The stock market is a vast platform due to current worldwide circumstances. The stock market has crashed the graph downwards. Many stock prices are reduced significantly. Here is the right move to purchase those shares at a low price and later make huge benefits from it but before that, let’s first understand the Basics of the Stock Market and How it works!
The post will help you understand how the complete Basics of Stock Market buying and selling transaction works what different players are involved how and why a stock price changes the different types of traders and investors in the market etc, so to get notification on this topic and many other life-changing future articles do subscribe to our website and stay tuned to Basics of Stock Market for Beginners Basics of Stock Market for Beginners
Many people talk about investing in the stock market to create wealth or financial independence but what is the stock market and how does it work? Well, let’s answer those questions in today’s article. Let’s get started the stock market is a global network of exchange where large sums of money move on a daily basis.
The stock market does not trade goods or services they trade securities are rights to financial assets like a business share. A share is a portion of ownership in a company when a person buys a share of a company they are buying small ownership in this company. But why are shares traded at all in order to build a large business?
Founders need resources to imagine the company as a pie the pie is divided into slices these small slices of the pie are shares of the company. Companies typically sell their shares to raise capital to grow and expand their business, many do this through an initial public offering or IPO.
This is when a company begins selling a portion of its shares to public investors in other words the company goes public and anyone can buy parts of the company in order to facilitate the trade of the securities to the public, a company needs a marketplace to make their transactions.
This is the place the securities exchange becomes an integral factor, there are many stock trades the world over where stocks are exchanged. In the U.S. we have the New York Stock Exchange and Nasdaq in New York City.
Few others in Canada have the TSX, the NSE in India, and the JPX in Japan just to name a few these make a global exchange system where shares can be traded all over the world. This allows companies to raise money to continue the growth and expansion of their companies, for example, Facebook in its initial public offering sold over 421 million shares at $38 per share earned. Facebook over 16 billion dollars from investors typically share values, reflecting how well a company is doing in business as the company expands in Rosen value so do the individual slices of the pie.
This is great for investors because it means that as the company grows in value so does their original investment. But sometimes the cinch gets so big that the individual slices also get big and expensive this is when stock splits occur, for example, if you bought 10 shares of Apple right after they went public in 1980. You will now own 560 shares without any further investment this happens when the company gets too big and their individual shares get too expensive for the average investor to buy.
For example, let’s say you took your company public with 100 shares you decided to sell 50 of these shares for $100 each as your initial public offering but now your company has grown significantly and your shares are now worth $500 each the average investor is no longer able to afford to buy your stock.
So to make sure your shares are easier for the public to buy you do a two-for-one split which means that each share splits into two shares now. Instead of having 100 shares your company now has 200 total shares.
Splitting shares also means that you split the value of the original share by two of your $500 shares after a two-to-one split are now two shares worth 250 dollars each. This encourages more investors to buy your stock to continue investing in your company this also means that investors who initially buy 10 stocks of your company now own 20 stocks the value of their investment remains the same.
Stock prices don’t always reflect the state of the company, a bad rumor about the company can bring its stock value down.
Regardless of its actual business performance, the opposite can also be true. Many investors can buy shares of a company. If they see the great potential behind an idea, this is great for new companies young companies can raise capital for their businesses. Even if they’re currently losing money. A great example of this is “Snapchat” the social media platform was actually not profitable before it went public yet it raised over three billion dollars in its IPO.
In the best-case scenario, companies can use this capital to make their idea a reality and begin making profits in the worst-case scenario the company runs out of money before it can become profitable. Which can lead investors to lose their money companies can be worth billions on paper due to speculation creating a financial bubble. Where the stock price is much higher than the practical value of the company.
This can lead to the loss of some or all the money invested this happened in the United States in 2001 many internet companies were starting up and since the internet was a new trend many investors poured money into new companies that fell to turn a profit many investors but shares at a high price expecting companies to grow in value. At the point when this didn’t occur numerous speculators sold their stock blasting, this air pocket bringing about the 2001 financial downturn.
Now share prices are influenced by many different factors from the company’s image to investors’ supply and demand of the company shares in many other factors, this leads to daily fluctuations of share prices.
