The Stock Market is a key component of the capital market, serving as a platform for trading shares.
It encompasses both highly regulated stock exchanges and less regulated equity markets, offering diverse opportunities for investors.
Prominent examples of European stock exchanges include the London Stock Exchange, Deutsche Börse, and the Amsterdam Stock Exchange, where shares are actively traded.

 

Stock Markets and the Financial System
A striking feature of the modern Western financial system is the trend toward disintermediation. This means that some financing, such as with hedge funds, goes directly to the financial markets, bypassing the traditional route through banks, loans, and deposits.
The growing popularity of investing, for example through mutual funds, has strongly stimulated this shift.
Figures show that in Sweden in the 1970s, more than 60% of the average household's wealth consisted of deposits and other risk-free assets.

By the first decade of the 21st century, this percentage had fallen to less than 20%.
Most of this wealth has shifted to the riskier stock markets, where fluctuations are a constant.
Therefore, a thorough understanding of risk is essential for investors.
The following quote is from the introduction to a biography of the legendary investor Warren Buffett:

"With each passing year, the noise level in the stock market increases."

Television commentators, financial journalists, analysts, and market strategists vie for investors' attention.

Meanwhile, individual investors often exchange questionable and sometimes misleading tips in chat rooms and forums.

Although information is abundant, it is becoming increasingly difficult for investors to achieve consistent returns.

Stock prices often rise for no apparent reason and can plummet just as suddenly. This creates uncertainty for people investing for their children's future or their own retirement.

Sometimes there seems to be no logic behind market movements, only chaos and speculation.

 

Stock Market Behavior
Stock markets are strongly influenced by changes and trends within the market.
During periods of optimism, investors often tend to drive stock prices up significantly, leading to so-called bull markets.
During periods of pessimism, the opposite occurs: stock prices fall, which is known as bear markets.

The assumption that financial markets always maintain a stable "price equilibrium" (according to the Gaussian distribution) is clearly refuted by these types of fluctuations.

 

Stock Market Crashes
According to the efficient market hypothesis, stock prices in the medium to long term are influenced only by fundamental changes, such as expected earnings or dividend payments.
However, the 1987 stock market crash, also known as Black Monday, severely challenged this theory.
In a single day, the Dow Jones Industrial Average plummeted by a staggering 22.6%.

This abrupt collapse raised major questions about rational choice theory and general equilibrium theory.
Other well-known crashes include the 1929 stock market crash, the 1973-1974 financial crisis, and the bursting of the dot-com bubble in 2000.

The exact cause of the 1987 stock market crash has never been fully determined.
Nevertheless, the sudden and significant fluctuations are often attributed to strategies such as Value at Risk, which were widely used at the time.

After the crash, stock trading worldwide was temporarily halted because computers could not handle the massive influx of transactions.
This gave the Federal Reserve and other central banks the opportunity to intervene quickly and prevent a further financial crisis.

 

Several studies show that psychological factors play a significant role in behavioral economics

These factors can lead to "exaggerated" price fluctuations because people think they recognize patterns too quickly and anticipate them.

As a result, they often lose their objectivity regarding the actual financial situation.
A good example of this is the sharp increase in shareholder confidence when a company in which they have invested makes a small profit. Furthermore, phenomena such as groupthink, mass hysteria, and euphoria play a crucial role in irrational market behavior.
A stock market crash is often described as a sudden, sharp drop in stock prices.

Besides economic factors, panic is a major driving force in this situation.

Some studies even draw parallels between stock markets and phenomena such as gambling.
Furthermore, the media has a significant influence on public opinion.

For example, during the run-up to the year 2000, there was a lot of talk about the "new economy," which, thanks to rapidly rising stock prices, was claimed to offer a unique opportunity to make a lot of money quickly.

Such reporting can significantly influence investor behavior.

 

Stock Index
A stock index is a price indicator that reflects price fluctuations within a specific market or market segment.
The value of this index is calculated based on the total market capitalization of the included stocks.

 

Derivative Instruments
Derivative instruments, such as options and futures, are financial products that derive their value from the price of underlying assets, such as stocks.
Although the pricing of these derivatives is often linked to stock prices, they are generally not considered part of the stock market.

 

Other strategies
Examples of strategies that involve trading stocks with borrowed money include short selling and margin trading.