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How Stock Market Works ?

By News Canvass | Mar 17, 2023

What is stock market?


  • Let us begin with understanding what is stock market and how it works. The term “stock market” refers to a variety of locations where investors can buy and sell shares of companies that are publicly traded. Such monetary dealings happen on recognized exchanges and in over-the-counter (OTC) markets that follow a predetermined set of regulations
  • Both “stock market” and “stock exchange” are frequently used synonymously. Traders buy and sell shares of stock on one or more of the stock exchanges that make up the larger stock market.
  • Securities buyers and sellers can connect, communicate, and conduct business on the stock market. The markets provide price discovery for stock in firms and act as a gauge for the state of the national economy. Because market participants compete on an open market, buyers and sellers may be sure that they will receive a fair price, a high level of liquidity, and transparency.
  • The London Stock Exchange was the first stock exchange, and it got its start in a café where traders gathered to trade shares in 1773.
  • Philadelphia hosted the country’s first stock exchange in 1790.
  • Investors can trade a variety of financial assets on the stock market, including shares, bonds, and derivatives. The stock exchange serves as a middleman for the purchase and sale of shares.
  • The Bombay Stock Exchange (BSE) and National Stock Exchange are the two main stock exchanges in India (NSE). Additionally, a primary market exists where businesses can list their shares for the first time. Following that, the shares are traded again on the secondary market.

How stock market works?

  • Understanding how does the stock market works, is an interesting concept. By selling shares of stock, the stock market assists businesses in raising money to support their operations and builds and maintains wealth for individual investors.
  • Companies offer ownership holdings to investors in order to raise capital on the stock market. Shares of stock are the name for these equity investments. Companies can sell shares on the stock exchanges that make up the stock market to raise the funds they require to operate and expand their businesses without incurring debt. For the right to sell stock to the general public, corporations are required to disclose information and give shareholders a say in how their companies are run.
  • Investors profit by exchanging their funds for shares on the stock market. When businesses invest in growing and expanding their operations, the value of their stock rises over time, generating capital gains, which benefits investors. Businesses also pay dividends to their shareholders as their revenues rise.
  • Individual company performance over time varies greatly, but the stock market as a whole has historically provided investors with average annual returns of close to 10%, making it one of the most dependable methods to increase your money.
  • The two primary categories of stockbrokers in India are full-service brokers and discount brokers.
  • The conventional type of broker known as a full-service broker offers a wide range of services, including the buying and selling of shares, investment guidance, financial planning, portfolio updates, share market research and analysis, retirement and tax preparation, and more. These brokers will provide you with individualized investing services and suggestions to meet your needs and financial objectives.
  • Online brokers known as discount brokers provide simple stockbroking accounts. They are renowned for offering the essential trade facility at the lowest cost while offering no individualized services.

How share market works

  • Companies can raise money by selling investors shares of stock, or equity, on the stock market. Shareholders who own stocks receive voting privileges as well as a residual claim on corporate profits in the form of dividends and capital gains.
  • On stock exchanges, both individual and institutional investors join together to purchase and sell shares in a public market. You purchase a share of stock on the stock market from an existing shareholder, not the company, when you do so.
  • What occurs when a stock is sold? Instead of returning your shares to the corporation, you sell them on the exchange to another investor.
  • Market makers are those who operate as middlemen between buyers and sellers. This guarantees that there is constantly a market for stocks on an exchange. Investors can choose to purchase and sell shares right away whenever they wish during market hours with such a liquid market. The following is a summary of the procedure that investors should be aware of:
  • Market makers continuously provide buy-and-sell quotations for shares while also purchasing and holding shares.
  • The bid is the highest purchase price made by a market maker for any given share, and the ask is the lowest price made available for sale.
  • The spread refers to the disparity between the two.
  • You’ll never have to wait to sell equities at their full market value thanks to market makers. A market maker will buy your exact amount of shares now; you don’t need to wait for a buyer to request them specifically.

What is the share market and how it works?

  • Demand and supply considerations affect the price of stocks on the market. Part of a company’s share price is determined by its market capitalization, which is the sum of the stock price times the number of outstanding shares. The market’s current asking price is determined by the most recent sale price. Consider that the previous closing price of 100 shares of firm XYZ was Rs 40, and you wish to purchase them. The share is worth (40*100), or Rs. 4,000, in fair market value.
  • The discounted cash flow approach is a different way to determine the fair price. According to the hypothesis, the sum of all future dividend payments discounted at current value represents the fair price.
  • The network of exchanges, broking firms, and brokers that makes up the stock market acts as a middleman between businesses and investors. Initial Public Offerings, or IPOs, are used to list companies in the market before investors can buy their shares. A company’s market capitalization can be determined by an initial public offering (IPO), and investors can choose shares to purchase from distinct lists of large-cap, middle-cap, and small-cap companies on the stock markets.
  • In addition, stock exchanges have indices. The Nifty and Sensex are different indices used by the Indian exchanges NSE and BSE. Based on market volume and share popularity, these indices are made up of the best large-cap firms. These indicators are followed by average investors to determine market direction.

How does the share market work?

Companies submit a draft offer document to SEBI that includes company information. Upon approval, the firm launches an initial public offering (IPO) on the primary market to sell its shares to investors. To some or all of the investors who made bids during the IPO, the Company offers and allots shares. The secondary market (stock market) is then used to list the shares, enabling trading. The brokers place their orders on the market after obtaining instructions from the clients. When a buyer and seller are found, the trade is completed effectively.




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