How Does A Stock Market Work?
The term stock market inevitably conjures up images of busy trading floors, men furiously punching on the keyboard, representatives talking non-stop on the phone, yelling, shouting, graphs, charts, tables and what not. Yes, the buzz on the trading floor can be unmistakably contagious. But what exactly happens in the trading floor or rather what is the action in the stock market all about that leads to all this chaos and in the middle of all this mayhem how do you end up making tons of money on good days. Well for that we first need to understand what a stock market is all about.
Definition of Stock Market
In simple terms, it is that platform that enables the buying and selling of publicly traded companies. It is that market where the shares or stocks of these public listed companies are offered for selling and buying. This is possible either through exchanges or through over the counter markets. The stock market is also known as equity market. In addition, it is one of the unique elements of the free economy seen across the world.
Essentially this listing and trading of stocks enable companies to raise fund from the public. Or the common man who are ready to put in their money in the company in return of a certain stake in that company. From a small sum of money to a huge amount, there is never any limit to what you can or cannot invest in the stock market.
For the average owner of a company, it provides an honourable means of raising funds without in any way getting into an obligation with the money lender or banks or begging to a potential investor to lend funds. Instead, it is going out on the street and showcasing the company’s features and growth prospects and convinces people to stake a claim in the company.
For the investor
For the investor, it is a means of creating additional wealth by investing the available resources in the company of their choice. They take part in the financial progress of the company by buying shares of that company. Besides that, the future of their investment gets intrinsically linked with the future of the company’s progress. When the company in which they hold position makes a profit, they make money in both notional and actual sense. National because the potential return on each stock of the company increases so even if they do not sell the stock, the net worth increases. The company also shares its profit with the investors via dividends. However, if the same company makes losses, the notional value declines if the stockholder has not already exited the position. Dividend payout also stops in case of losses.
Essentially it is an intangible market. With the advancement in technology, stock market trade has almost completely shifted to the online platform. There isn’t any trade happening physically. Whether you are trading in a couple of thousands or many millions, the stock market is a great leveller; everyone has to follow the same procedure to execute the trade of their choice at a time when they deem it suitable.
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