Question 1

What is the difference between primary and secondary stock markets?

Accepted Answer

The primary market is where new stocks are issued to the public for the first time, often through an Initial Public Offering (IPO), allowing companies to raise capital directly. The secondary market, in contrast, is where investors trade previously issued stocks with each other, facilitating liquidity and price discovery without direct involvement from the issuing company. Major stock exchanges like the NYSE and NASDAQ are examples of secondary markets.

Question 2

How do dividends affect stock prices?

Accepted Answer

When a company announces a dividend, its stock price typically drops by roughly the dividend amount on the ex-dividend date, as the company's assets decrease by the total dividend payout. This is because the right to receive the dividend is no longer attached to the stock after this date, making it less valuable to new buyers. However, dividend-paying stocks are often seen as more stable and can attract income-focused investors.

Question 3

What is short selling in the stock market?

Accepted Answer

Short selling involves borrowing shares of a stock and selling them, with the expectation that the price will fall. The short seller then buys the shares back at a lower price and returns them to the lender, profiting from the price difference. This strategy is employed by investors who believe a stock is overvalued and its price is likely to decline, but it carries significant risk if the stock price rises instead.

Question 4

How does quantitative easing impact stock markets?

Accepted Answer

Quantitative easing (QE) is a monetary policy where central banks purchase large quantities of government bonds or other financial assets to inject money into the economy and lower interest rates. This typically leads to increased liquidity in the financial system, which can drive up stock prices as investors seek higher returns in alternative assets. Reduced borrowing costs for businesses also tend to boost corporate profits, further supporting equity valuations.

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