This is one of the reasons why investment experts recommend diversifying your investment portfolio and investing in the long term. If we take a look at the history of the stock market it has both expansions and recessions but historically the US market trends up in the long term now that you understand how the stock market works
How the Stock Market Really Works!
How the Stock Market Works Now coming to the topic let’s go ahead and understand how the Share Market actually works! So there’s a trade a friend of ours, Mr. Akash who owns a clothes shop which is doing fill normally well after a couple of years he opens five grow branches in a state and after ten good years, he opens 35+ branches across India the business is doing exceptionally well now! Mr. Aaksh wishes to expand further and open multiple branches across the world but for this, he would need more funds to let’s say 5,000 crores.
Mr. Aakash is not having presented now to raise this money he has multiple options like approaching an individual financier taking a loan from a bank etc but all these options would require him to pay interest on the borrowed money which would eat away his profits and what if these new branches do not do well then there would be tremendous losses to the organization. So what next now Mr. Aakash? Would he turn towards stock markets or he will approach the public and raise money while?
That is initial public offering Akash company would issue shares that are a partnership in the company to people and if people feel that the company is likely to do well then they can become partners in the company but buying those shares at a stipulated price now that weighs Mr. Aakash raises interest fee money and his risk also gets distributed amongst people.
The IPO will get launched in the primary market and the company will get listed in the secondary market on the stock exchange where the shares will get traded. Now this combination of the primary and secondary markets is called the share market!
That is as simple as possible now one benefit the people derive by buying shares in Mr. Akash’s company is when the shares of the company get listed the training starts and when the share prices go up people will make profits by selling those shares at higher prices that’s it so this is a win-win deal for people. Mr. Akash and also the country which benefits indirectly and yes to make sure that all these transactions happen clearly without any cheating.
So now let’s see how the stock market works and how a complete buy and a sale transaction happens. Now the buyer and the seller come together in the secondary market to buy and sell shares. The buyer feels that Mr. Akash’s company will do well in foreign countries and hence he is interested in buying its shares so the buyer logs into his trading account and places a buy order for say a number of shares.
Now there are millions of such buyers and sellers in the market and so to handle transactions between them we have brokers like ICS. The trading account is provided by the Broker without a trading account you cannot trade Now the broker passes on the buy order to the exchange where the
stock is listed so NSE and BSE are the two prominent exchanges in India It is the exchange that actually connects the buyer and the moment the exchange gets a sellar it confirms the buy order with the broker.
the broker then completes the transaction of buying and selling. Now that the transaction is complete the seller should get his money and the buyer should get delivery of the shares.
So whose responsibility is this? The Clearing House makes sure that the give-and-take between the buyer and the seller happens smoothly the Clearing House gives a guarantee to both the buyer and the seller that this transaction of theirs will be executed successfully at all costs. The moment the trade gets completed the buyer gets the shares in his diamond account from the seller and the seller gets money in
his account from the buyer.
By the way, your demand account is with your broker and you get this with your trading account so that’s how a complete buying selling transaction is executed. Mindset for Stock Market Mindset for Stock market Stock markets should be treated as an investment platform do not make it a trading platform You can try trading for yourself for say six months to get a feel of what you’re aiming for.
So you need to fall in the investor category to make money in the stock markets just like you invest your money in real estate you never expect your investment to double in a month
right! you know that it’s a clean investment and will give your profits after a decent period of time so on similar lines in Share markets.
You will have to hold on to your shares for a decent period of time you will have to select the right companies to invest in which will give you huge profits. Repeating again if you do trade in stock markets you will lose your money.
You will face loss and confusion in the herd of buyers and sellers. You will never be able to decide correctly which stocks to buy and sell also greed will start overpowering you and eventually, you will end up losing your capital.
How true is this, if your money doesn’t start working for you then you may have to slog your whole life? The only mantra to wealth creation is that your money should work harder than you even while you sleep. And that would be possible only when you invest right and invest early don’t wait for a big amount to get accumulated. Start with whatever you have it’s very good to experiment with smaller amounts you will get to learn a lot, start small but make
history has proven that every man who is cumulated well he started small and remember you are a tiger year so let the roar gets louder and louder go and break all the shackles megastar it’s important
to make a start!