• Exchange-Traded Fund

An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on stock exchanges while mutual funds are bought and sold based on their price at day's end. An ETF holds assets such as stocks, bonds, currencies, and/or commodities such as gold bars, and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur. Most ETFs are index funds: that is, they hold the same securities in the same proportions as a certain stock market index or bond market index. The most popular ETFs in the U.S. replicate the S&P 500 Index, the total market index, the NASDAQ-100 index, the price of gold, the "growth" stocks in the Russell 1000 Index, or the index of the largest technology companies. With the exception of non-transparent actively managed ETFs, in most cases, the list of stocks that each ETF owns, as well as their weightings, is posted daily on the website of the issuer. The largest ETFs have annual fees of 0.03% of the amount invested, or even lower, although specialty ETFs can have annual fees well in excess of 1% of the amount invested. These fees are paid to the ETF issuer out of dividends received from the underlying holdings or from selling assets.

https://en.wikipedia.org/wiki/Exchange-traded_fund

• What Is an ETF?

An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.

A well-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An exchange traded fund is a marketable security, meaning it has an associated price that allows it to be easily bought and sold.

https://www.investopedia.com/terms/e/etf.asp

• ETF Naming

An ETF is called an exchange traded fund because it's traded on an exchange just like stocks are. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. This is unlike mutual funds, which are not traded on an exchange, and trade only once per day after the markets close. Additionally, ETFs tend to be more cost-effective and more liquid when compared to mutual funds.

https://www.investopedia.com/terms/e/etf.asp

• Cash Invested in ETFs

The dollar amount, in trillions, invested in exchange-traded funds worldwide. An ETF is a type of fund that holds multiple underlying assets, rather than only one like a stock does. Because there are multiple assets within an ETF, they can be a popular choice for diversification.

An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector. Some funds focus on only U.S. offerings, while others have a global outlook. For example, banking-focused ETFs would contain stocks of various banks across the industry.

https://www.investopedia.com/terms/e/etf.asp

• Stock ETFs

Stock ETFs comprise a basket of stocks to track a single industry or sector. For example, a stock ETF might track automotive or foreign stocks. The aim is to provide diversified exposure to a single industry, one that includes high performers and new entrants with potential for growth. Unlike stock mutual funds, stock ETFs have lower fees and do not involve actual ownership of securities.

https://www.investopedia.com/terms/e/etf.asp

• Industry ETFs

Industry or sector ETFs are funds that focus on a specific sector or industry. For example, an energy sector ETF will include companies operating in that sector. The idea behind industry ETFs is to gain exposure to the upside of that industry by tracking the performance of companies operating in that sector. One example is the technology sector, which has witnessed an influx of funds in recent years. At the same time, the downside of volatile stock performance is also curtailed in an ETF because they do not involve direct ownership of securities. Industry ETFs are also used to rotate in and out of sectors during economic cycles.

https://www.investopedia.com/terms/e/etf.asp

• Commodity ETFs

As their name indicates, commodity ETFs invest in commodities, including crude oil or gold. Commodity ETFs provide several benefits. First, they diversify a portfolio, making it easier to hedge downturns. For example, commodity ETFs can provide a cushion during a slump in the stock market. Second, holding shares in a commodity ETF is cheaper than physical possession of the commodity. This is because the former does not involve insurance and storage costs.

https://www.investopedia.com/terms/e/etf.asp

• Currency ETFs

Currency ETFs are pooled investment vehicles that track the performance of currency pairs, consisting of domestic and foreign currencies. Currency ETFs serve multiple purposes. They can be used to speculate on the prices of currencies based on political and economic developments for a country. They are also used to diversify a portfolio or as a hedge against volatility in forex markets by importers and exporters. Some of them are also used to hedge against the threat of inflation.

https://www.investopedia.com/terms/e/etf.asp

• Inverse ETFs

Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price. An inverse ETF uses derivatives to short a stock. Essentially, they are bets that the market will decline. When the market declines, an inverse ETF increases by a proportionate amount. Investors should be aware that many inverse ETFs are exchange traded notes (ETNs) and not true ETFs. An ETN is a bond but trades like a stock and is backed by an issuer like a bank. Be sure to check with your broker to determine if an ETN is a good fit for your portfolio.

In the U.S., most ETFs are set up as open-ended funds and are subject to the Investment Company Act of 1940 except where subsequent rules have modified their regulatory requirements. Open-end funds do not limit the number of investors involved in the product.

https://www.investopedia.com/terms/e/etf.asp

• Advantages and Disadvantages of ETFs

ETFs provide lower average costs because it would be expensive for an investor to buy all the stocks held in an ETF portfolio individually. Investors only need to execute one transaction to buy and one transaction to sell, which leads to fewer broker commissions because there are only a few trades being done by investors. Brokers typically charge a commission for each trade. Some brokers even offer no-commission trading on certain low-cost ETFs reducing costs for investors even further.

