12 Q&As about the stock market
Stock market activity is the object of intense scrutiny, especially in Sweden. Here, direct ownership in stocks as a share of total financial assets is among the highest in Europe. The Swedish environment for equities benefits not only large companies, but also innovation companies in, for example, the life science sector. What is a stock, why does a company want to list its stocks and does it matter which marketplace the company’s stocks are listed on? BioStock sought answers to some common questions on the subject.
Interest in the stock market is particularly high in Sweden. According to a report from 2020, the proportion of Swedes’ financial assets accounted for by direct ownership in stocks amounts to 11 per cent. Only Finland, with 19 per cent, reports a higher figure in Europe.
What is a stock, what marketplaces are available in Sweden and why do the companies want to list their stocks? These are some questions addressed in this article.
1. What is a stock?
A stock is an ownership interest in a company. When you buy a stock, you become a stockholder in the company. As a stockholder, you get to take part of the company’s assets and earnings. If the company is profitable, the board can decide on dividends, i.e. that the stockholders receive a part of the company’s profits. As a stockholder, you are also allowed to participate in the General Meeting. In these meetings, decisions are made on how the company should be governed and financed.
2. What is common stock?
When talking about stocks in a company, you usually mean common stock – simply, the most common class of stock. In Sweden, so-called A and B shares are common, a type of ordinary share where the difference lies in how strong each share is in terms of votes at the general meeting. An A share gives the holder more votes at a general meeting than a class B share. For a private investor, the most relevant aspect is usually which share has the highest turnover, i.e. which share is traded most actively.
3. What is a preferred stock?
Preferred stocks are a class of stocks in which the owners are entitled to dividends before the ordinary stockholders. In many cases, the dividend is determined in advance – something that does not usually apply to common stocks. Therefore, preferred stocks can be seen as a middle ground between a common stock and a corporate bond.
In the event of bankruptcy or liquidation of a corporation, the preferred stockholders may prevail over the common stockholders, implying a higher price of the preferred stocks compared to the common stock.
4. What is a depositary receipt?
A depository receipt is a security that represents a specified number of stocks in a foreign company. For example, AstraZeneca stocks can be traded on the US Nasdaq. However, this does not involve buying and selling the actual stock, rather, a depositary receipt issued by a US custodian bank – AstraZeneca ADR (American Depositary Receipt).
Similarly, there are foreign companies whose depositary receipts are traded on the Stockholm Stock Exchange. For example, the engineering company Autoliv’s main listing is on the New York Stock Exchange, but it is also listed in Stockholm with Autoliv SDB (Swedish Depositary Receipt).
Owners of a depository receipt receive the same development and rights as a stockholder of the company’s ordinary stocks.
5. What is an MTF?
Stock trading is also available on other marketplaces, so-called MTFs. A Multilateral Trading Facility is a European term for trading in stocks or other financial assets. It is not a regulated exchange, but falls under EU’s MiFID II regulations, which are there to protect retail investors. Examples of MTFs in Sweden are Nasdaq First North Growth Market, Spotlight Spot Market and Nordic SME.
In the US, the equivalent is called ATS – Alternative Trading Systems – and although these are less regulated than the official exchanges, they are under the supervision of the SEC, the American equivalent of the Swedish FI.
7. What is a stock index?
A stock index is a way of categorising listed stocks according to various criteria, such as size, field of activity, region, etc.
OMXS30 is an index with the 30 most traded stocks on Nasdaq Stockholm. The index is the leading stock index on the Stockholm Stock Exchange thanks to the good liquidity of the underlying stocks. Trading in the stocks on the stock exchange is measured continuously and every six months an evaluation determines the 30 most traded stocks. The stocks included in the OMXS30 are weighted by market value, with the largest having the heaviest weight.
The broader Stockholm All Share is also a value-weighted stock index that includes all companies listed on Nasdaq Stockholm.
8. What is a sector index?
The companies on the stock exchange can also be divided according to their area of activity – industrial companies, finance, healthcare, etc. Morgan Stanley Capital International (MSCI) and Standard and Poor’s have developed a system for this type of categorisation that has become a financial industry standard. The Global Industry Classification Standard (GICS) divides all companies into 11 main categories:
Energy, materials, industrial goods, durable goods, consumables, healthcare, finance, information technology, telecom operators, power supply and real estate.
Each sector is further divided into subgroups – under the healthcare sector we find categories such as pharmaceuticals, biotechnology, medical technology and healthcare companies.
In the United States, which is the leading country in the world when it comes to stock trading, there are, for example, sector indices such as the Nasdaq Biotechnology Index (NBI). This index consists of approximately 275 companies listed on Nasdaq under the categories of biotechnology or pharmaceutical companies. Well-known American companies are included, such as Amgen and Gilead Sciences, but also large foreign companies such as AstraZeneca and Sanofi.
9. Where is the threshold for a large cap company?
The companies on Nasdaq Stockholm are divided into segments sorted by size – large cap, mid cap and small cap. A large cap on Nasdaq Stockholm has a market value of over 1 billion EUR. The mid-cap segment includes companies with market values in the range of 150 million EUR to 1 billion EUR. The small cap list lists companies with a market value of up to 150 million EUR.
10. How do you trade stocks?
A retail investor can access the stock market through banks and brokers. Many of these traders offer online services that make it possible to trade stocks via computer and mobile phone.
The order depth also has a practical significance for trading. How many buyers and sellers have placed their bids on the market? For larger, more liquid companies, the order depth is large and there is often enough buying and selling interest to handle most orders.
For smaller companies, the lack of order depth may mean that you are not guaranteed to buy or sell all the shares at the desired price, as the matching interest is insufficient.
11. What is the difference between a listed and unlisted company?
A listed company has opened its stocks for trading on a public marketplace. In the marketplace, investors buy and sell orders are matched at the current market price.
An unlisted company is privately-owned, and there is no established trading of the company’s shares. Often, unlisted companies are small organisations, sometimes in the development phase. However, there are examples of very large unlisted companies, such as IKEA and Tetra Pak.
12. What determines the stock price?
The demand and supply of the stock in question controls the market price. A positive view of the company’s future growth and profitability will drive up the stock price. Conversely, a negative view of the future will put pressure on the price.
News that affects the conditions for the company often has an immediate impact on the share price. In life science, such news can be about achieved milestones in the development process, results in clinical studies, licensing or partnering agreements with major players, etc.
In this article, we have addressed a few common questions and answers about the stock market. Of course, there are many more, and if you would like to learn more about investing in the biotechnology sector, read the first part of BioStock’s article series on the matter here.