What is a Stock Market? Working of The Stock Market

By Editorial Staff | October 15, 2018 – 1:05 PM IST


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The stock, share or equity market is an aggregation of buyers and sellers of stocks. These buyers and sellers buy/sell stocks in this market. Stocks are the certificate of ownership in public or private companies.

The stocks of public companies trade openly in a stock exchange.

Working of the stock market

To know more about equity investing it is necessary to understand the functioning of the stock market, i.e. how it works.

You are probably aware that a stock market is a place where people buy and sell shares of companies. The stock market or more particularly stock exchange is a meeting place of different participants of the equity market.

In this article, we will discuss the functioning of the stock exchange and what parties participate in it. But before addressing that first take a look at why companies issue shares in the first place.

Why do companies issue shares

Every company needs funds to perform its operations and for its expansion.

Companies can raise this fund either by borrowing money or by issuing shares as IPO (initial public offerings) to investors. Every investor is a part owner of the company with voting rights in important decision makings of the company.

By selling shares companies get fund while shareholder gets part ownership in the company. After raising funds, the company can use this fund for its operations. On the other hand, shareholders can buy and sell their shares on the stock exchange.

If the company performs well in its businesses, the share of the company will appreciate. Shareholders can sell this share at an appreciated price and can earn a profit.

The company does not receive any profit from the sale of shares made by the shareholder. It only gets the money after the first issuance of its shares as IPO (initial public offering).

What stock exchanges are

A stock exchange is a meeting place for different parties participating in the equity market. It provides investors with a platform to buy and sell shares of the companies.

An investor can not trade with another investor directly on an exchange. They need a broker to mediate their trades. The broker reconciles the trades between investors and charges a small brokerage fee for his services.

The broker takes the buy/sell orders from its clients (the investors) and sends it to the exchange.

Stock exchange queues these orders and executes trades when orders match from buyers and sellers. The price at which trades are happening in the exchange is called the market price of that stock at that moment.

What type of companies trade on the stock exchange

The companies whose shares are available to trade openly on an exchange are called public companies. A privately held company goes public by issuing IPO to the public.

After going public by issuing IPO, the company applies for listing on an exchange.

A company can list its shares on one or more exchanges if it fulfils all the requirements of that exchange. The company pays fees for listing its shares on a stock exchange.

Listing shares on more than one exchange increase liquidity of the stock. It also increases the reach of the stock of the company to a broader group of investors.

In case of a company listed on more than one exchanges, the price of shares might vary on different exchanges. The cost of stocks on different exchanges depends on supply and demand of shares on that particular exchange.

Participants in the stock market

The stock market is an aggregation of buyers and sellers of the stocks. Brokers mediate the trade between buyers and sellers.

Participants of the equity market include retail investors, institutional investors like mutual funds, insurance companies, bank, hedge funds, pension funds etc.

The institutional investors are the primary participants there.

Institutional investors derive significant volume in the exchanges. Most of the share trades done there are by institutional investors.

Big order by institutional investors can cause a significant price change in the share price in a low volume exchange. Institutional investors trade in big order sizes, that’s why they avoid trading in low volume markets.

Up and down movement of the stock market

You might regularly hear on different media sources that the stocks are up today or are down today. When they talk about the ups and downs of the equity market, they are referring to the different indexes of the equity market.

There are so many different types of indexes to indicate overall market sentiments. Different indexes address different regions/sectors. For example Sensex and nifty are the two most followed indexes in the Indian stock market.

Some indexes target the global market by selecting components from all over the world irrespective of their country of origin like S&P Global 100 and MSCI Global.

Stock indexes represent the investors’ confidence in the market. In case of any adverse economic, political news or an increase in interest rates or increasing inflation, the indexes go down that is overall market will show a negative impact.

Conversely, in the case of positive news, decreased interest rates or stable inflation will give confidence to the investors, and it will reflect in by indexes going up.

In the modern economic scenario, the ups and downs of the equity market represent the overall financial health of a nation. Any good or bad decision made by a government or by a central bank will reflect in the market.

The modern financial market is a global one, and every big news around the world impact the equity markets globally. The global investors’ sentiments can be seen in global stock indexes.