading at $68.05 per share, with more than 12 million shares traded. They had previously increased $74.95. Earlier this year, the company announced that it would increase its annual dividends by 9% following an impressive financial performance. Currently, the company’s stock market capitalization is more than $200 billion and it has an estimated volume of $9 million. Over the years, the company has remained profitable, and it has rewarded its investors with dividends.

References:

Brigham, F. E., & Houston, F. J. (2009). Fundamentals of financial management. New York, NY: Cengage Learning

Walmart (2012). Dividends and stock splits. Retrieved from http://stock.walmart.com/stock-information/dividends-stock-splits