Are you new to the stock market? Let’s know with this guide about what the stock market is and how does it work.
How does the Stock Market Work
Check out this post to know in detail about the stock market.
Let’s Start with Knowing What Stock Is
In layman language, you may know stock as share. It denotes ownership in a venture and also, represents a certain claim on the assets and earnings of that company. A shareholder is another very common term that you talk about shares. If you are a shareholder of a company, it means that you own a part of that company equal to the number of shares that you have purchased.
For example, if you have purchased 20000 shares of a company having a worth of 2 million, you own a partnership in the company for 10%.
Types of Stocks
Generally, you’ll come across two types of stocks in the share market. One is common stock and the other is preferred stock. You can also be called common stocks as equities. In every Stock you have to do stop on quote to make a better investment or trading.Other than this, when it comes to the market value and trading volumes of the common stock, it is much higher than preferred stocks.
While distinguishing between common stocks and preferred stocks, the major difference is that the owners of the common stock are a part of annual meetings and also, they can give their opinions in the annual meetings. But, this is surely not the case with preferred stocks. In preferred stocks, there is no voting system. They are named preferred because they are given the preference when it comes to distributing the dividend and assets of the company.
Why Companies Opt to Issue Shares
Well, it is a fact that all these giant companies have started their business as small entities. It took them a lot of effort and capital to become such a big company in some decades.
As we have mentioned, a small company needs a lot of capital to become such a giant company in the market. To make their ideas into a successful idea, purchase all the required equipment’s and raw material, they need money. Selling their shares can help them through this.
Usually, all the startups choose equity financing to raise the capital for their firm. When you start a business, the capital need is low but when it starts growing, the need for capital becomes high. Therefore, companies sell their shares to raise their capital.
Price Determination in Stock Market
So, now if you wish to know how does the stock market work, you may also want to know how they determine the price of the stock. In simple words, the price of the stock is determined by the demand and supply rule.
In the stock market, there is always someone ready to pay the minimum amount for the stock. You have to check top factors before buying a stock which affects it’s price. Other than this, you can also consider it as an auction. So, if a seller is willing to sell the stock for a certain price, there will be a buyer who will be willing to buy that stock at that price.
Also, if there is a high demand for a particular stock, sellers will not want to sell it and the buyers will not want to miss any chance to buy it. Hence, the price of the stock will eventually rise. Similarly, if the demand for the stock decreases, no seller will want to keep it and no buyer will want to buy it. So, the price will eventually drop.
Buyers and Sellers are Always There In the Market
Well, as we have explained to you in the previous sections of this article, if there is a buyer of a stock, there will be a seller also or vice versa. In such scenarios, market makers come into play. They make sure that the investors can select the stock that they wish to buy or sell immediately. They act as intermediaries who make sure that there is always a marketplace for the investors to invest and sellers to sell the products.
Now, in this section of the article, we have explained to you all the things that one must know before selling or buying shares in the stock market.
• Market maker buys the share and holds them. They then list those shares for buy or sell.
• Next, the maximum price asked by the market maker for a particular stock is known as bid and the minimum price asked for that particular stock is known as to ask.
• Lastly, the difference between the bid and ask is termed as a spread.
So, the basic idea behind the stock market is to make sure that there is always a buyer and seller for a particular stock. Also, when you buy any share or sell any share, you will not have to wait for the required order. You can customise the order according to your need.
The Process of Buying a Stock
Now that you wish to know how does the stock market work, you may also know what happens in the market when you buy any stock. So, in this section of this post, we have explained to you what happens when you buy any stock from the market.
• To begin with, you inform the broker that you wish to buy a particular stock. You can do this in person or you can do this electronically. Also, you need to specify the number of shares that you wish to buy from the market.
• After this, the broker will pass your order to the seller and then the seller will sell the stocks at the asked price.
• In the end, the stocks will reflect in your Demat account.
Never Get Confused Between Stock Market, Stock Index and Stock Exchange
Usually, people get confused about what the stock exchange, stock market, and stock index is. They usually end up misunderstanding all these terms for the same term. But, they are indeed different. When it comes to the stock market, it is considered as the process of letting investors or sellers buy or sell stocks.
