What is the Stock Market?

The term “stock market” refers to the public marketplaces that are available for the issuance, purchase, and sale of stocks that trade over-the-counter or on a stock exchange. The stock market is a marketplace where investors can purchase and sell ownership of such investable assets. Stocks, often referred to as equities, represent a portion of ownership in a corporation. Since it enables businesses to swiftly access public capital, a well-functioning stock market is thought to be essential for economic growth.

Purpose of the Stock Market

The stock market fulfils two crucial functions. The first is to give firms capital so they can finance and grow their operations. A corporation can spend Rs 10 crore in capital to expand its operations if it issues 10 Lakh shares of stock that initially sell for Rs 10 per share (minus whatever fees the company pays for an investment bank to manage the stock offering). The business avoids taking on debt and paying interest on that debt by issuing stock shares rather than borrowing the money required for expansion.

The ability for investors—those who buy stocks—to participate in the profits of publicly traded corporations is the secondary function of the stock market. There are two ways that stock purchases might benefit investors. Some stocks offer consistent dividends (a given amount of money per share of stock someone owns). Investors can also make money from their stock purchases by selling their shares at a profit if the price of the stock rises from the price at which they bought them. For instance, if an investor purchases shares of a company’s stock for Rs 100 per share and the price of the stock later rises to Rs 125 per share, the investor can then sell their shares to recoup a 25 % return on their investment.

How are Prices Determined on the Stock Market?

Stock exchange prices are solely influenced by supply and demand. There is always a maximum price someone will pay for a particular stock and a minimum price someone else will accept for selling the stock. These are referred to as the bid and ask prices, respectively. Consider the trading on the stock market as an auction. For the equities that other investors are willing to sell, buyers are continuously placing bids.

Investors will purchase shares of a stock more quickly than sellers will want to sell them if there is high demand for it. This can raise the price. The market price will decrease, on the other hand, if more investors are selling a stock than are buying it.

Furthering the point, it’s crucial to remember that you can almost always buy or sell a stock you own. Market makers play a role in this.

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What are stock exchanges and their functions?

The Indian stock exchange acts as a market for the trading of financial items such stocks, bonds, and commodities. It is a platform where buyers and sellers meet to exchange financial instruments at certain times during any business day while following the clear rules set forth by SEBI. However, only businesses that are listed on a stock exchange are permitted to conduct trading there.

List of stock exchanges in India are- Bombay Stock Exchange Ltd, National Stock Exchange of India Ltd (NSE), India International Exchange or India INX, NSE IFSC Ltd. The NSE was founded in Mumbai in 1992 and is seen as the leader among India’s demutualized electronic stock exchange platforms. As of March 2016, the National Stock Exchange was ranked as the 12th largest stock exchange in the world with an estimated market capitalization of US$ 4.1 trillion.

Stock Market Indices

The performance of several stock market indexes often tracks and reflects the overall performance of the stock market. Stock indexes are collections of equities chosen to represent how the market as a whole is doing. Options and futures contracts, which are likewise traded on regulated exchanges, are used to trade stock market indexes themselves.

The Nifty 50, BSE Sensex, Standard & Poor’s 500 Index (S&P 500), Nikkei 225 Index, Dow Jones, and NASDAQ Composite Index are some of the famous stock market indices in the world.

Market Sentiments

The terms “bull” and “bear” markets are two of the foundational ideas in stock market trading. A stock market where stock prices are typically rising is referred to as a “bull market.” Since most stock investors buy stocks rather than sell them short, this is the kind of market where most investors do well. When stock prices are falling overall, a bear market is in effect.

Through short selling, investors can still make money even during weak markets. The act of borrowing stock that an investor does not own from a brokerage business that does own shares of the stock is known as short selling. The investor then sells the shares of borrowed stock on the secondary market and collects the proceeds. When buying enough shares to repay the broker for the number of shares they borrowed at a total price less than what they earned when selling shares of the stock earlier at a higher price, an investor can make money if the stock price decreases as they anticipate.

For instance, an investor may make a “margin deposit” to borrow 100 shares of stock from his broker if he feels that the stock of XYZ Company will likely decrease from its current price of Rs 50 per share. The shares are then sold for the current price of Rs. 50 each, giving him Rs. 5,000. If the share price drops to Rs. 40, the investor can purchase 100 shares to return to his broker for Rs. 4,000, making a profit of Rs. 1,000.

In summary, having a fundamental understanding of how the stock market functions can help you become a better investor. You’ll see why it’s possible to buy and sell your investments at any time. Additionally, you’ll comprehend that prices are determined by supply and demand rather than just the core principles of business, and that the market functions like an auction system.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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