Every day we listen in news about SENSEX going down or up and I am sure it always comes to your mind what SENSEX is? How is it going down or up? What it actually means and how it works? You might have also heard that many people have invested their money in stock market.
So what is stock market all about? Is it some kind of a store in a market?
In this post I will try to answer all the above queries.
What is stock Market?
Stock Market (or stock exchange) is a place where stock (or shares as we call in India) are traded between investors at a particular price that is purely determined by the demand and supply of the shares.
When you buy a stock you’re buying a piece of the company. When a company needs to raise money, they issue shares. This is done through an Initial Public Offering (IPO), where the price of shares are set based how much the company is estimated to be worth of, and how many shares are being issued. The company gets to keep the money raised to grow its business, while the shares (also called stocks) continue to trade on an exchange, such as the Bombay stock exchange in India, New York stock exchange (NYSE) etc.
Traders and investors continue to buy and sell the stock of the company on the exchange, although the company itself no longer receives any money from this type of trading. The company only receives money from the IPO.
There are various stock exchanges in the world where the trade of stocks (shares) take place and some of them are:
Bombay Stock Exchange(BSE)/ National Stock Exchange(NSE) – INDIA
New York Stock Exchange(NYSE) – USA
Shanghai Stock Exchange(SSE)- China
Why someone Buy or Sell Shares?
Normally one would want to buy the shares of company that are performing good. This would result in a rise in demand of the shares and the price will start rising. The price will rise until the investor feel that the share price correctly co relates with the good performance of the company. Similarly one would try and sell shares of a company that is performing poorly and so the supply will rise. The price will continue to fall till investors feel that the price correctly correlates with the performance.
It is worth noting that any news that has an effect on the performance of the company will be reflected in the price movement of the share. For example, if the government announces that there is an upward revision in the price of petrol, the most likely gainers will be oil and gas companies like Indian Oil, BPCL, HPCL, ONGC, Reliance etc. Therefore, their stocks (share prices) will start rising. Alternatively if the government announces that there is no revision in the price of petrol even though the price of crude is rising in the international market, the share prices of these companies will be under pressure and will probably fall.
Now a days shares are held in dematerialized or demat (i.e. in electronic form without any paperwork involved) form with a share broker who is registered with the stock exchange.
What is SENSEX?
Sensex (Sensitive Index) is an index of the most commonly traded 30 stocks on the BSE. Time to time, the BSE allocates weight age to different stocks that reflect their importance in the stock markets. Take an example of two company stocks INFOSYS and TATA Power where both are included in the SENSEX. If the stock price of INFOSYS goes up by Rs 10 and the stock price of TATA Power falls by Rs 10, does it mean that they will balance each other? The answer is no. This is because the weight of the INFOSYS Stock is much more than Tata Power. In such a case the rise in the INFOSYS Stock will outweigh the loss in Tata Power’s stock and the SENSEX will rise (assuming other stocks remain where they are). It is to be noted that the SENSEX will either move upwards or downwards only the performance of these 30 stocks. Since the general mood of the market is reflected by the movement in the SENSEX, hence it is always in news.
I know you are scared of stock market investment as there is always an uncertainty on its movement but always keep in mind that Stock Exchange is the reason of the wealth of world’s 3rd richest man Mr. Warren Buffet. You can also get more information on Warren Buffet in the following link http:/www.forbes.com/profile/warren-buffett
The above explanation is a simple detail about stock market and there may be many more parameters which define the movement of market and the demand and supply of shares.