Stock Market Explained

What is stock market? Stock Market Explained.

Stock market, also known as, share market, securities market, and equity market is a marketplace for buying and selling financial assets such as stocks, bonds, commodities etc.

It is an exchange where people (investing public) and companies can buy and sell all the available financial assets. It is a venue that facilitates and brings together buyers and sellers to buy and sell financial assets mentioned above.

How does the stock market work?

The very basic purpose of stock market is to help companies acquire funds from public and other investors (investment companies) and share profits in return for the acquired funds.

Stock market exists to assist businesses to raise money by listing their company in the stock exchange and make it available to the public.

Now people can buy stocks (shares) of that company and become shareholders in the company.

In return to buying stocks of a company, the investors get two benefits: increase in the prices of shares and annual dividends i.e. a share out of the profits the company makes.

In simple words, public can become a partner (shareholder) in any company listed in the stock exchange.

Brief History of Stock Market:

Now that you have an understanding of what is stock market and how does it work, let’s take a look into the brief history of stock market.

The history of stock market dates back to the 17^th century. The idea of stock market came into existence in 1602 A.D. when Dutch East India Company, for the first time in history, offered the public to invest in their trading business and get a share out of the profits. It was the time of trading gold, spices, ceramics, etc. through ships.

Later, this idea evolved and the first stock exchange came into being in Amsterdam, Netherlands that paved the path to modern day stock exchanges.

What are shares and how their prices increase and decrease?

A share, also called stock, is a portion of ownership in a company. Shares are issued by a company who wants to raise funds from the public to invest in their company.

Initially, shares of a company are launched through initial public offering (IPO) on a stock exchange. After the launch of shares through IPO, they are available to the public and other investors to buy and sell on the stock exchange. The people who buy shares are called shareholders.

Bear in mind that not all the companies are publicly listed. Some companies are privately owned and their shares are not offered for sale.

How the prices of shares increase and decrease?

Increase and decrease in the prices of shares are subject to many factors. The main reason for change in price of a share is demand and supply dynamics. When the demand for a particular share surges, its price goes up. The price comes down when there is enough supply of shares in the market i.e. more people are selling their shares.

The factors that affect demand and supply i.e. increase and decrease in prices are diverse. Current performance of the company and investor’s confidence in its future performance affect the demand and supply and hence the stock prices.

Stock Market and Stock Exchange:

A stock exchange acts as a marketplace where stock buyers connect with stock sellers. It is the infrastructure that facilities the process of securities trading.

There maybe many stock exchanges in a country where shares are bought and sold. For example, New York Stock Exchange (NYSE) and Nasdaq are two stock exchanges in America. There were three stock exchanges in Pakistan in Karachi, Lahore, and Islamabad cities which were merged in January 2016 into one stock exchange called Pakistan Stock Exchange (PSX).

On the other hand, stock market is a broader term that represents all the stock exchanges in a country or region.

What is stock market index?

A stock market index is a group of stocks (companies) in a country’s stock exchange. Index i.e. the group of stocks is generally formed around a particular industry. For example, Nasdaq Composite, a U.S. market index is known as an index where tech stocks are traded. Indexes may also be formed around a range of industries.

A market index represents the performance of that group of stocks. Standard and Poor’s 500 (S&P 500) index of the U.S. market shows the performance of top 500 companies in the U.S.

Market indexes work as an indicator to track the overall stock market performance and county-specific economies.

American stock market is analyzed by three market indexes: S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite. KSE-100 Index is a representation of top 100 companies listed in Karachi Stock Exchange. Nifty and Bank Nifty are two market indexes of the Indian stock market. Bank Nifty comprises of large capitalized banking stocks.

What is broker, stockbroker, and brokerage?

A broker is a firm/company that acts as an intermediator between the investor and the stock exchange. Broker works as a middleman who connect buyers and sellers of stocks. They charge a fee or commission for financial transactions like buying and sale of stocks.

A stockbroker is an individual, usually in a brokerage firm, who buys and sells securities (stocks, bonds, etc.) on behalf of his/her clients. Stockbrokers work for both retail and institutional clients and charge commissions per transaction. They also work as financial advisors and suggest stock investments to their clients.

Brokerage is the commission the broker (company) or stockbroker (individual) gets for connecting the sellers and buyers or making a deal.

Who regulates the stock market?

Stock market is a business where billions of dollars of transactions are recorded daily. With so much of money at stake, and many parties involved, including the stock exchange, brokers, and investors, it becomes mandatory for the market to function fairly and transparently for all the parties involved.

To make all the operations fair and transparent, every country has some regulatory agency who makes it sure to prevent manipulation and fraudulent activities. These agencies have complete legal frameworks through which they have control over the parties operating in the stock market.

They make the publicly-listed companies disclose financial information like financial statements, quarterly and annual reports in order to help investors take informed decisions. The companies are also bound to share future goals and projects from Management and Discussion Analysis (MD&A) meetings with their shareholders.

The regulatory agency for stock exchanges in the U.S. is Securities and Exchange Commission (SEC). The Indian stock markets is regulated by Securities and Exchange Board of India (SEBI) while in Pakistan it is regulated by Securities and Exchange Commission of Pakistan (SECP).

Secondly, stock exchanges have functions within their own operations to study trades and look for patterns indicating of manipulation or fraudulent activities. They also conduct checks and audits on broker’s operations.

How to earn money in the stock market?

Stock market is a wonderful investment tool to build long-term wealth. There is a wide range of methods and strategies one can adopt to profit from the stock market.

The history of stock market shows that it has always been profitable in the long-term. A long term strategy is to buy and hold. Buy stocks of a stable company and get profits and bonuses each year. There are two benefits of the buy and hold strategy: the prices of your shares appreciate over time i.e. capital gains and you’ll receive annual dividends for shares that you hold for a minimum of one year. Capital gain is an appreciation in the prices of stocks that you hold, and dividend is a sum of money out of a company’s profits that they share with their shareholders.

If you can put in enough time and effort, you can invest in stocks for the short-term. It is also known as trading stocks. In trading, you buy stocks and sell them the same day or after a couple of days when their prices increase.

The easiest way to invest in the stock market is to invest through a mutual fund company. Mutual fund companies take your money and pool it up with that of thousands of other investors and invest it in the stock market. You don’t have to put in any efforts or your time. Just invest an amount and get monthly returns. This is the easiest way of earning passive income on your savings.

Conclusion:

This was a peep into the stock market business. It is one of the most profitable industries in the world. The best part of it is that it’s open to anyone and everyone. Choosing to learn investing in the stock market is highly profitable, especially in the long run. However, you can also earn passive income through dedicating a small percentage of your monthly salary to stock mutual funds.

I hope this blog helps you out in understanding the basics of the stock market.