Stock Market: Decoded

According to the Collin’s Dictionary, a stock market, a countable noun, consists of the general activity of buying stocks and shares and the people and institutions that organise it. Fairly complicated to comprehend for someone who does not understand the financial jargons. So, let’s break it down into simple terms.

To begin, we must understand why the stock market came into existence. The company form of business organization allows for a separation between the ownership and the management of the business.

In simple words, people gather money to form a company but the company in itself has a separate existence independent of the funding parties. It may or may not be run by the people who invested in it. The investors have voting rights and a share in profits if the company decides to disburse them.

It is unlikely for a few people formulating a business idea to have enough money, among themselves, to run a company on a big scale. To surpass this problem, the concept of a joint stock company was evolved. The entire capital of a company was divided into small units of equal nominal value, called shares, these units were offered to be sold to the common public. Hence, a ‘share’ quite literally means a share in the ownership of a company. A share market is where shares are traded freely.

A stock market, being a slightly broader term, not only offers shares but other instruments such as debentures, bonds and options for trading as well.

We have established that a stock market or a stock exchange is the medium through which the common public invests in the operations of a company. With a total capitalization of over 1.41 Trillion US Dollars with NSE and 2 Trillion US Dollars with BSE, it’s a lot of public money. Trades in the olden times were conducted on the floor of the exchange itself, by shouting instructions or through telephones. In modern exchanges, trades are conducted online through brokers.

To ensure there are no wrongdoings and fraudulent exchanges, strict norms are put in place for dealings. India has two major stock exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) both of which come under the purview of the Securities and Exchange Board of India (SEBI). SEBI is the regulatory body which regulates and promotes securities trade in India.

In terms of trading, the stock market can be split into two main sections: the primary market and the secondary market. The primary market is where the new issues of a company are brought out via Initial Public Offers (IPOs), it is the market segment based on trust. Usually, institutional investors take up a major portion of these shares. The primary market is for the purpose of raising capital or debt, depending on the instrument put up for sale, for a business.

The secondary market is the derivative market, where subsequent trading of stock takes place. The company does not earn anything on subsequent trading of its stocks. This is the segment where people gamble. Millions of transactions take place between 9:55 am and 3:30 pm, Monday through Friday on both stock exchanges.

Regardless of the mode and medium, the motivation behind stock market trading remains simple, hope and it is well known that hope is a dangerous thing. A trader opens a Demat account with a broker, purchases securities and later decides to buy, sell or hold as he sees fit, to earn a profit. You buy at ten and sell at twenty, simple.

Simple, yet very dangerous, as prices on a stock market change every second, depending on the nature of the forces of demand and supply ruling the market. The possibility of an investment doubling overnight is equal to its possibility of becoming worthless. It is important to learn how the market responds to the constantly varying socio-economic conditions before investing.

The price of a share depends on a lot of dynamic factors- the company’s net worth, its reputation with the public, the inflation rate of the country, the performance of rival companies, to name a few. Making it very difficult to accurately predict the future prices of shares. Hence, risk and reward go hand in hand in the stock market, fortunes are made and broken every minute. It is advised-

“Don't ever make the mistake of believing that market success has to come to you fast. Trade small, stay in the game, persist, and eventually, you'll reach a satisfying level of proficiency.”

― Yvan Byeajee, Paradigm Shift: How to cultivate equanimity in the face of market uncertainty

References:

“Stock Exchanges.” Risks and Rewards, www.risksandrewards.org.uk/background_city_115.html.

“Stock Market.” Investopedia, 21 Sept. 2017, www.investopedia.com/terms/s/stockmarket.asp.