What is Stock Market

What Is the Stock Market and How Does It Work?

The stock market is where investors connect to buy and sell investments — most commonly, stocks, which are shares of ownership in a public company.

When you need groceries, you go to the supermarket. When you’re ready to buy stocks or mutual funds, you’ll usually buy them online through the stock market, which anyone can access with a brokerage account, robo-advisor or employee retirement plan.

You don’t have to officially become an “investor” to invest in the stock market for the most part, it’s open to anyone. And after you purchase your first investment, you’ll join the ranks of investors around the world who are using the stock market to build long-term wealth. But before you do this, it’s critical to learn what the stock market is, how it works and a few introductory investment strategies.

Definition: What is the stock market?

The term "stock market" often refers to one of the major stock market indexes, such as the Dow Jones Industrial Average or the S&P 500. Because it's hard to track every single stock, these indexes include a section of the stock market and their performance is viewed as representative of the entire market.

You might see a news headline that says the stock market has moved lower, or that the stock market closed up or down for the day. Most often, this means stock market indexes have moved up or down, meaning the stocks within the index have either gained or lost value as a whole. Investors who buy and sell stocks hope to turn a profit through this movement in stock prices.

How does the stock market work?

The concept behind how the stock market works is pretty simple. Operating much like an auction house, the stock market enables buyers and sellers to negotiate prices and make trades.

The stock market works through a network of exchanges — you may have heard of the New York Stock Exchange or the Nasdaq. Companies list shares of their stock on an exchange through a process called an initial public offering, or IPO. Investors purchase those shares, which allows the company to raise money to grow its business. Investors can then buy and sell these stocks among themselves, and the exchange tracks the supply and demand of each listed stock.

That supply and demand help determine the price for each security, or the levels at which stock market participants — investors and traders — are willing to buy or sell.

Buyers offer a “bid,” or the highest amount they’re willing to pay, which is usually lower than the amount sellers “ask” for in exchange. This difference is called the bid-ask spread. For a trade to occur, a buyer needs to increase his price or a seller needs to decrease hers.

This all may sound complicated, but computer algorithms generally do most of price-setting calculations. When buying stock, you’ll see the bid, ask, and bid-ask spread on your broker's website, but in many cases, the difference will be pennies, and won’t be of much concern for beginner and long-term investors.

What is the stock market doing today?

Investors often track the stock market's performance by looking at a broad market index like the S&P 500 or the DJIA. The chart below shows the current performance of the stock market — as measured by the S&P 500's closing price on the most recent trading day — as well as the S&P 500's historical performance since 1990.

What is stock market volatility?

Investing in the stock market does come with risks, but with the right investment strategies, it can be done safely with minimal risk of long-term losses. Day trading, which requires rapidly buying and selling stocks based on price swings, is extremely risky. Conversely, investing in the stock market for the long-term has proven to be an excellent way to build wealth over time.

For example, the S&P 500 has a historical average annualized total return of about 10% before adjusting for inflation. However, rarely will the market provide that return on a year-to-year basis. Some years the stock market could end down significantly, others up tremendously. These large swings are due to market volatility, or periods when stock prices rise and fall unexpectedly.

If you’re actively buying and selling stocks, there’s a good chance you’ll get it wrong at some point, buying or selling at the wrong time, resulting in a loss. The key to investing safely is to stay invested — through the ups and the downs — in low-cost index funds that track the whole market, so that your returns might mirror the historical average.

How do you invest in the stock market?

If you have a 401(k) through your workplace, you may already be invested in the stock market. Mutual funds, which are often composed of stocks from many different companies, are common in 401(k)s.

 

You can purchase individual stocks through a brokerage account or an individual retirement account like an IRA. Both accounts can be opened at an online broker, through which you can buy and sell investments. The broker acts as the middleman between you and the stock exchanges.

With any investment, there are risks. But stocks carry more risk — and more potential for reward — than some other securities. While the market's history of gains suggests that a diversified stock portfolio will increase in value over time, stocks also experience sudden dips.

 

To build a diversified portfolio without purchasing many individual stocks, you can invest in a type of mutual fund called an index fund or an exchange-traded fund. These funds aim to passively mirror the performance of an index by holding all of the stocks or investments in that index. For example, you can invest in both the DJIA and the S&P 500 — as well as other market indexes — through index funds and ETFs.

 

Stocks and stock mutual funds are ideal for a long-time horizon — like retirement — but unsuitable for a short-term investment (generally defined as money you need for an expense within five years). With a short-term investment and a hard deadline, there's a greater chance you'll need that money back before the market has had time to recover losses.

