Business

How Does Stock Market Work | Detailed Guide

Stock Market

There was a time when other sources of income meant taking up two other jobs and so much more late-night hustles. Today, those things have changed. Doing one 9 to 5 is stressful enough. Moreover, let alone the amount of time it takes to travel to work and back, and also maintain a social life. With all of this, will one be able to make extra money? It is quite hard. With new businesses coming up every day, entrepreneurs popping out with brand new ideas around every corner, and the corporate world getting expansive, we all know what has come to play – the stock market.

More people getting involved in the stock market is also another reason why it has gotten much more famous than before. If you have friends and colleagues already trying their hand in the stock market, you might know they are making some money. So let us get started on trying to understand the stock market and how it works.

What is the Stock Market?

The stock market is a set of marketplaces and exchanges where regular operations such as buying, selling and issuing publicly traded company shares take place. Such financial operations are carried out through established official exchanges or over-the-counter markets that follow a set of rules. A nation or area may have several stock trading venues that allow transactions in stocks and other kinds of securities.

Though it is recognized as a stock market or equity market and is mostly renowned for trading stocks/equities, it also trades other financial assets such as exchange-traded funds (ETF), corporate bonds, and derivatives based on stocks, commodities, currencies, and bonds. So now you know what the Bombay Stock Exchange, the National Stock Exchange, and what those stocks on Nifty and other indexes mean.

Where it All Started!

Although stock trading dates back to the mid-1500s in Antwerp, modern stock trading is often seen as having begun with the trading of shares in the East India Company in London. 

Company shares were issued on paper, allowing investors to swap shares with other investors, but regulated exchanges did not exist until the London Stock Exchange (LSE) was founded in 1773. Despite substantial financial instability following the LSE’s initial creation, exchange trading managed to endure and flourish throughout the 1800s.

There are 2 Types of Share Markets in Our Country; They are

Primary Market: This is the market where firms or corporations may register. Companies offer their equities on the primary share market in order to raise cash. The term “Initial Public Offering” refers to the process by which a firm registers itself on the primary share market and offers to sell its shares for the first time (IPO). You must comprehend that shares are a tangible representation of a small portion of the company’s worth and that having the shares entitles you to a portion of the company’s value.

Secondary Market: The secondary share market is where a company’s shares are traded. After a company’s stock is listed on a stock exchange, investors can engage in trading or the selling or acquisition of shares at market rates. Only through a broker can you trade in the secondary share market. In today’s digital age, you may simply create a Demat Account and a Trading Account, after which you can trade in stock markets using broking platforms.

Well, if we want to know how the stock market works, the first thing we need to know is its major components.

Components of the Stock Market

Stockbrokers

It is critical that you understand that you may only trade in the stock market through a broker. Stockbrokers are financial middlemen who enable you to trade in exchange for a brokerage charge. Stockbrokers/brokerage businesses are registered with SEBI and serve as a conduit between investors and stock exchanges.

Regulatory

The Securities and Exchange Board of India (SEBI), established in 1992 under the SEBI Act, supervises and monitors India’s stock markets. Along with general administrative management of stock markets, SEBI is also tasked with conducting inspections and developing stock market rules.

How to Trade in the Market?

  • After supplying the broker with the details of your Demat Account and Trading Account, you must indicate the number of stocks to be sold or acquired.
  • The broker verifies that your account has sufficient cash.
  • Your order has now been sent to the stock exchange for execution. For example, if you make a buy order, it will be matched with a corresponding sell order. You must finalize a price, after which the vendor will confirm it.
  • The exchange then certifies the transfer of share ownership. You will then be notified of the settlement, and the shares will be reflected in your account within two working days.
  • The transaction results in either a profit or a loss depending on market movement.

How Can You Calculate Your Stock Market Returns?

To calculate market returns, two methods are commonly used:

  • Absolute Return Methodology: Variables such as purchasing price, selling price, returns, and return percentage are utilized to determine returns in this method.
  • Compounded Annual Growth Methodology: The returns are determined after taking the whole time period into consideration. This technique is preferred by market professionals over the former.

Conclusion

The stock market is a critical component of a free-market economy. When you are aware of your know-about in this market you can definitely make some good profit out of it. 

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