An ETF's expense ratio is the cost to operate and manage the fund. ETFs typically have low expenses because they track an index. For example, if an ETF tracks the S&P 500 Index, it might contain all 500 stocks from the S&P, making it a passively managed fund that is less time-intensive. However, not all ETFs track an index in a passive manner.

https://www.investopedia.com/terms/e/etf.asp

• Actively managed ETFs

There are also actively managed ETFs, wherein portfolio managers are more involved in buying and selling shares of companies and changing the holdings within the fund. Typically, a more actively managed fund will have a higher expense ratio than passively managed ETFs. It is important that investors determine how the fund is managed, whether it's actively or passively managed, the resulting expense ratio, and the costs versus the rate of return to make sure it is worth holding.

https://www.investopedia.com/terms/e/etf.asp

• Indexed-stock ETFs

An indexed-stock ETF provides investors with the diversification of an index fund as well as the ability to sell short, buy on margin, and purchase as little as one share because there are no minimum deposit requirements. However, not all ETFs are equally diversified. Some may contain a heavy concentration in one industry, or a small group of stocks, or assets that are highly correlated to each other.

https://www.investopedia.com/terms/e/etf.asp

• Dividends and ETFs

Though ETFs provide investors with the ability to gain as stock prices rise and fall, they also benefit from companies that pay dividends. Dividends are a portion of earnings allocated or paid by companies to investors for holding their stock. ETF shareholders are entitled to a proportion of the profits, such as earned interest or dividends paid, and may get a residual value in the event that the fund is liquidated.

https://www.investopedia.com/terms/e/etf.asp

• ETFs and Taxes

An ETF is more tax-efficient than a mutual fund because most buying and selling occurs through an exchange and the ETF sponsor does not need to redeem shares each time an investor wishes to sell or issue new shares each time an investor wishes to buy. Redeeming shares of a fund can trigger a tax liability, so listing the shares on an exchange can keep tax costs lower. In the case of a mutual fund, each time an investor sells their shares, they sell it back to the fund and incur a tax liability that must be paid by the shareholders of the fund.

https://www.investopedia.com/terms/e/etf.asp

• ETFs Market Impact

Because ETFs have become increasingly popular with investors, many new funds have been created, resulting in low trading volumes for some of them. The result can lead to investors not being able to buy and sell shares of a low-volume ETF easily.

Concerns have surfaced about the influence of ETFs on the market and whether demand for these funds can inflate stock values and create fragile bubbles. Some ETFs rely on portfolio models that are untested in different market conditions and can lead to extreme inflows and outflows from the funds, which have a negative impact on market stability.

https://www.investopedia.com/terms/e/etf.asp

• ETF Creation

When an ETF wants to issue additional shares, the AP buys shares of the stocks from the index—such as the S&P 500 tracked by the fund—and sells or exchanges them to the ETF for new ETF shares at an equal value. In turn, the AP sells the ETF shares in the market for a profit. The process by which an AP sells stocks to the ETF sponsor in return for shares in the ETF is called creation.

https://www.investopedia.com/terms/e/etf.asp

• Creation When Shares Trade At Premium

Imagine an ETF that invests in the stocks of the S&P 500 and has a share price of $101 at the close of the market. If the value of the stocks that the ETF owns was only worth $100 on a per-share basis, then the fund's price of $101 is trading at a premium to the fund's net asset value (NAV). The NAV is an accounting mechanism that determines the overall value of the assets or stocks in an ETF.

An authorized participant has an incentive to bring the ETF share price back into equilibrium with the fund’s NAV. To do this, the AP will buy shares of the stocks that the ETF wants to hold in its portfolio from the market and sells them to the fund in return for shares of the ETF. In this example, the AP is buying stock on the open market worth $100 per share but getting shares of the ETF that are trading on the open market for $101 per share. This process is called creation and increases the number of ETF shares on the market. If everything else remains the same, increasing the number of shares available on the market will reduce the price of the ETF and bring shares in line with the NAV of the fund.

https://www.investopedia.com/terms/e/etf.asp

• ETF Redemption

Conversely, an AP also buys shares of the ETF on the open market. The AP then sells these shares back to the ETF sponsor in exchange for individual stock shares that the AP can sell on the open market. As a result, the number of ETF shares is reduced through the process called redemption.

The amount of redemption and creation activity is a function of demand in the market and whether the ETF is trading at a discount or premium to the value of the fund's assets.

https://www.investopedia.com/terms/e/etf.asp

• Transparency

The SEC generally requires ETFs to be transparent and issuers generally are required to publish the composition of the ETF portfolios daily on their websites. However, the SEC does allow certain actively managed ETFs to be non-transparent - i.e. they do not have to disclose exactly what they own.

