Everyone’s always fascinated by the workings, ins and outs of the stock market. This field has been gathering momentum for several decades and vigor to know about the inner workings of the stock market is in demand now more than ever. So, I have written this blog especially for those who are just starting and want to know how does the stock market works.
The stock/share market is where the trade of company shares occurs. Now before moving further let us get a primary idea of what is meant by a “Company Share”.
In a layman’s language we can say that shares refer to a percentage of ownership of a company and by their trading, one asserts percentage ownership of it. If that company profits in its field- some amount of that profit is shared with its shareholders – similarly if the company incurs losses, a percentage of that loss is borne by its shareholders mandatorily.
Note:-This percentage of profit is termed as “DIVIDEND” in the market.
Why Dilute Shares of the Company in the Market?
Now one may argue- what is the requirement of shares if by releasing them in the market the actual owner of the Company (the one who established it) loses a chunk of its ownership?
Here is what the actual scenario is…For establishing or expanding a firm, often a huge investment (Capital amount) is required. This huge amount is often thought to acquire so in this case releasing shares in the market or looking for private investors comes up as the sole remedy.
All these shareholders now own a part of the organization with the actual establisher holding onto the majority of the shares to keep his/her authority. So in simple words companies release their shares to raise funds for their work.
Person “A” wants to establish a start-up that requires a capital investment of Rs 20,000. Circumstances are such that he can afford to invest only Rs 10,000 – In this case, he offers his friend, Person “B” to invest Rs 10,000 in his company and become a fifty percent (50%) shareholder. Now the company can be established in which all the profits made will be distributed between the two of them (A and B) in equal halves.
This same phenomenon occurs on a large scale in the stock market, the only exception being that in the market the shares are open to being bought by the entire world public.
How Does Stock Market Deal With its Business?
With all this said- Let us now talk about how a stock market deals with its business:
As the name clearly states, it is basically a market whose primary ethos is that of a “Demand-Driven Supply Network.” What we mean by saying this, is that when the demand for a particular company share increases due to its good reputation or future assurances – its value upscales.
The body or building in which all this trading occurs is known as the “STOCK EXCHANGE”. This is where the market can be divided into two types:
- Primary Market
- Secondary Market
Primary markets are where the companies sell their shares upon deciding the exact value of them following the protocols of the organizations governing the market and keeping in mind the demand of its shares. These exact values of the shares of the companies are known as the “NOMINAL VALUE” or “FACE VALUE”, being bound by the two factors stated above companies cannot manoeuvre too on this value. Every share of the company has an equal value and the number of shares is decided by the company itself. A company never sells 100% of its shares in the market, as stated above the owner retains a majority of the shares to keep possession of his/her decision making power.
Secondary markets are where people trade in shares amongst themselves. The companies cannot control the price of their shares in this market. The share prices fluctuate based upon the demand and supply of the shares. This value of the share is termed as the “MARKET VALUE”.
Note: – The dividend percentage is always calculated on the nominal value and never on the market value of the company shares.
The Meeting Place – Stock Exchange
In India there are two stock exchanges:
- The Bombay Stock Exchange (BSE)- Enlisted with 5400 companies.
- National Stock Exchange (NSE)- Enlisted with 1700 companies.
The general trend in the prices of the shares of all the companies enlisted can be judge using some relative index. This varies from country to country and for India we have:
- Sensex (Sensitivity Index) of the BSE: It is the average trend of the top performing 30 companies of the Bombay Stock Exchange (BSE).
- Nifty (National + Fifty) of the NSE: It is the fluctuations of the top 50 company shares enlisted on the National Stock Exchange (NSE).
NOTE: The exact values of these indices are not enough to determine the trends, one needs to compare the values for a regular interval of time to arrive at a relative result.
Trading vs Investing
Now we have to agree any market-related investments are subject to some amount of risk factor.
Keeping this in mind let us know about the two ways the general public can engage in stocks:
- Trading: It is a kind of job in itself, where a person puts and withdraws investment from shares to earn instant profits. It is short-term and volatile.
- Investing: It is to put money in the stock market and to let it mature for future return. It is long-term, involves a factor of risk as one doesn’t know the future trend of the share values, and also a greater fundamental knowledge of the market is required.
For the general public to trade in shares one needs:
- A bank account.
- A trading account.
- A DEMAT Account ( To store the shares one has bought in digital form)
- Lastly a Broker ( An agent who brings the CUSTOMER and the SELLER together for a commission )
Note: General people who want to trade in stocks are known as “Retail Investors”.
Now that you are aware how does the stock market works and inner operations of the stock market, the next step is to understand the basics of the stock market and how to choose stocks for trading or investing in it.
Several books can teach you the nitty-gritty of the stock market from basics to advanced. But you will need a lot of practice before you are fully prepared to dive into the deep waters of trading & investing in the stock market. This is where the stock market courses come in handy. Depending upon the level of expertise you are looking for, you can choose the course and then jump right off the diving board and start swimming with profits.