How does the stock market work?


We daily hear and read about stock market on television and in newspaper but we are not aware that what is it and how it works.

Let us start from the very basic. If someone wants to launch a company he needs money for his business. Either the person has the enough amount of money or he borrows it. One other way is to issue stock to those people who are interested in company and wants to share the profit and in return they will help in venture of that particular company. So by the process of issuing stock company can collect more money for the business. Big investors of the company generally use the stock exchange for the transaction of shares. People make profit by buying the shares of a company at low prices and sell them at high rates.

Few terms that are to be understood for the better learning of stock market:-

Stock prices
It is the price at which the stock is to be sold. This price is fixed in accordance with the trading trends, economy health, spending trends and report of other companies or any other party.

Market capitalization
This is the real price or value of the company or its stock. This can be calculated by:-
No. of outstanding shares multiplied by the price of stock

Underwriter
Company hires an underwriter for the selling and buying of its stock. He is the one who is investment banker for the help.

Prospectus:-
A legal document containing the financial status, company history, the offered price of stock, legal advice, cost on investment etc. It is given to the customers for their satisfaction and to attract them.

When a company takes the decision to sell the stock then it has to register with exchange commission and securities. Then the prospectus is shown to underwriter and he buys all of the company stock to sell them to the investors who are interested in investing money for the company. A person interested in buying the stock places an order. If the broker is of same price as the value for your order then your order is completed. The details about trade are sent to all the interested people. Now the brokerage firm exchanges the money and stock. The number of shares and company are mentioned to the broker and sale order is entered accordingly. Investment account is required for share trading. It can be an online account or an account with share broker. This account is to be funded before placing an order to buy stock.

If the company is in profit the prices of share raises and falls with the loss. Experienced people observe the work of company and their other aspects and according to their observation they decide when to sell and buy the shares.

When the share prices drop it crashes the stock market. It rises with the increase in share prices. There is no particular or fixed reason for this but it is caused due to the imagination and speculation of the investors about the market trend.

The stock that is to be sold by the companies is bought to stock market or stock exchange. So that it is convenient for the public to go to one place and decide how many shares of a particular company they want to sell or buy . If there would not be a stock exchange then this work was much harder. Because of stock exchange the investor can observe the rise and fall in the price of stock every second.

The only disadvantage in issuing stock is that all the share holders are also involved in the decisions of the company.

More Entries

  • None Found

Leave a Reply