ETFs are priced continuously throughout the trading day and therefore have price transparency.

https://en.wikipedia.org/wiki/Exchange-traded_fund

• Trading

ETFs can be bought and sold at current market prices at any time during the trading day, unlike mutual funds and unit investment trusts, which can only be traded at the end of the trading day. Also unlike mutual funds, since ETFs are publicly traded securities, investors can execute the same types of trades that they can with a stock, such as limit orders, which allow investors to specify the price points at which they are willing to trade, stop-loss orders, margin buying, hedging strategies, and there is no minimum investment requirement. Because ETFs can be cheaply acquired, held, and disposed of, some investors buy and hold ETFs for asset allocation purposes, while other investors trade ETF shares frequently to hedge risk or implement market timing investment strategies.

Also unlike with mutual funds, options, including put options and call options, can be written or purchased on most ETFs. Covered call strategies allow investors and traders to potentially increase their returns on their ETF purchases by collecting premiums (the proceeds of a call sale or write) on call options written against them. There are also ETFs that use the covered call strategy to reduce volatility and simplify the covered call process.

https://en.wikipedia.org/wiki/Exchange-traded_fund

• Stock Market Index

In finance, a stock index, or stock market index, is an index that measures a stock market, or a subset of the stock market, that helps investors compare current price levels with past prices to calculate market performance. It is computed from the prices of selected stocks (typically a weighted arithmetic mean).

Two of the primary criteria of an index are that it is investable and transparent: The methods of its construction are specified. Investors can invest in a stock market index by buying an index fund, which are structured as either a mutual fund or an exchange-traded fund, and "track" an index. The difference between an index fund's performance and the index, if any, is called tracking error.

https://en.wikipedia.org/wiki/Stock_market_index

• What Is an Index?

An index is a method to track the performance of a group of assets in a standardized way. Indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market. These could be a broad-based index that captures the entire market, such as the Standard & Poor's 500 Index or Dow Jones Industrial Average (DJIA), or more specialized such as indexes that track a particular industry or segment.

https://www.investopedia.com/terms/i/index.asp

• Understanding Indexes

Indexes are also created to measure other financial or economic data such as interest rates, inflation, or manufacturing output. Indexes often serve as benchmarks against which to evaluate the performance of a portfolio's returns. One popular investment strategy, known as indexing, is to try to replicate such an index in a passive manner rather than trying to outperform it.

An index is an indicator or measure of something. In finance, it typically refers to a statistical measure of change in a securities market. In the case of financial markets, stock and bond market indexes consist of a hypothetical portfolio of securities representing a particular market or a segment of it. (You cannot invest directly in an index.) The S&P 500 Index and the Bloomberg Barclays US Aggregate Bond Index are common benchmarks for the U.S. stock and bond markets, respectively.

Each index related to the stock and bond markets has its own calculation methodology. In most cases, the relative change of an index is more important than the actual numeric value representing the index. For example, if the FTSE 100 Index is at 6,670.40, that number tells investors the index is nearly seven times its base level of 1,000.3 However, to assess how the index has changed from the previous day, investors must look at the amount the index has fallen, often expressed as a percentage.

https://www.investopedia.com/terms/i/index.asp

• Index Investing

Indexes are also often used as benchmarks against which to measure the performance of mutual funds and exchange-traded funds (ETFs). For instance, many mutual funds compare their returns to the return in the S&P 500 Index to give investors a sense of how much more or less the managers are earning on their money than they would make in an index fund.

"Indexing" is a form of passive fund management. Instead of a fund portfolio manager actively stock picking and market timing—that is, choosing securities to invest in and strategizing when to buy and sell them—the fund manager builds a portfolio wherein the holdings mirror the securities of a particular index. The idea is that by mimicking the profile of the index—the stock market as a whole, or a broad segment of it—the fund will match its performance as well.

Since you cannot invest directly in an index, index funds are created to track their performance. These funds incorporate securities that closely mimic those found in an index, thereby allowing an investor to bet on its performance, for a fee. An example of a popular index fund is the Vanguard S&P 500 ETF (VOO), which closely mirrors the S&P 500 Index.

When putting together mutual funds and ETFs, fund sponsors attempt to create portfolios mirroring the components of a certain index. This allows an investor to buy a security likely to rise and fall in tandem with the stock market as a whole or with a segment of the market.

https://www.investopedia.com/terms/i/index.asp

• Presentation of Index Returns

Some indices, such as the S&P 500 Index, have returns shown calculated with different methods.[These versions can differ based on how the index components are weighted and on how dividends are accounted. For example, there are three versions of the S&P 500 Index: price return, which only considers the price of the components, total return, which accounts for dividend reinvestment, and net total return, which accounts for dividend reinvestment after the deduction of a withholding tax.

