If your interest in investing in the stock market is getting a pullback because of the fake promises and highly public stories of investors getting rich or losing everything, you are not the only one. Many of the readers here would be tangled up in one or the other thought of insecurity.
So let’s untangle this and understand the fantastic stock market with a different perspective.
This is likely to gear you up towards TRADING as “A viable Investment.”
Let us start with understanding “STOCKS” –
What are the stocks?
Stocks also termed as shares, grant the traders to own a portion of a public corporation.
Stocks consist of two markets – Primary and Secondary.
The primary market is the place where the shares are issued for the first time. So when a company is getting listed for the first time at the stock exchange and issuing shares, this process is undertaken at the primary market. The shares or stock issued by the company are termed as the Initial Public Offering.
So, IPO can be better explained as the first offering of stock, when a company goes public.
This initial hand of support for the new or growing businesses help them to gain additional funds to grow the company. On the other hand, the secondary market is the actual stock market where all the existing stocks are bought and sold by the retail investors through the brokers. It is the secondary market that controls the price of the stocks. Generally, when we speak about investing or trading at the stock market we refer to trading at the secondary stock market. It is the secondary market where we invest and trade stocks.
What makes the stock price go up or down?
Once the offering is completed the game of supply and demand begins making the Stock prices change every day.
If more people want to buy a stock that is the stock is in high demand. When the demand rises higher than supply, then the stock prices go up!
DEMAND > SUPPLY – Price rises.
Conversely, if more people want to sell a stock, and the stock is in higher supply than its demand, the prices would fall.
DEMAND < SUPPLY – Price falls.
Understanding supply and demand is quite easy, right? What is difficult to understand is what makes supply or demand take an upward or downward movement? Understanding the movement of supply and demand can help to understand the price movement of the stock as well.
To figure this out, one needs to know the many aspects of the market.
Firstly never look at NEWS as just NEWS but focus and interpret its effect on stocks. Analyze whether the news has a positive impact or a negative one for a specific stock. The same news can be positive for one stock and at the same time negative for the other and thus giving an impact on supply and demand of that particular stock.
Also, the impact of the same news on general public should be noticeable to understand the sentiment of people directing the price flow of the stock, as it’s the general public force driving the stock movement.
Domestic and international government policies also bring about fluctuations in stocks and commodity prices.
The price also fluctuates with merger or acquisitions of companies and also with the differing earnings and performance of the company.
If a company is earning adequate profits in the long run, it can steadily provide good returns on investment by shareholders. However, if the company is not able to turn a profit, the shareholders are likely to sell off its shares and look for better investing opportunity.
Earnings projection helps the analysts to understand the future value of the company. If a company’s results are better than expected, the price jumps up. If a company’s results disappoint and are worse than expected, then the price is likely to fall.
So, supply and demand of a stock in the market determines the stock price.
How does stock market work?
Now we know what stocks are, why the companies offer shares and what makes the price fluctuate.
Next, let us understand the actual market that holds these stocks and brings it into trading.
— Firstly, the stock market is not a particular place. It is many places and many computer systems networked to facilitate the buying and selling of shares in public companies. So, we can call it an electronic auction platform.
— All the stocks are registered on the two stock exchanges:
The Bombay Stock Exchange (BSE) and the National Stock Exchange(NSE).
— Under these exchanges stock brokers come in as facilitators. Stockbrokers are the intermediaries between the stock exchange and the traders. Stockbrokers provide trading platforms to the traders and all the monetary and stock transactions are performed by the stock brokers on behalf of the traders.
— Every stock broker has their own set of service/brokerage charges, though the brokerage charges are fixed with an upper cap as per SEBI regulations.
About SEBI (Securities And Exchange Board of India)
SEBI is a regulatory board of the stock market.
Its preamble states that SEBI must “protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental there to.”
In this light, as a board, SEBI must be responsive and proactive to the needs and interest of the groups that constitute India’s financial and investment markets: the investors, the market intermediaries and the issuers of securities. It is mandatory for a stockbroker to be registered under SEBI (Securities And Exchange Board of India). So as a trader, you need to choose your broker wisely to experience trading in a more joyful and strategic way.
You will surely come across expected and at times unexpected movements of the stocks, totally defying all the logic, readings, predictions and explanations made by you or the advisory. Fluctuation is in nerves of trading but participating in a disciplined, limited way can be an experience of benefit and fun for you.
Hopefully, if you are looking for profitable trades, you now know a little more about what the market is and how it works.