How efficiently does Stock Market operate- [Updated 2020]

Does the thought of investing in the stock market scare you? Ever thought how the stock market works?

You are not alone who fears about investing their money in the stock. It petrifies individuals with less or no experience in this field with the horror stories of losing their money in the stock market.

Investing in the stock market carries a lot of risks, but when it is approached in a disciplined manner, it is one of the best ways to increase your worth.

We have simplified stock market trading for beginners, and how does it operate.

Day trading that requires day to day buying and selling of stocks because of a change in their price is extremely risky. But if we do the investment in the stock market for a longer period is the best way to increase your wealth. To understand the mechanism of the stock market, we need to understand the basics.

Definition of ‘Stock’

A stock or share (also known as a company’s “equity”) is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets (what it owns) and earnings (what it generates in profits).

Stock ownership implies that shareholders own a slice of the company equal to the number of shares held as a proportion of the company’s total outstanding sources.

For instance, an individual or entity that owns 200,000 shares of a company with two million outstanding shares would have a 10% ownership stake in it. Most of the companies have outstanding shares that run into the millions or billions.

Why does the company issue share?

Most of the huge corporate companies started as a small private company by a visionary founder. For example, Mark Zuckerberg formed Facebook in 2004 from his dorm room. These types of technologies have become an enormous company. And to run these companies by the entrepreneurs, a huge man source and a big place is required for fulfilling these need a huge capital. Thus, the need to issue shares of the company.

Equity or Preferred share

There are two types of shares the equity shares and preferential shares. The equity shares have much more value as compared to the preferred shares.

equity shares and preference shares

The basic difference between the equity and preference shares is the voting rights and the share of dividends. The equity shareholders may vote in the annual general meetings to appoint BODs or auditors. While the preference shareholders may get their share of dividends or assets before equity shareholders at the time of liquidation.

Well, in the case of equity shares, the no. of votes depends on the policies of the company. For example, company A gives the right of 1 vote 1 share and Company B gives the right of 1 vote 10 shares. So, the right to no. of votes depends on the company.

Raising Funds

A start-up company can raise funds either by issuing shares or by debt financing. Debt financing can be a problem for start-up companies due to less tangible assets plus the burden of interest.

Therefore, it is preferred to issue the shares for raising funds. Personal saving can do the basic ground setup of the business or borrowing money from friends, family, but once the business expands a vast amount of money is required.

Stock market Working

A stock market is a place where the buying and selling of shares take place. We often hear in the news about the trends of the share prices going up or down, this means that either the value of share prices increases or decreases. People invest in the stock market to gain profits.

A stock exchange is a secondary market where the owners of the shares can transfer their shares to the potential buyers. It is important to understand that the companies listed on the stock market rarely buy or sell their shares regularly. (companies may sell new shares or buyback of shares, but these are not day-to-day work.)

How share prices are set

The price of the shares is set in various ways. But the most common way is through an auction. In which all the interested buyers bid a particular amount for the share, and the sellers offer a particular amount for the share. The amount where the bid and offer are the same is the price for the share.

Demand and supply of stock

The law of demand and supply applies with shares. I suppose the demand for the shares is more than the supply of the shares, then the prices of the shares will surely rise and vice versa.

Investing in stock

There might be other profitable business ideas in India to invest in, but for stocks, the various studies have shown that in a long run the return from the stock investment is comparatively higher than the return from assets. These returns arise from capital gain and dividends.

A capital gain is when you sell your shares for a price higher than you paid for it. A dividend is a share of the profits which the company provides to its shareholders.

Frequent buying and selling of stock can lead you to suffer losses. The secret to having a higher wealth is to stay invested, even if there are ups and downs in the price so you can get a higher return.

Stock market index

The stock market index represents the prices of different stocks and the movements in the share prices. A market index is a popular way to measure the performances of stocks.

It shows the trends of the stocks. Most we know popular trends through market capitalization.

Market capitalization

Market capitalization refers to the total market value of a company’s outstanding shares and is calculated by multiplying these shares by the current market price of one share.

How to invest in stock market

You might have already invested in the stock market through mutual funds. But to invest in the stocks you can buy the shares through the brokers or an individual.

Investments carry a lot of risks, but there is no suitable reward for investments in stocks. They can create accounts for the same online.

List of the stock exchange in India

  • Bombay stock exchange (BSE)
  • National stock exchange (NSE)
  • Calcutta stock exchange (CSE)
  • Metropolitan stock exchange (MSE)
  • India international exchange (India INX)
  • NSE IFSC LTD.

Among these stock exchanges, BSE and NSE are the most famous stock exchanges.

List of few trending companies in the stock market

  • Reliance industries
  • TCS
  • HDFC
  • Hindustan Unilever
  • Wipro
  • Lupin
  • NTPC
  • Tata
  • ITC

Wrap Up

Among these companies Reliance, Tata, HDFC, TCS are mostly trending. It is very important to analyze the company’s trends before investing in them. According to the recent report, the prices for Reliances industries are around INR 2150 (with a rise of 0.57%), prices for TCS has fallen by 0.55% to INR 2300 (approx.).

After understanding the working of the stock market, analyzing the trends of the companies, you can start investing your money in the stock market by creating your portfolio online.

 

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