The Wilshire 4500 and Wilshire 5000 indices have five versions each: full capitalization total return, full capitalization price, float-adjusted total return, float-adjusted price, and equal weight. The difference between the full capitalization, float-adjusted, and equal weight versions is in how index components are weighted

https://www.investopedia.com/terms/i/index.asp

• Types of Indices by Weighting Method

Stock market indices could be segmented by their index weight methodology, or the rules on how stocks are allocated in the index, independent of its stock coverage. For example, the S&P 500 and the S&P 500 Equal Weight both covers the same group of stocks, but S&P 500 is weighted by market capitalization and S&P 500 Equal Weight is an equal weight index. Below is sample of common index weighting methods. In practice, many indices will impose constraints, such as concentration limits, on these rules.

https://www.investopedia.com/terms/i/index.asp

• Market-Capitalization Weighting

Market-Capitalization Weighting based indices weight constituent stocks by its market capitalization (often shortened to "market-cap"), or its stock price by its number of shares outstanding, divided by the total market capitalization of all the constituents in the index. Under Capital Asset Pricing Model, the market-cap weighted market portfolio, which could be approximated with the market-cap weighted equity index portfolio, is mean-variance efficient, meaning that it produces the highest return for a given level of risk. Tracking portfolios of the market-cap weighted equity index could also be mean-variance efficient under the right assumptions, and they could be attractive investment portfolios. A market-cap weighted index can also be thought of as a liquidity-weighted index since the largest-cap stocks tend to have the highest liquidity and the greatest capacity to handle investor flows; portfolios with such stocks could have very high investment capacity

https://www.investopedia.com/terms/i/index.asp

• Free-Float Adjusted Market-Capitalization Weighting

Free-float adjusted Market-Capitalization Weighting based indices adjust market-cap index weights by each constituent's shares outstanding for closely or strategically held shares that are not generally available to the public market. Such shares may be held by governments, affiliated companies, founders, and employees. Foreign ownership limits imposed by government regulation could also be subject to free-float adjustments. These adjustments inform investors of potential liquidity issues from these holdings that are not apparent from the raw number of a stock's shares outstanding. Free-float adjustments are complex undertakings, and different index providers have different free-float adjustment methods, which could sometimes produce different results.

https://www.investopedia.com/terms/i/index.asp

• Price Weighting

Price Weighting based indices weight constituent stocks by its price per share divided by the sum of all share prices in the index. A price-weighted index can be thought of as a portfolio with one share of each constituent stock. However, a stock split for any constituent stock of the index would cause the weight in the index of the stock that split to decrease, even in the absence of any meaningful change in the fundamentals of that stock. This feature makes price-weighted indices unattractive as benchmarks for passive investment strategies and portfolio managers. Nonetheless, many price-weighted indices, such as the Dow Jones Industrial Average and the Nikkei 225, are followed widely as visible indicators of day-to-day market movements

https://www.investopedia.com/terms/i/index.asp

• Equal Weighting

Equal Weighting based indices give each constituent stocks weights of 1/n, where n represents the number of stocks in the index. This method produces the least-concentrated portfolios. Equal weighting of stocks in an index is considered a naive strategy because it does not show preference towards any single stock. Zeng and Luo (2013) notes that broad market equally weighted indices are factor-indifferent and randomizes factor mispricing. Equal weight stock indices tends to overweight small-cap stocks and to underweight large-cap stocks compared to a market-cap weighted index. These biases tend to give equal weight stock indices higher volatility and lower liquidity than market-cap weight indices.[8][9][10] For example, the Barron's 400 Index assigns an equal value of 0.25% to each of the 400 stocks included in the index, which together add up to the 100% whole.

https://www.investopedia.com/terms/i/index.asp

• Fundamental Factor Weighting

Fundamental Factor Weighting based indices, or Fundamentally based indexes, weight constituent stocks based on stock fundamental factors rather stock financial market data. Fundamental factors could include sales, income, dividends, and other factors analyzed in fundamental analysis. Similar to fundamental analysis, fundamental weighting assumes that stock market prices will converge to an intrinsic price implied by fundamental attributes. Certain fundamental factors are also used in generic factor weighting indices.

https://www.investopedia.com/terms/i/index.asp

• Factor Weighting

Factor Weighting based indices weight constituent stocks based on market risk factors of stocks as measured in the context of factor models, such as the Fama–French three-factor model. These indices Common factors include Growth, Value, Size, Yield, Momentum, Quality, and Volatility. Passive factor investing strategies are sometimes known as "smart beta" strategies. Investors could use factor investment strategies or portfolios to complement a market-cap weighted indexed portfolio by tilting or changing their portfolio exposure to certain factors.

https://www.investopedia.com/terms/i/index.asp

• Volatility Weighting

Volatility Weighting based indices weight constituent stocks by the inverse of their relative price volatility. Price volatility is defined differently by each index provider, but two common methods include the standard deviation of the past 252 trading days (approximately one calendar year), and the weekly standard deviation of price returns for the past 156 weeks (approximately three calendar years).

https://www.investopedia.com/terms/i/index.asp

• Minimum Variance Weighting

Minimum Variance Weighting based indices weight constituent stocks using a mean-variance optimization process. In a volatility weighted indices, highly volatile stocks are given less weight in the index, while in a minimum variance weighting index, highly volatile stocks that are negatively correlated with the rest of the index can be given relatively larger weights than they would be given in the volatility weighted index

https://www.investopedia.com/terms/i/index.asp

• How to Create a Stock Index

You can create a custom index by selecting a group of stocks whose performance you wish to track as a group. If you have an online brokerage account, the process of creating a custom index merely involves choosing the shares that make up the index.

