Have you ever wondered about how the stock market works? We all know that we can buy and sell stocks, but do we know the real mechanism of how markets function and exactly what a stock is? In this blog, we will try to dig deeper into how the stock market works and how to start investing.
What is a Stock Market ?
Before understanding what a stock market is, first let us understand what a stock is.
A stock is a share in the company. When you purchase a stock, you get the part ownership in the business of that company. That is also the reason why the stock market is also known as the share market.
Buying a stock gives you a share in that company, which you can sell anytime in the stock market. An investor buys a stock in the hope that the profits of the company will keep increasing and the value of that stock will also go up. As and when the investor feels that the profits are going to decline and the value of the stock has reached its potential, they will sell that stock.
So now, assume we want to buy stock in a company.
How do we do it? This is where the stock market comes into the picture. A stock market facilitates the trading of the stock. Trading of the stocks is where one buyer tries to buy the stock from the seller of the stock. The stock market, like all other markets, runs on the concept of demand and supply. The buyers here create demand that they want to buy the stock, and the sellers are the suppliers who sell the stock.
As and when the company increases its profits, adds new customers, or introduces new products, the demand for the stock rises, and if people are not willing to sell the stock, then the price also rises. Price rises can be caused by the rise in demand and supply being normal, or by demand being normal but fall in supply as no one is willing to sell.
But, where do you do this?
For any other market, the buyer and seller meet at a certain location on open ground, and there the trade takes place. But here in the stock market, there is no requirement for the person to be available physically, as stock is in dematerialized form, so for this, a stock market exchange is created, and all buying and selling happens online!
The stock market facilitates trading in stock by acting as a market place through which stocks can be bought and sold. If you want to buy a stock you have to place an order with the exchange and the exchange will find a seller for you with your exact same requirements.
An order contains the name of the stock and the price at which you want to buy a stock with the quantity of how many stocks you want to buy, the exchange finds you a seller with the exact same price and quantity and then the order is traded.
The buyer is credited or receives the stock in their demat account and money is deducted from the demat account and credited to the sellers demat account and the stock is debited or deducted from the sellers demat account.
So then how do you start your beginners investing journey ?
The first step is to open a demat account with a broker. A demat account, like a bank account, can hold money but can also hold stock. A broker helps you in placing an order by providing their networks to the exchanges through which your orders get executed.
Another participant in the markets are clearing houses and depositary houses that helps in getting the stock in the demat, receiving or paying money and in other corporate actions like right issues, dividends, etc. They also ensure that the stock market remains a safe space from dangerous risk in the markets.
TLDR
The stock market functions as a marketplace where investors can buy and sell stocks, which represent ownership in a company.
Investors purchase stocks with the expectation that the company's profits will increase, leading to a rise in the stock's value. Trading in the stock market operates on the principles of demand and supply, where buyers create demand for stocks and sellers supply them.
Stock market exchanges serve as the platforms for trading, facilitating transactions between buyers and sellers. Orders to buy or sell stocks are placed with the exchange, which matches buyers with sellers based on their requirements.
Transactions are executed electronically, with stocks held in dematerialized form in demat accounts. Brokers assist investors in placing orders and executing transactions, while clearing houses and depositary houses facilitate the settlement process and handle corporate actions like dividends
While this is the only primer you’re ever going to need, investing in the stock market can get confusing. If you want an expert to take that tension off your shoulders, just visit our website by clicking on the button below!
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