What is Stock Market and How does it work?

Stock Markets have for long stood as a facilitator for cash flows both to individuals and organizations who act as passive investors.

This sudden intrigue and interest around Stock Markets has proliferated into every financial section and crowd and has made people wonder “What is Stock Market after all? How do they work?”. This is what we will be looking to cover in this article in depth.

For more resources to learn about Stock Markets, you can check out our introductory article on Stock Markets for beginners and can also check out our course on Stock Markets where you will learn more about the field and gain fruitful experience.

What is Stock Market?

Stock Market is generally considered to be a level-playing field for investments and acts as a facilitator for trade and exchange for stocks, bonds, and commodities which people invest in or trade for some time.

Stock Markets are an important part of the economic scenario and are a very interesting case for studying and knowing about.

In India, there are two major players in the Stock Market regulations. One is the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange). These are the two stock exchange bodies that manage and regulate everything related to the stock markets and pertinent investments and trades.

The Bombay Stock Exchange is India’s oldest exchange and was started in 1875. The National Stock Exchange was founded in 1992. Both have almost the same purpose. The BSE has almost 5000 companies on its roster and the NSE being relatively new has about 2000 companies.

In the United States, it is the NYSE (New York Stock Exchange) and NASDAQ which is a computer-only exchange facilitator.

How does the Stock Market Work?

Now that you have an idea about what is Stock Market, lets’ go over its working Stock Markets have two sides, the investors like general people who invest money in the stock, and when it matures they sell their stocks and enjoy their profits or are given specific yields of the profit, often called “dividends”. The other half is the publicly-listed companies, commonly referred to sometimes as IPOs (Initial Public Offering).

The money they receive from public investments is used for their business and commercial purposes. An important advantage of getting listed on the stock market is that companies can attain money without having to contend with repaying any sort of returns themselves. The returns that the investors will get will be monitored and offered by the regulatory board for such commodities and actions.

In India, this is managed by SEBI (Securities and Exchange Board of India). In the US, it is SEC (Securities Exchange Commission), these are the two regulatory bodies for all things trade.

When any stock is up in the market some people either buy it or sell it. Those are the two sets of competitors, the buyers, and the sellers. The constant tug of war that happens between the two parties is what leads to fluctuations in the prices of the stocks.

These fluctuations are the results shown in those fancy charts and figures in movies and on trading apps that feature in your ads section across social media. That’s how fervent Stock Markets have become in studying and working on.

Most of the stocks are traded and invested through such Stock Exchanges on a macroscopic level, there are certain OTC (Over-the-counter) trades where the exchanges happen through the influence of a dealer.

These OTC deals are also called equity investments and can be both private and public. We have all heard in modern times fancy terms like “funding” among others. Consider equity investments to be the fancy terminology behind them.

What is Stock Market Index?

A Stock Market index or Stock Market indices are evaluatory measures that assess the performances of stocks and securities in the market based on various conditions.

The nature of these indices depends on multiple factors that influence the fluctuations in the prices of these stocks.

Stock Market Indices are used to assess stocks and commodities in every type of industry from banking to even energy industries. They are the performance regulators and it requires a lot of understanding to work on these stocks.

The major stock market indices in our country are:

• SENSEX

SENSEX Is a term you must be familiar with hearing when your parents discuss its level fluctuating as shown in the Economic Times. SENSEX stands for Sensitivity Index. SENSEX contains the top 30 Indian companies in terms of the per stock price, the company’s economic and financial strength, and their capability to hold ground within the market. It is a major component of focus.

The companies in the SENSEX are among the best and most affluent companies in India. This is reason enough why they are among the top 30. There is no other regulatory index on the lines of SENSEX.

• NIFTY

NIFTY is a similar scale to SENSEX but a small variation is that NIFTY calculates the top 50 companies in India. These 50 companies include the top 30 companies, as listed in SENSEX and the next 20 best companies.

NIFTY is a more vast stock market index than SENSEX as it has a wider level of focus. It is used across multiple industries. Some examples of NIFTY indices include NIFTY50, NIFTYBANK (or) BANKNIFTY, NN50 (Nifty Next 50 -> Ranks the companies from 51-100) etc.

Some other prominent stock market indices include:

• Dow Jones
• NASDAQ
• S&P500 (Standard&Poor500 -> Related to SMEs)
• SmallCap2000
• Euro Stoxx 50 -> Used in European countries

Quite often your portfolio of investments is evaluated with respect to these indices and the assessment can help you improve your quality of trades and investments. It is how stock traders learn their trade and also go about helping others sort theirs.

What are the four types of stocks?

Stocks are typically defined as a set of individual dividend yields in the organization or any profit medium. So since they are so diverse and spread across multiple markets in terms of investment and returns, Stocks are generally classified in four different categories:

• Common Stocks -

Common Stocks are general stocks that we see every day. A common stock gives the shareholder a dividend that is commensurate with their equity stake within the company. The return or “dividend” as its technically known is what the stakeholder will gain as part of their investments and the profit that the company has realized.

Common Stocks are not subject to averse variations such as loss in returns and liquidation and that is why they are more common ground. Stakeholders with common stocks can have a more distinctive say in the scheme of things when it comes to decision making.

• Preferred Stocks

Preferred Stocks are meted out with a fixed dividend value as discussed before the allocation of dividends every year. Preferred stocks are disadvantageous when the company is not generating revenue, profit or is undergoing liquidation.

Due to having a fixed dividend payout every year, people with preferred stocks don’t have much say in the scheme of things as well.

• Hybrid Stocks

Hybrid Stocks are a combination of both preferred and common stocks. There are situations where some companies can issue preferred stocks to holders with the probability of a few of them maturing into common stocks at a later time.

The power to have a say varies in this case based on the discussions that surround the deal in allocation.

• Embedded Derivative Stocks

Embedded Stocks are a rare occurrence in the stock allocation scene. They are typically a situation where the stocks can be either “called” or “put”. A “call” is the action where a company can buy back the shares at a later time for a particular price.

The “Put” option enables the shareholder to sell it back to the company at a particular time for a price.

Difference between Stock market and Share market?

For the most part, Stocks and shares represent the same thing. But they have a few fundamental differences in accuracy and investment levels.

Stocks are referred to as the ownership of shares in multiple companies and having diversity in those investments. Stocks can be in one or more firms. They focus on the bigger picture. When someone says that he/she owns “X amount of stocks”, they mean that they hold the slice of ownership in the stake of X companies and all of them bring in their return in the divided, owing to this investment and the return booked at the end of the trade.

The end usually occurs when one sells his stock.

Shares, on the other hand, are referred to as the slice of ownership within a particular group or organization. Shares are endemic to a group or company. Shares together accumulate to having the stock in the company.

So that concludes our study of Stock Markets. It’s evident by now that you have a fair amount of idea about what is Stock Market and are very interested in learning Stock Markets that you’ve made it till here. Now that you have understood the basics of Stock Markets’ existence and their working, you are now ready to start learning more about them in an in-depth manner.

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You will get to learn from industry experts who have been there, done that. With interesting case studies and analytical samples, you will get a great hold on improving your portfolio with the best stocks to invest and trade in from time-to-time.

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