• Initial Public Offering

An initial public offering or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also retail investors. An IPO is typically underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges.

https://en.wikipedia.org/wiki/Initial_public_offering

• What Is an IPO?

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering.

https://www.investopedia.com/terms/i/ipo.asp

• Post IPO

After the IPO, shares are traded freely in the open market at what is known as the free float. Stock exchanges stipulate a minimum free float both in absolute terms (the total value as determined by the share price multiplied by the number of shares sold to the public) and as a proportion of the total share capital (i.e., the number of shares sold to the public divided by the total shares outstanding). Although IPO offers many benefits, there are also significant costs involved, chiefly those associated with the process such as banking and legal fees, and the ongoing requirement to disclose important and sometimes sensitive information.

https://en.wikipedia.org/wiki/Initial_public_offering

• Advantages

When a company lists its securities on a public exchange, the money paid by the investing public for the newly-issued shares goes directly to the company (primary offering) as well as to any early private investors who opt to sell all or a portion of their holdings (secondary offerings) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to provide itself with capital for future growth, repayment of debt, or working capital. A company selling common shares is never required to repay the capital to its public investors. Those investors must endure the unpredictable nature of the open market to price and trade their shares. After the IPO, when shares are trade market, money passes between public investors. For early private investors who choose to sell shares as part of the IPO process, the IPO represents an opportunity to monetize their investment. After the IPO, once shares are traded in the open market, investors holding large blocks of shares can either sell those shares piecemeal in the open market or sell a large block of shares directly to the public, at a fixed price, through a secondary market offering. This type of offering is not dilutive since no new shares are being created. It should be noted however, that stock prices can change dramatically during a company’s first days in the public market

https://en.wikipedia.org/wiki/Initial_public_offering

• How do IPOs work?

IPOs convert private companies into public ones, allowing the general public to purchase stock on an exchange like the New York Stock Exchange. New IPOs can be startups that have been set up to grow quickly and then go public, or they can be older companies that had been privately owned before, but are now looking for a new source of investors.

Before a company goes public, it must be underwritten by an investment bank or banks. This process is intended to ensure that the business has a reliable business model, plenty of opportunity for growth, and has its finances in order. Companies must file appropriate forms with the Securities and Exchange Commission (SEC), a branch of the federal government that regulates the financial industry.

At first, larger investors may have a chance to invest in the company. However, after this initial phase of investments, the stock usually goes fully public, and becomes available for purchase by anyone with access to a broker or robo-advisor.

https://mint.intuit.com/blog/investing/what-is-an-ipo/

• Are IPOs good investments?

Like all investing, it’s good to think of investing in IPOs as a balance of risk and reward. The rewards of IPO investment are potentially very high: if you get in early on a new company that accelerates in its growth, you could end up making a significant amount of money through early investment in an IPO.

However, the risks of IPO investment are also pretty high. Unlike an established publicly traded company, IPOs have not been as well researched by investors, banks, and other authorities. What’s more, nobody knows for certain how they will do once they’re publicly traded. It could turn out that the IPO company struggles under the weight of its new larger size, and suffers from mismanagement.

https://mint.intuit.com/blog/investing/what-is-an-ipo/

• Pricing

A company planning an IPO typically appoints a lead manager, known as a bookrunner, to help it arrive at an appropriate price at which the shares should be issued. There are two primary ways in which the price of an IPO can be determined. Either the company, with the help of its lead managers, fixes a price ("fixed price method"), or the price can be determined through analysis of confidential investor demand data compiled by the bookrunner

https://en.wikipedia.org/wiki/Initial_public_offering

• Market Capitalization

Market capitalization, commonly called market cap, is the market value of a publicly traded company's outstanding shares.

Market capitalization is equal to the share price multiplied by the number of shares outstanding. Since outstanding stock is bought and sold in public markets, capitalization could be used as an indicator of public opinion of a company's net worth and is a determining factor in some forms of stock valuation.

https://en.wikipedia.org/wiki/Market_capitalization

• Reflection

Market cap only reflects the equity value of a company. A firm's choice of capital structure has a significant impact on how the total value of a company is allocated between equity and debt. A more comprehensive measure is enterprise value (EV), which gives effect to outstanding debt, preferred stock, and other factors. For insurance firms, a value called the embedded value (EV) has been used.