Regulator of the Indian Stock Market

Securities Exchange Board of India

·        Securities Exchange Board of India (SEBI) is the regulatory body of the Indian Stock Markets. The main objective of SEBI is to safeguard the interest of retail investors, promote the development of stock exchanges, and regulate the activities of financial intermediaries and investors in the market. SEBI ensures the following:

·        The stock exchanges (BSE and NSE), brokers and sub-brokers conduct their business fairly.

·        Corporate houses should not use markets as a mean to unfairly benefit themselves

·        Small retail investors’ interest is protected.

DEMAT Account

DEMAT account or dematerialized account allows holding shares in electronic form instead of taking physical possession of certificates. It is mandatory to have a DEMAT account to trade in shares.  DEMAT account holds all the investments an individual makes in shares, exchange traded funds, bonds, government securities, and mutual funds in one place.

How to open DEMAT Account?

·        Below mentioned are the steps to open DEMAT account in India:

·        To open a DEMAT account; an individual has to approach a depository participant (DP), an agent of depository, and fill up an account opening form. The list of DPs is available on the website of depository’s i.e. CDSL and NSDL.

·        An individual must attach photocopies of KYC documents like identity proof, proof of address along with the account opening form.

·        The DP will provide the depository participant ID or client ID. All the purchase / sale of shares will be through DEMAT Account

Trading Account

·        A trading account is used to place buy/sell orders in the stock market. One can open their trading account with a stock broker who is registered with SEBI. An order can be placed either through an online or offline mode. In the online mode, one can buy/sell stocks through the trading terminal provided by the broker whereas; in the offline mode, an individual can ask its broker to place an order on his/her behalf.

·        Key takeaways

·        A stock market is a place where people buy/sell shares or stocks of publicly listed companies.

·        NSE and BSE are the two major stock exchanges in India.

·        An individual has to mandatory open a trading account to trade in the stock market.

·        There are different market participants like retail investors, domestic institutions and foreign institutional investors

·        Indian stock market is governed by SEBI.

·        There are different financial intermediaries like stock broker, banks, depository participants etc.

·        DEMAT account or dematerialized account allows holding shares in electronic form instead of taking physical possession of certificates.

Trading in the Stock Market

Once listed on the stock exchanges, the stocks issued by companies can be traded in the secondary market to make profits or cut losses. This buying and selling of stocks listed on the exchanges are done by stockbrokers /brokerage firms, that act as the middleman between investors and the stock exchange.

Your broker passes on your buy order for shares to the stock exchange. The stock exchange searches for a sell order for the same share.

Once a seller and a buyer are found and fixed, a price is agreed to finalize the transaction. Post that the stock exchange communicates to your broker that your order has been confirmed.

Pricing of Shares in the Stock Market

The key to making money in the stock market is to learn how to properly value a company and its share price in the context of the Indian economy and the firm’s operating sector.

·        Let me explain to you how stocks are priced through a simple example.

·        Let’s say you bought a notebook for ₹100. The next day, a friend of yours offered you to sell it for ₹150 to him.

·        So, what’s the price of the notebook then?

·        It is from ₹150. You can encash ₹150 by selling the notebook to him.

·        But you choose to reject his offer hoping that your other friends may bid more than ₹150.

·        The very next day 3 of your friends offer you ₹200, ₹250 and ₹300 for the notebook respectively.

4 types of stocks everyone needs to own

·        Growth stocks. These are the shares you buy for capital growth, rather than dividends. 

·        Dividend aka yield stocks. ...

·        New issues. ...

·        Defensive stocks. ...

·         Strategy or Stock Picking?

Why do people buy stocks?
Investors buy them for the income they generate. ... Value stocks may be growth or income stocks, and their low PE ratio may reflect the fact that they have fallen out of favor with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock's price will rebound.

Who buys stocks that you sell?

A broker does not have to buy the stock you are trying to sell; a broker is there to act as an agent on behalf of the seller, finding someone to make the purchase.

Do stocks sell instantly?

However, the stock market is fluid, allowing investors to buy and sell a stock on the same day or even within the same hour or minute. Buying and selling a stock the same day is called day trading.

What should I invest 5k in?

7 Best Ways to Invest $5,000 of Your Savings

·         Research online investment firms.

·         Consider investing in a Roth IRA.

·         Invest in actively managed mutual funds.

·         Go for index funds.

·         ETFs.

·         Save with an online bank.

·         Think about certificates of deposit (CDs) or money market accounts.