It is reasonably uncomplicated to understand how the stock market works. Simply put, a company sells a portion of its ownership to investors, who further sell their shares to other investors. So, when you invest in a company, you become a part-owner of the said business. Now, if you sell those company shares at a price higher than you purchased, its value is set to go ‘up’, but if you sell those shares at a price lesser than what you paid, its value is said to go down.’
Understanding how the stock market functions
A stock market contains buyers and sellers that trade existing previously issued shares offered by one set of investors and purchased by another.
A stock exchange is no more than a giant, globally-networked and organised marketplace. In the stock exchange, vast sums of money are moved every day and back and forth. In this marketplace, securities are traded. Securities are rights to assets primarily as shares. Hence, a share represents a share in the company. So, this brings us to the question, why are shares traded at all?
Fundamentally, the value of a share relates to the concerned business or organisation.
Let’s consider the value of a company in terms of a pizza — the more substantial the circumference size of the pizza, the more significant each slice. For example, Company A is able to increase its profits significantly with a new business model, the size of Company A’s pizza will also increase and as a result so will the value of its shares.
This piece of news can be excellent for shareholders. So, if a share which is priced at Rs. 38 can now be worth Rs. 50. When it is sold this represents a profit of Rs. 12 per share.
But what does Company A gain from all this?
Company A can raise funds by selling its shares to invest or expand its business.
Let’s say that Company A holds an excellent reputation. In this case investors are likely to back it. But if Company A has a poor performance or standing, it may have difficulty in selling its shares.
In a typical market you can touch and buy goods on how you view it and its importance to you. On the stock market, however, only virtual products can be purchased and sold as share prices.
The trading of shares in the stock market is primarily like a roulette. No individual can accurately claim which company will perform well and which will not.
Share prices can rise or fall in seconds. Shareholders, therefore, need to act quickly so as not to miss an opportunity. Even a simple rumour can result in the fall of a company’s shares regardless of the real value of the company.
At the same time, the opposite can also be possible. If a large number of investors buy shares of a weak company because they see potential behind an idea, the value of the shares will rise as a result of bulk purchase. Notably, young and growing companies can benefit from this trend.
Supply and demand
Many factors influence the fluctuation of supply and demand. Companies come under the influence of various forces in the market such as the changing price of raw materials, developments in technology, rising costs in labour and so on. Further, investors may display concern on changes in company management, negative publicity or more substantial impacts such as new laws or global trade policies. All these factors that result in noise can make companies appear less or more profitable. And knowing how share market works in India if investors perceive that a company is losing value, the company could lose its actual value.
Since human confidence in the supply and demand of the stock market has the potential of triggering economic booms to financial downturns, professionals and financial experts recommend long-term investing in the stock market rather than making a quick buck. Well established brokers and financial experts such as Kotak Securities are continually building their knowledge base, analytical tools and expertise to increase investor’s chances of success in a highly unpredictable stock market.
Bottom line
Today, through the Internet you can invest and buy stocks in the same way that a sizeable influential investor would. By becoming knowledgeable about how the complex system of the stock market works, you too can trade in stocks, support companies that you believe in and pursue your financial objectives.