Market capitalization is used by the investment community in ranking the size of companies, as opposed to sales or total asset figures. It is also used in ranking the relative size of stock exchanges, being a measure of the sum of the market capitalizations of all companies listed on each stock exchange. In performing such rankings, the market capitalizations are calculated at some significant date.

https://en.wikipedia.org/wiki/Market_capitalization

• What Is Market Capitalization?

Market capitalization refers to the total dollar market value of a company's outstanding shares of stock. Commonly referred to as "market cap," it is calculated by multiplying the total number of a company's outstanding shares by the current market price of one share.

As an example, a company with 10 million shares selling for $100 each would have a market cap of $1 billion. The investment community uses this figure to determine a company's size, as opposed to using sales or total asset figures. In an acquisition, the market cap is used to determine whether a takeover candidate represents a good value or not to the acquirer.

https://www.investopedia.com/terms/m/marketcapitalization.asp

• Understanding Market Capitalization

Understanding what a company is worth is an important task, and often difficult to quickly and accurately ascertain. Market capitalization is a quick and easy method for estimating a company's value by extrapolating what the market thinks it is worth for publicly traded companies. In such a case, simply multiply the share price by the number of available shares.

Using market capitalization to show the size of a company is important because company size is a basic determinant of various characteristics in which investors are interested, including risk. It is also easy to calculate. A company with 20 million shares selling at $100 a share would have a market cap of $2 billion. A second company with a share price of $1,000 but only 10,000 shares outstanding, on the other hand, would only have a market cap of $10 million.

Understanding what a company is worth is an important task, and often difficult to quickly and accurately ascertain. Market capitalization is a quick and easy method for estimating a company's value by extrapolating what the market thinks it is worth for publicly traded companies. In such a case, simply multiply the share price by the number of available shares.

Using market capitalization to show the size of a company is important because company size is a basic determinant of various characteristics in which investors are interested, including risk. It is also easy to calculate. A company with 20 million shares selling at $100 a share would have a market cap of $2 billion. A second company with a share price of $1,000 but only 10,000 shares outstanding, on the other hand, would only have a market cap of $10 million.

https://www.investopedia.com/terms/m/marketcapitalization.asp

• Misconceptions About Market Caps

Although it is used often to describe a company, market cap does not measure the equity value of a company. Only a thorough analysis of a company's fundamentals can do that. It is inadequate to value a company because the market price on which it is based does not necessarily reflect how much a piece of the business is worth. Shares are often over- or undervalued by the market, meaning the market price determines only how much the market is willing to pay for its shares.

Although it measures the cost of buying all of a company's shares, the market cap does not determine the amount the company would cost to acquire in a merger transaction. A better method of calculating the price of acquiring a business outright is the enterprise value.

https://www.investopedia.com/terms/m/marketcapitalization.asp

• Changes in Market Cap

Two main factors can alter a company's market cap: significant changes in the price of a stock or when a company issues or repurchases shares. An investor who exercises a large number of warrants can also increase the number of shares on the market and negatively affect shareholders in a process known as dilution.

https://www.investopedia.com/terms/m/marketcapitalization.asp

• What Is an Offering?

An offering is the issue or sale of a security by a company. It is often used in reference to an initial public offering (IPO) when a company's stock is made available for purchase by the public, but it can also be used in the context of a bond issue.

An offering is also known as a securities offering, investment round, or funding round. A securities offering, whether an IPO or otherwise, represents a singular investment or funding round. Unlike other rounds (such as seed rounds or angel rounds), however, an offering involves selling stocks, bonds, or other securities to investors to generate capital.

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• How an Offering Works

Usually, a company will make an offering of stocks or bonds to the public in an attempt to raise capital to invest in expansion or growth. There are instances of companies offering stock or bonds because of liquidity issues (i.e., not enough cash to pay the bills), but investors should be wary of any offering of this type.

When a company initiates the IPO process, a very specific set of events occurs. First, an external IPO team is formed, consisting of an underwriter, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts. Next, information regarding the company is compiled, including financial performance and expected future operations. This becomes part of the company prospectus, which is circulated for review.

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• Why IPOs Are Risky

IPOs, as well as any other type of stock or bond offering, can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading, and in the near future, there is often little historical data to use to analyze the company. Also, most IPOs are for companies that are going through a transitory growth period, which means that they are subject to additional uncertainty regarding their future values.

IPO underwriters work closely with the issuing body to ensure an offering goes well. Their goal is to ensure that all regulatory requirements are satisfied, and they are also responsible for contacting a large network of investment organizations in order to research the offering and gauge interest to set the price. The amount of interest received helps an underwriter set the offering price. The underwriter also guarantees a specific number of shares will be sold at that initial price and will purchase any surplus.

