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Home » Stock Market – What is The Stock Market and How Done it Works

What is Stock Market

Before we understand stock market let’s see what a stock means. A stock is a share of ownership in a company. So a Stock market also known as the equity market is a place where purchase and sale of securities takes pace either through exchanges or over-the-counter. The price of these securities is determined by the supply and demand forces in the market. Stock market forms a very important constituent of the capital market. It provides a common platform for the investors and corporations – the investors get a part of ownership in the company and make money through the dividends and can sell the stocks at a premium called capital gain, on the other hand the companies get access to the capital required to run the business. Stocks are mainly traded through exchanges. Today, majority of the stock market trades are executed electronically, and the stocks are not available in physical form but electronically. This market is monitored by a market regulator, who design a framework and lay down certain rules and policies within which this market operates.

The stock market has been divided broadly into two:

  1. Primary market: This is where the companies, governments and other incorporated bodies raise capital. These are new issues sold for the first time and known as initial public offering.
  2. Secondary market: Here investors sell their securities to other investors for cash, which helps in maintaining the liquidity of the market.

Market participants include:

Stock Market

Stock Market Definition

The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as,

“An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”

Importance of Stock Market

  • Source for corporations to raise money from the public.
  • Provides liquidity for the investors to quickly buy and sell the shares.
  • It is considered as an indicator of an economy’s strength and development.
  • It is a medium for the general public to inculcate the habit of saving money. This money gets invested into corporations which utilize this money for productive purposes.
  • It promotes capital formation in the country.
  • It provides employment opportunities which leads to economic growth.

How Stock Market works?

The working of a stock market can be really confusing and that is an also a reason why people lose money in stock investing. Now let’s understand the mechanism of stock market in simple words. As we have already discussed stock market is a place where stocks are bought and sold. A company makes available its shares to the public, which are bought by the investors and in turn get a share of ownership in the company.

All of us know that this buying and selling is because of the economics law of supply and demand which moves the prices of these securities and hence the market. For example if there are limited number of shares and the number of people who want to buy them are more, the prices will go up for those shares and vice verse. This demand for shares is dependent on how well the company has been and is doing financially, though it also considers the future plans of the company.

The buying and selling works around the simple concept that investors would want to make highest returns which is buying the stock before the prices go up and selling them before it starts decreasing. So the investors make money either through the price differential, dividends that the company announces on per share basis, based on the profits they have made. Also to note is that companies always do not declare dividends even if they have made profits as they would want to retain it for future growth and its operations.

How to invest in Stock Market?

Anyone who has money can invest in stocks but only those who have the knowledge and understand this market well can be successful in this industry. Majorly stock trading is done with the help of a broker who acts as middleman between the investor and the stock exchange. Brokers who execute orders for the investors are called full service brokers and charge a high commission as against those who do not provide investment advice’s called the discount broker.

When you trade you are basically placing an order, let’s now look at the different types of order:

When a stock is bought or sold on the current market price it is called the “market order”. If there are differences between the actual price and the quoted price it is because of the rapid fluctuations in prices.

There is another order known as the “stop order” or the “limit order”. Here when it is a stop order the broker is instructed to trade at a certain stock price, while a limit order instructs the broker to trade at a specified stock price or something better.

When orders remain active until it is cancelled is called as a “good ‘til canceled” (GTC) order and when an order remains active only till the end of a current trading day is the “day order”. Stocks are usually traded in multiples of 100 and known as the “round lot”, conversely trading in any other amount is known as an “odd lot”.

There are two conditions of the stock market- it can be a bull market or a bear market. A bull market indicates the constant upward movement of the stock market whereas a bear market indicates the continuous downward movement.

Career in stock market

There are numerous job options that are available for those who want to build their career in stock market. It may involve investing in, analyzing and interpreting the stocks and commenting on them. The following part discusses the various job options:

  • Stockbrokers

A stockbroker also known as the financial adviser typically buys and sells stocks, determine the best investment and make portfolio recommendations for clients. Brokers are usually are compensated through commission on each trade they make, or an annual fee. Even though individuals could be stockbrokers, it is usually the broker from the stock brokerage firm who provide such services.

  • Securities Sales Agent

Securities sales agents are employed by stock brokerage companies are commonly referred to as investments brokers, stockbrokers, and registered representatives. They are licensed to sell a range of financial services such as stocks, mutual funds, bonds etc.

  • Financial Analysts

A financial analyst/stock analyst analyze stock market trends and patterns along with the developments in companies and give suggestions to investors to buy/sell/hold stocks. This analysis or research could be based specifically on an individual stock or companies in specific sector. Stock analyst work for the stock brokerage firms, banks, Mutual Funds Company and other companies which provide financial services.

  • Trader

Stock traders engage in trading (buy/sell) of securities. They trade either for themselves investing their money and keeping the profit/loss they make on stocks or on behalf of the financial institution they work for. When he works for an institution he gets a salary plus bonus based on the performance

Investment bankers provide advisory services to publicly traded and private companies to help them issue stocks to the public. Investment bankers usually have an MBA, or a CFA degree.

  • Financial Reporter

Financial reporter main tasks involve reporting on the day-to-day activities of the stock market. They provide reports on the earnings of the public companies; they conduct interviews with the industry people and also traders. These reporters have in depth knowledge about the stock market and journalism background. These journalists observe and comment on market movements via the Internet, broadcast or print media which can be used by the investors and public at large.

  • Bank Investment Officer

A bank investment officer works for the bank clients for which he is paid a salary rather than any commissions. They make investment plans and trade on behalf of the clients.