Starting From The Basics: How Does The Stock Market Work?

4 Feb 2020

You must have seen the effects of the Union Budget 2020 on the stock market. While the markets are mainly going negative, there are some people who see this as an opportunity to go bottom fishing. The equity indices have crashed badly and almost all sectors have a drastic fall in the prices. Confused about these terms and the constant hype about markets?

Have you wondered why the Budget influenced the market up to such an extent? Learn all about the stock markets of India in this post and how it works.

What Is A Stock?

Let’s start from the basics first. Stock market trading or share market trading is very common these days. Investing in shares and stocks is amongst the most common form of investment. Nut have you ever wondered what exactly a stock or share means?

If you own a stock, it means you possess a part of that company.  For example, if you have a share of TCS, you are a part owner in TCS. Now since you are a part owner of TCS, you should also get a share in the profits of the company. The company pays you the profit as per the percentage of shares you are holding. The profit is known as dividend.

You can also sell out your part of the company or by trading your shares or stocks. For this trade you need to go to the stock market. The trade process is executed through a body which is known as an exchange. The governing body of this whole process in India is Securities and Exchange Board of India (SEBI).

Calculation of Market Cap

The total worth of a company which is also the market value is known as the market capitalization or market cap of that company. To know the market cap of any company we can simply multiply the price of a company’s share by the total number of shares outstanding.

For example, if the share of a company is trading for INR 50 on a day, and that company has 1 crore shares outstanding, the valuation of the company will be INR 50 crores.

Any change in the price of stock will result in huge changes in the valuation of the company. This is the reason why corporates and investors are worried about the stock prices. What appears as a drop of Re 10 INR per share can result in loss of crores for shareholders with multiple shares.

The calculation of a company’s market cap is first done at the time of IPO or Initial Public Offering. The Investment Banker hired for rolling out the IPO uses mathematical formulas and valuation techniques to calculate the value of company and the quantity of shares that will be offered to the public.

The Price Fluctuations

The stock market works on the concept of demand and supply. The price of the stock is usually the last traded price. Whenever a stock is traded, the buyer and seller agree to trade for a mutually agreed price. This price becomes the market price of that stock.

When a second trade is executed for the same stock, the new traded price becomes the new market price. This process keeps on going and thus, the prices of share keep on changing. A stock which is highly volatile, which means that it is trading in very high numbers will show very fast movements in the price.  

If the shares of a company are in high demand due to some factors, the prices will start increasing. On the other hand, if there is high volume of sell in a company’s stock, the sellers will eventually start selling it at lower prices, which will bring a decrease in the price of the shares.

Conclusion

People usually invest in the stock market with an anticipation of buying at a lower price and selling at a lower price to earn profit. Most of the traders, trade and invest in the market with this goal. But since the market is uncertain and volatile, there is no guarantee to it. It is very necessary to have an idea of the amount of risk that your finances can handle. Therefore it is recommended to get you risk profiling done from any of the certified investment advisors.

The budget 2020 didn’t bring any sectorial sops as per the expectations, which has forced the people to sell the stock they were holding considering the future of the companies after the budget. Thus, there is a sudden selling in the market, which is responsible for the fall of share prices, eventually leading to the fall of indices.

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