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• Secondary Offerings

A secondary market offering is a large block of securities offered for public sale that have been previously issued to the public. The blocks being offered may have been held by large investors or institutions, and the proceeds of the sale go to those holders, not the issuing company. Also called secondary distribution, these types of offerings are very different than initial public offerings and don't require nearly the same amount of background work.

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• Non-Initial vs Initial

Sometimes an established company will make offerings of stock to the public, but such an offering will not be the first offering of securities for sale by that company. Such an offering is known as a non-initial public offering or seasoned equity offering.

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• Market Sector

The term market sector is used in economics and finance to describe a part of the economy. It is usually a broader term than industry, which is a set of businesses that are buying and selling such similar goods and services that they are in direct competition with each other.

https://en.wikipedia.org/wiki/Market_sector

• What Is a Sector?

A sector is an area of the economy in which businesses share the same or related business activity, product, or service. Sectors represent a large grouping of companies with similar business activities, such as the extraction of natural resources and agriculture.

Dividing an economy into different sectors helps economists analyze the economic activity within those sectors. As a result, sector analysis provides an indication as to whether an economy is expanding or if areas of an economy are experiencing contraction.

In the financial markets, economic sectors are broken down even further into sub-sectors called investment sectors. Investment sectors represent a grouping of companies with similar business activities. Examples of investment sectors include technology, energy, and financial services.

This article explores the main types of economic sectors and the business activity associated with them, and how investment sectors play a role in determining a nation's economic conditions.

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• Understanding Sectors

Sectors are used by economists to classify economic activity by grouping companies that are engaged in similar business activities. For example, some sectors are engaged in activities that involve the earliest stages of the production cycle, such as extracting raw materials. Other sectors involve the manufacturing of goods using those raw materials. Still, other companies are engaged in service activities.

Developing and emerging economies tend to have only one or two sectors that define most business activities. For example, some nations rely heavily on the extraction and sale of crude oil, which can be turned into gasoline and sold to consumers within developed economies. On the other hand, developed nations tend to have a more diverse representation of all sectors.

Although there is some debate about the true number of sectors that represent business activity in an economy, typically, sectors are broken out into four main categories. However, please bear in mind that there can also be sub-sectors within each of the four major sectors listed below.

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• Primary Sector

The primary sector involves companies that participate in the extraction and harvesting of natural products from the Earth. Primary sector companies are typically engaged in economic activity that utilizes the Earth's natural resources, which are sold to consumers or commercial businesses.

Companies involved in the processing and packaging of raw materials are also categorized within the primary sector. Primary sector business activities include the following: Mining and quarrying, Fishing, Agriculture, Forestry, Hunting.

Emerging economies tend to have a higher amount of economic activity and employment concentrated within the primary sector versus more advanced economies. On the other hand, developed nations tend to utilize machinery and technology in their primary sector activities, meaning the primary sector doesn't represent a large portion of the population's employment.

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• Secondary Sector

The secondary sector consists of processing, manufacturing, and construction companies. The secondary sector produces goods from the natural products within the primary sector. The secondary sector includes the following business activities: Automobile production ,Textile, Chemical engineering, Aerospace space, Shipbuilding, Energy utilities

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Tertiary Sector

The tertiary sector is comprised of companies that provide services, such as retailers, entertainment firms, and financial organizations.

The tertiary sector provides services to businesses and consumers by selling the goods that are manufactured by companies in the secondary sector. The types of services provided by the tertiary sector include: Retail sales, Transportation and distribution, Restaurants, Tourism, Insurance and banking, Healthcare services, Legal services

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• Quaternary Sector

The quaternary sector includes companies engaged in intellectual activities and pursuits. The quaternary sector typically includes intellectual services such as technological advancement and innovation. Research and development that leads to improvements to processes, such as manufacturing, would fall under this sector.

The companies and firms within the quaternary sector had been traditionally part of the tertiary sector. However, with the growth of the knowledge-based economy and technological advancements, a separate sector was created.

Firms within the quaternary sector use information and technology to innovate and improve processes and services, leading to enhancements in economic development. Firms within the quaternary sector might be engaged in the following business activities: Research and development, Information technology, Education, Consulting services

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• Stock and Investment Sectors

In the financial markets, the economic sectors are broken down into sub-sectors to help investors compare companies with similar business activities. While economic sectors represent a broad representation of the economy, investment sectors further define and categorize companies.

Investment sectors are important because they help measure how well an economy is performing based on the financial performance of the corporations within that sector

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• Sectors and the Economy

Investors use sectors to group stocks and other investments into categories that share unique characteristics. Investment sectors can provide insight as to how an economy is performing and which areas of the economy are performing better than others.

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• Sector Investing

It is common for investment analysts and other investment professionals to specialize in certain sectors. For example, at large research firms, analysts may cover just one sector, such as technology stocks. Additionally, investment funds often specialize in a particular economic sector, a practice known as sector investing.