Other than this, the stock exchange refers to the interface where the buyers and sellers make a purchase or sell. Lastly, the stock index is the numerical representation of the value of the stock over some time.
Check How Stock Index Track the Market
So, now that you know that the stock index is the numerical representation of the price of a stock over time, you must know how the stock index analysis and keep track of the market. In this section, we have explained to you the same whole process.
You may have come across Different stock exchanges where they reflect and compare the performance of a group of certain stocks. They analyse each stock individually and then judge if the market is low or high.
Stock indexes are used for the convenience that they provide to the users to analyse the performance of the share market. Also, you must know that the stock market is not used to represent all the stocks in the market. It represents only a certain group of stocks.
Know Some Basics to Invest in Stock Market
Before ending this guide on how does the stock market work, we would like to explain to you some basics that you need to know before you invest in the stock market. You should make a limit order to minimize your loss. Here is a short guide for you to know how to invest in the stock market. To know in detail, check out our article on stock market strategies for beginners. So, let’s begin.
Identify Your Investing Approach
The very first thing that you will have to do is to identify the investing or trading approach in the stock market. Every person follows a different approach to investing in the market. Some people may wish to buy any individual stock and for some people, buying an index fund is better if they are not ready to invest much time in choosing the stock that they wish to buy.
You have to be clear weather You are investing or trading, Read the difference between trading vs investing to find a better option for you. All you need to decide is the strategy that you are going to follow to invest in the stock market.
Decide Your Budget
So, you know how to invest in stocks, it’s time to decide the amount that you wish to spend in buying your stocks. Other than this, you will have to make sure to invest the amount that you are not going to use in your near future that is at least 5 years. Always remember to use the money which is surplus for you. Never use your savings for this.
Start Your Demat Account
Now, if you wish to invest in stocks, you will have to make sure that you have a Demat account. You will have to open an investment account for yourself so that you can use it to invest in the market and also, buy and sell your stocks using that account only.
Select the Stocks
The next thing that you will have to do when buying a stock is to choose the stocks that you wish to buy. For this, you will have to go through all the fundamentals of the stock and make sure that stock will be suitable for your portfolio.
Choose whether you wish to invest in a long-term stock or a short-term stock. Also, make sure that you diversify your portfolio and choose the one that offers you a great profit. Other than this, make sure to invest in the businesses which are known to you and you understand the fundamentals for the same.
Want to make money from stock market? Read the full Guide Now!
This is one of the most common mistakes that most people make. They invest in stocks, earn profit and redeem their money and use it. We suggest NOT to do this. If you have invested in stocks and gained the profit that you wanted, sell the stocks and reinvest in some other stock. Do not spend your money on some other thing. So, this is the only way you can keep earning and growing with the stock market.
Investing in stocks becomes easier if you are aware of what to do and how does it work. In this post, we have tried explaining to you everything about how does the stock market work. We have tried compiling all the important facts and explained the same to you in detail. Hopefully, this article has helped you understand how does the stock market works and how you need to deal in the market.
Frequently Asked Questions
- How does a beginner invest in the stock market?
If you are a beginner, you will have to first have to open a Demat account for yourself and then make sure that you use your surplus money to invest in the stock market. After this, you will have to make sure to shortlist the stocks that you wish to buy. Simply start investing and reinvesting in different stocks.
- Can you earn a good amount with 1 share of a company?
In usual situations, buying or selling a single stock of a company may not get you a lot of money. But, there are still some companies available whose one stock will result in some great investment. Other than this, if you receive dividends, you can also earn a good amount of money.
- A beginner should buy how many stocks?
If being a beginner you wish to diversify your portfolio, we suggest you buy at least 10-15 different stocks. This is also suggested by a lot of experts so that you can invest in some good stocks and recover the loss from one stock with the help of another in profit.
- Can I become rich by investing in stocks?
Well, yes you surely can become rich if you invest in stocks. But, for this, you will have to choose reliable stocks and also, make sure that you know when to sell them and how long you need to hold the same.