How the Stock Market Works | Basics of Share Market
Hi friends in this article I’m about to tell you How the Stock Market Works
Any Company that wants to raise capital and decides to go public then that company offers few of its shares to the stock exchange
Once a company gets listed in the stock exchange people start buying and selling that company shares regularly but why keep buying and selling? It’s with the intention of creating profit.
Let’s take the example of a company X
X is currently facing an internal leadership issue because of which most of the senior leaders and leaving the company because of this news the stock prices of the company X have gone down from 2000 to 1500
How the Stock Market Works with Example
Assume the two traders John and Stella
John believes that the stock prices of company X will go further down so he wants to sell his shares
Stella, on the other hand, believes that this a momentary lapse and they find a good CEO the stock price of X will go back up again
So at 1500. Rs John becomes a seller Stella becomes buyer, they go to a respective stockbroker at the stock exchange and stock exchange makes sure that the order is matched and the trade gets executed.
The price of the shares go up and down because of three things
Different Point of View – John and Stella as I discussed had different opinions about company X which causes of demand and supply situation that moves the share prices
News – If there is positive news about the company like if the company has made a profit in the last quarter or if it has hired a good CEO then the share price can also go up
Event – Event can be directly relayed to the company or the economy as a whole
Now, what will happen to your shares after you buy them?
Simple they will sit in your Demat Account with the Holding Period
The Holding Period is defined as the period during which you intend to hold the stock with you, it can be as short as a few minutes to as long as a few years
let me explain what that means
Once you enter the stock market you will participate based on your experience & your risk taking capability and that will classify you as a Trader or an Investor.
Basics of Share Market #1. Stock Market Trader
A Trader is someone who is constantly alert during the market hours, looks at the patterns, stays updated with the news, spots an opportunity and buys the share and sells them on the same day or after a few weeks.
For example: Suppose a trader buys 100 shares of TVS at 2000 rupees at 9:30 a.m. and at 3 p.m. he notices that the share price of TVS have increased from 2000 to 2008 so he immediately sells the shares making a profit of 800 Rs on that trade.
Normally the traders are involved in 4 to 5 such trades per day.
Basics of Share Market #2. Stock Market Investor
Warren Buffett is an investor their objective is to find good companies whose right now have a low share price because of market fluctuations thus making them a great buy
An example of this is L&T, in September 2013 due to some negative market sentiment the stock price of L&T dropped from 1200 to 690, it was as if a great product was available on discount.
So most of the investors jumped on the opportunity and bought L&T Shares with the intention of holding on to them because the believed that L&T will do good anyway in long-term eventually it did pay off because the share price of L&T rose up to 1440 in May 2014.
This long term investment in good companies irrespective of the market fluctuations is what generates wealth.
Now let me explain to you one last and important concept called
Basics of Share Market #3. Stock Market Index
There are around 5000 companies in the Bombay Stock Exchange aStock Market Indexnd around 1600 companies in the National Stock Exchange
so if I ask you how is the Stock Market doing today you are not going to check the price of each and every company right?
You will pick a few major companies across key sectors and check their status and if the majority of their status is going up then you will say that the stock market is up or else you will say the stock market is down.
Now these few major companies that you use to determine the health of the stock market form the Stock Market Index
In India, we have two major Index Sensex and Nifty
Sensex has 30 major company from the Bombay Stock Exchange and Nifty 50 major companies from the National Stock Exchange
The reason why we need an index is that it is a barometer for comparing any trading or investing activity
For example: let’s assume that last year you have invested 1lakh rupees and generated a return of 20000 which means that now you have 120000 rupees which is a 20% return which is great
But what if last year Nifty moves from 6000 points to 7800 points generating 30% now your 20% do not look so good, does it? because you have underperformed the INDEX and INDEX acts as a barometer for every trader and investor because their intention is to outperform the INDEX plus a stock market acts as a barometer for our countries economy.
If this is sounding too complicated to you don’t worry you’ll understand how things work in detail in the below articles Stock Market Index
Hope now you all have the brief idea on How the Stock Market Works & Stock Market Index
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