For those who want to invest in a particular sector, there are exchange-traded funds (ETFs) called sector ETFs. These funds contain a basket of stocks or securities within a particular industry or sector. For example, the energy sector, particularly the oil and gas industry, is a large industry that attracts specialized investment funds.

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• Sector vs. Industry

While a sector represents a large segment of an economy that includes many companies, an industry represents a more narrow focus of the companies within a particular sector. Thus, industries are the result of breaking down a sector into more defined and specific groupings. On the other hand, sectors can represent a large grouping of companies that have similar business activities. Sectors may have companies that don't necessarily compete with each other, while industries tend to represent corporations that are in direct competition.

For example, companies within the oil and gas industry, such as Exxon and Chevron, are competitors. Those same companies also fall under the primary sector since they both engage in the extraction of natural resources. However, Exxon or Chevron would not likely compete with companies involved in agriculture despite being classified within the primary sector.

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• Stock Split

A stock split or stock divide increases the number of shares in a company. A stock split causes a decrease of market price of individual shares, not causing a change of total market capitalization of the company. Stock dilution does not occur.

A company may split its stock when the market price per share is so high that it becomes unwieldy when traded. One of the reasons is that a very high share price may deter small investors from buying the shares. Stock splits are usually initiated after a large run up in share price

https://en.wikipedia.org/wiki/Stock_split

• Understanding Stock Splits

All publicly-traded companies have a set number of shares that are outstanding. A stock split is a decision by a company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.

For example, in a 2-for-1 stock split, an additional share is given for each share held by a shareholder. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split.

A stock's price is also affected by a stock split. After a split, the stock price will be reduced (since the number of shares outstanding has increased). In the example of a 2-for-1 split, the share price will be halved. Thus, although the number of outstanding shares increases and the price of each share changes, the company's market capitalization remains unchanged.

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• Why Do Companies Engage in Stock Splits?

When a company's share price increases to levels that are too high, or are beyond the price levels of similar companies in their sector, they may decide to do a stock split. The reason for this is that a stock split can make shares seem more affordable to small investors (even though the underlying value of the company has not changed). This has the practical effect of increasing liquidity in the stock.

When a stock splits, it can also result in a share price increase—even though there may be a decrease immediately after the stock split. This is because small investors may perceive the stock as being more affordable and buy the stock. This effectively boosts demand for the stock and drives up prices. Another possible reason for the price increase is that a stock split provides a signal to the market that the company's share price has been increasing; people may assume this growth will continue in the future. This further lifts demand and prices.

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• What Is a Reverse Stock Split?

Another version of a stock split is called a reverse split. This procedure is typically used by companies with low share prices that would like to increase their prices. A company may do this if they are afraid their shares are going to be delisted or as a way of gaining more respectability in the market. Many stock exchanges will delist stocks if they fall below a certain price per share.

For example, in a reverse 1-for-5 split, 10 million outstanding shares at $0.50 cents each would now become 2 million shares outstanding at $2.50 per share. In both cases, the company is still worth $5 million.

In May 2011, Citigroup reverse split its shares 1-for-10 in an effort to reduce its share volatility and discourage speculator trading. The reverse split increased its share price from $4.52 to $45.12 post-split. Every 10 shares held by an investor were replaced with one share. While the split reduced the number of its shares outstanding from 29 billion to 2.9 billion shares, the market capitalization of the company stayed the same (at approximately $131 billion).

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• What Is a Reverse Stock Split?

How Do Stock Splits Affect Short Sellers?

Stock splits do not affect short sellers in a material way. There are some changes that occur as a result of a split that can impact the short position. However, they don't affect the value of the short position. The biggest change that happens to the portfolio is the number of shares being shorted and the price per share.

When an investor shorts a stock, they are borrowing the shares with an agreement that they will return them at some point in the future. For example, if an investor shorts 100 shares of XYZ Corp. at $25, they will be required to return 100 shares of XYZ to the lender at some point in the future. If the stock undergoes a 2-for-1 split before the shares are returned, it simply means that the number of shares in the market will double along with the number of shares that need to be returned.

When a company splits its shares, the value of the shares also splits. For example, suppose the shares of XYZ Corp. were trading at $20 at the time of the 2-for-1 split; after the split, the number of shares doubles, and the shares trade at $10 instead of $20. If an investor has 100 shares at $20 for a total of $2,000, after the split, they will have 200 shares at $10 for a total of $2,000.

In the case of a short investor, prior to the split, they owe 100 shares to the lender. After the split, they will owe 200 shares (that are valued at a reduced price). If the short investor closes the position right after the split, they will buy 200 shares in the market for $10 and return them to the lender.

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• The Bottom Line

A stock split is used primarily by companies that have seen their share prices increase substantially. Although the number of outstanding shares increases and the price per share decreases, the market capitalization (and the value of the company) does not change. As a result, stock splits help make shares more affordable to smaller investors and provides greater marketability and liquidity in the market.

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