How Does the Stock Market Works

When I was a child I used to get so curious to see those red and green signals(stock price) going up and down. Listening Sensex goes up nifty go down. I always wondered how the doest stock market works? Who decides the price of stocks, why people even buy stocks if they could lose their money. How the stock market crash? and lots of stupid yet valid questions.

But now as I grow I begin to understand the magnificence of the stock market. Basically the stock market is a market where we buy or sell a proportion of the company’s ownership which we call stocks or share or equity.

Let’s see How does the stock market actually works and get a little deeper into the topic.

What Is A stock?

A stock also known as the share is a security that indicates your proportion in the ownership of the company. In simple words, share or the stock indicates the proportion of ownership you own in a given company.

Lets See an Example:-

There is a company named The Absolute Money having 100 shares in total. Now you buy 10 shares of the respected company. This means now you own the 1/10 part of the company and you are the owner of the 10% of the company.

When you own a certain amount of shares in the company you own that amount of ownership in the company.

Why Do Company Sell Stock?

Now your most probable question is why company sell their ownership and what they get in return?

The answer is to raise money. Selling stocks allows companies to raise a massive amount of money. Companies sell their stocks to raise capital to grow their business faster, to grow their company bigger, to provide new products and better service.

A small company with high potential in the future can earn millions of dollars by selling their shares, and this is because investors often invest their money thinking this company might grow in the future.

How Company List Their Stocks?

Whenever a company decides to raise money through the stock market it has to list its stocks in the share market. Newcomers do it by initial public offering (IPO). IPO is basically a process every new company has to grow through where it offers its stocks to the public to buy. This turns a company from a private company to a public company.

Once the stocks of the company are listed in the stock exchanges common people are allowed to trade them.

Why And How Shares Price Fluctuate?

You must have seen those green and red signals (the price of stocks) going up and down respectively. But why the price of shares fluctuate? Why the price of stocks keeps changing? Let’s look at it in a simple way

The stock market basically depends on a simple economic formula of demand and supply. According to this simple formula of demand and supply if the demand for any stock is greater than its supply then stock price increases.

But on the contrary, if the supply is more than the demand of the stock then stock price increases.

Example of an increase in price: Let’s assume Company A made a product that has a huge demand and high potential in the market, investors tend to buy more shares in order to get profit, and as a result demand increases which in turn increases the price of the stocks.

Example Of Decrease in the price: In this case company B made a huge mistake with its existing product resulting in a drop in sell, now investors tend to sell their existing stocks in order to avoid loss but due to less demand and more supply the price of stocks will go down.

If everyone buys the stock of a company A, then the price of the stocks goes up and on the other hand, if everyone wants to sell their stock of same company price will go down.

What is Supply and Demand in the Stock Market?

Though we have discussed the demand and supply in the above paragraph, let’s see it in a very simple way

In Every Stock Market, there are buyers and sellers,

If Buyers are more than Sellers

  • More buyers mean more demand
  • More demand means more sells
  • Higher sells mean higher revenue
  • More revenue means higher profit
  • Higher profit means an increase in the value of stocks
  • An increase in value means an increase in the price of stocks.

.

If Sellers are more than Buyers

  • More sellers mean more supply
  • More supply means fewer sells
  • Fewer sells mean lower revenue
  • Lower revenue means low profit
  • Low profit means a decrease in the value of stocks
  • A decrease in the value of stocks means a decrease in the price of the stock

.

How Does The Stock Market Works?

Now you have understood all the elements of the stock market lets see how this magnificent market works and put a good amount of money in your pocket.

The stock market is the same as all other markets where you sell or buy goods, the only difference is goods in this market are known as stocks.

Whenever a company wants to grow their business and they need money for it. Since banks can be risky sometimes they prefer selling some proportion of their stocks by initial public offering(IPO) to raise capital.

Now that company raises capital, it grows its business and attracts even more investors. Investors or traders seeing the potential in the company start investing their money in the company making the company grow even more.

As the company starts performing well in the market, more and more people want to invest their money to get a higher return. Due to this the demand for the shares increases which also increases the price of the stocks. This way the company makes more money with increasing investors and investors make money due to increase value of their stock’s.

Company making profit also pays dividends to its investors as a token of appreciation. Dividend income can be a huge asset depending on the value of your stocks.

Now the company launches a new product which fails badly in the market due to which company suffers a great loss. Now investors seeing the risk of losing their money, they sell their stocks. As the supply of shares is more than the demand its value decreases causing the decrease in the price of the shares.

So in simple words, the stock market is a place where people buy and sell stocks. Investor and trader buy stocks a low prices and sells it for higher prices.

Why Invest In Stocks?

Investing in stocks is one of the best ways to grow your money. Investing in a great source of passive income. Plus investing in stocks gives you a much higher return (up to 10% per year) if done for a long period of time which is way more than investing in others like savings accounts (3-5%returns) and fixed deposit 6-7% returns).

But it should be noted that one should have proper knowledge of the stock market as you might lose your money otherwise. So educate yourself and rock the market.

How To Invest in stocks?

Thank god, you born in a modern generation. Now it’s not like the 1970s or 80s where the stock market was more complex, you need to buy stocks physically, analyze it physically and all other hassles. Now it’s all on your mobile or computer screen.

There are so many investment apps that allow you to invest your money in the stock of your stocks. Some of the best investing apps have mentioned below:-

  1. Robinhood
  2. E*trade
  3. T Ameritrade

All you need to do is to create a trading account and decide which company’s stocks to purchase. Remember one thing and that is knowledge, do some research on the company you want to invest in.

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2 thoughts on “How Does the Stock Market Works

  1. Today you live up to my expectations. Very very meaningful article for me. I want to know about stock market from a reliable source.

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