Stock market basics that everyone should know

Added in: Cashonomics
By broggl | 5th January 2019
Share |
Stock Market Basics

Stock market, also known as equity market, is a place where the equity shares and other such securities of companies are traded. This market is an integral part of the economy, as here, companies can invite the general public to invest in their capital in return for a share in the company’s profit.

Stock markets are nothing but a cluster of stock exchanges and over the counter market, though in certain countries; over the counter trading does not come under the sticks purview of the a stock exchange’s trading cycle.

What is a stock exchange

A stock exchange is a place where the securities of the company are listed. These listed securities can be bought and sold on the stock exchange through stock market intermediaries known as stock brokers.

The main function of the stock exchange is to make the stock liquid, this facilitates the investors to hold, buy or sell multiple stocks of different companies. This enables the investors to quickly capitalise on their investments in the event the price of the stock they are holding rises. Also, for the time they hold a particular stock, the company rewards them with a slice of their profit in proportion to their investments.

Market wise break-up of the stock market

The stock market consists of primary and secondary markets. When a company goes public it has to first sell its securities through an Initial Public Offer (IPO). The general public as well as institutional investors can buy shares through the IPO.

Primary Market – An overview

The company that desires to call for investment in its capital from the general public has to first sell its shares in the primary market.

Before these shares can be sold, the company has to issue a red herring prospectus and invite the general public and institutional investors to subscribe to the shares of the company. This prospectus has the price at which the stock is being offered and other details of the company. The prospectus contains details such as the past performance of the company, information of the people running the company like the names of the board of directors and other important officials, etc. This allows  the investors to make a informed decision as to invest or not to invest in the company.

The number of shares subscribed too, the net worth of the company and the number of shares finally issued determine the trading price at which the stock starts trading once it is listed.

Secondary market – An overview

Once the stock starts trading on the exchange it is said to be traded in the secondary market. Here the appreciation or depreciation in the stock price is possible. The stock becomes like any other item whose price may fall or rise depending firstly on demand and many other ancillary factors.

The liquid nature of the stocks and the possibility of quick price appreciation makes it possible for individuals and institutional investors to manipulate the price for their own gain. Sometimes even companies themselves manipulate the market practices for their own gain.

This is why in the last 3 decade market regulators have gained momentum and are heavily monitoring the activities of such investors and companies who do not operate within the gamut of the law and deceive the common investors.

Market regulators

Due to the increased risk of market manipulation that could put the economics of the work in peril, market regulators of different economies have strengthened their regulations and widened their scope of operations for regulation of the market and to safeguard the rights of the investors.

Some of the leading market regulators of the world include

  • Securities & Exchange Commission (SEC) – United States of America
  • Hong Kong Securities and Futures Commission – Hong Kong
  • Securities and Exchange Board of India (SEBI) – India
  • Securities and Exchange Surveillance Commission – Japan

Many more such market regulatory bodies are making sure that the trading in the stock market are done as per the law and do not harm the interest of any of the trading parties, especially the general investor.

The major players in the stock market

There are many individuals and entities who play important roles in the stock market some of them are listed here.

Stock brokers

These are market intermediaries who help the investors buy or sell stocks of the companies of their choice. For a broker to able to provide you with these services he has to be registered with the market governing body, for instance the SEC in the US and SEBI in India.

These intermediaries are also responsible for the settlement of the trades. Incase, the individual buying the securities is unable to pay within the stipulated time the shares are sold in auction to recover the amount.

Portfolio managers

These are individuals who invest in securities and manage the investment portfolio for the client investor. They buy and sell securities on behalf of their client based on their market expertise. Mostly, HNIs take the help of portfolio managers to maximise their returns.

Stock analysts

These are individuals or entities who analyse the movement of the stock and make their data available to investors so that they can make an informed decision so as to invest or not to invest in the stock based on the price appreciation patterns and rate of return of the stock.

Also Read: Currency exchange – Do’s and don’ts

Stock market performance

Different stock exchanges have their own index made up of different stocks. For instance NASDAQ Composite Index in the US or BSE SENSEX in India. They are the general indicators of how the market is moving each day or at a given time during the day. You can follow multiple indexes of different stock exchanges in your country to get the best picture of the entire market.

Also Read: How digital cash can help individuals build purchasing power and savings?

Also, you can follow different stocks of a particular sector, for instance – banking, Pharma or hotels to know how that particular sector is performing in terms of stock.

Investing is securities is subject to market risks. Make sure you read the offer documents and are well aware of the nuances of the market before investing.