The Working of a Stock Market
Stock markets work on the simple principle of price movements. Investors take advantage of the price fluctuations and buy/sell stocks accordingly. Stocks can either be traded through an exchange or through over-the-counter market. They act as a buying and selling avenue of stocks. It is a meeting point for investors. Stocks can either be private or public. Public stocks are those which are listed on a stock exchange like NSE or BSE. Private stocks are traded through over-the-counter markets or through dealers.
Once a company gets listed through an IPO, stocks are issued in the primary market which is subsequently traded in the secondary market. An investor can buy/sell these stocks through a stockbroker or brokerage firms. Once an investor places a buy order, the broker processes the order at the exchange. The price of the stock and the order confirmation details are then communicated to the investor. After a period of T+2 days, the shares are deposited in the demat account. You can then manage your portfolio based on the rise/fall of stock prices.
Types of Share Market
There are two types of trading in the Indian share market - Primary Market and Secondary Market. The primary market is the part of the capital market which deals with issuing new securities to investors. When a firm sells bonds or new stocks for the first time to the public, it creates a primary market. The company, at this point of time, gets listed in a stock exchange and becomes public. The primary market can take form through an Initial Public Offering (IPO). Secondary market, on the other hand, is all the trading that takes place subsequent to primary market. At this stage, you can sell your shares to another investor through intermediaries like a stockbroker. Simply put, the secondary market is one where investors trade the previously issued securities without the company’s involvement. The company that issued the shares is now not a party to any further sale between investors.
Why People Invest in Share Market
Investors buy and sell shares through a share market. Investors buy shares for the specific reason of getting income. Though investing in shares has its share of risks, it can reap good returns in the long run. Shares offer you income through dividends. Hence, it acts as an annual income and as a reward for shareholders. The higher the profitability of the company, the higher its dividend rate is.
Purchasing stocks of a company can give investors a sense of ownership, thereby allowing you to have a share of the profit that the company earns. Investing in shares also adds diversity to your investment portfolio. Share trading also has a stop-loss feature - if the value of your shares falls below this stop-loss limit, it will automatically be sold, thus saving you from unexpected losses.
Things You May Also Like to Know:
What is meant by equity market?
In simple terms, an equity market is a market used for trading equity instruments. Through an equity market, shares are traded either through stock exchange or over-the-counter markets. It offers two-way benefits to companies and investors. Companies get an opportunity to raise required capital without incurring debt. Investors can earn profits through these company shares. They also have a claim on the future earnings of the company.
Equity markets act as a buying and selling avenue of stocks. It is a meeting point for companies and investors. The equities traded in the equity market can either be public stocks or private stocks, Public stocks are those stocks which are listed on a stock exchange, like NSE or BSE. Private stocks are traded through over-the-counter market, or through dealers.
Who is a stock trader?
Simply put, a stock trader is an investor who trades stock in the financial markets with the aim of earning profits on those investments. Stock traders may be investors as a full-time profession or can partake in the practice casually. They may be a hedger, investor, speculator or an arbitrageur. Stock traders trade financial instruments like mutual funds, shares, equity, pension funds, etc. In order to be a successful stock trader, you must have a profitable investment strategy in place. Some use the buy and hold strategy, where bought stocks are held for a longer term for higher profits. Various stock traders have different investment strategies based on their financial goals.
What is a stock exchange?
A stock exchange is a financial market where buy and sell transactions of securities takes place. These buy and sell prices are determined by market forces like demand and supply. A stock exchange helps investors to trade through a convenient and secured platform. The Bombay Stock Exchange (BSE) is the oldest stock exchange in India. Currently, the National Stock Exchange (NSE) is the leading stock exchange of the country and is located in Mumbai.
You can buy and sell securities like shares, debentures, bonds, etc. through a stock exchange. It requires registration by the Central Government. Trading securities is governed by rules and regulations of the stock exchange and SEBI (Securities and Exchange Board of India) guidelines. SEBI is the regulator for the securities market in India.
How much is the minimum amount for investing in share market?
There is no minimum amount required for share market investment. You can buy a single share or any number of shares you like. In order to trade in shares, you have to open a demat account with a depository participant. A trading account has to be opened as well, with your stockbroker. You can begin trading shares once these accounts have been opened. Shares offer you income through dividends. Hence, it acts as an annual income and as a reward for shareholders. The higher the profitability of the company, the higher its dividend rate is.
People also buy shares to have a stake in companies which are likely to perform well, thus giving them a sense of ownership. It also helps to create a diverse investment portfolio. Buying shares also allows easy access to your money as you can easily buy and trade shares without having to cough up a penalty.
How is the market qualified as bull or bear?
The market is known as a bull market if stocks are rising, GDP is increasing and there are many job opportunities. During this time, investors are of the belief that the upward trend will continue in the near future. It is characterized by high levels of optimism and investor confidence. Bear market, on the other hand, means that stock prices are falling and the economy is on verge of a recession. At this time, when share prices are falling, most investors sell their shares to avoid added losses. It becomes difficult to earn stellar gains during this time unless the investor is a short seller.
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