How Stock Market Works?

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?

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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.

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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?

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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.

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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?

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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.

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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.

Happy Investing!

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Harsh

Harsh is a curious writer who loves to explore his surroundings. There are many websites who provide answer to people queries but no single website alone resolves the curiosity of people. Curious Mind Box is an initiative to resolve the curiosities and answer every What, How and Why question that comes into your mind.

8 thoughts on “How Stock Market Works?

  • June 27, 2015 at 2:05 am
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    I’d like to thank you for the efforts you’ve
    put in penning this website. I’m hoping to check out the same high-grade content by you in the future as well.
    In truth, your creative writing abilities has motivated me to get
    my own, personal website now 😉

    Reply
  • July 9, 2015 at 12:58 am
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    That’s an intresting fact that sensex is listed with a count of 30 company. not a that big number, I guess it should not be that difficult to keep the track of the sensex now and I can understand how the finance ppl r ableto predict ki kal market itne points par khulega bcs they have the figure of these 30 companies on their tips.. cool 🙂

    Reply
  • July 10, 2015 at 3:56 pm
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    how would you differentiate between BSE and NSE? Are foreign investors allowed to put their money into the companies listed under NSE?

    Reply
    • July 10, 2015 at 4:53 pm
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      BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are two different stock exchanges in INDIA. You can trade in either in both exchanges or in one but you might find some companies listed in BSE and not in NSE or vice versa.
      Foreign investors are allowed to invest money in companies listed on NSE . You can find more info on this link

      Reply
    • July 10, 2015 at 7:10 pm
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      Not a much difference Narendra, all what it differs about is the, market of investors.

      Additonally two companies can be registered with both of the stock exchanges at the same time, Infosys is one of them. so I believe it does not create a huge difference between BSE and NSE. just their operating bodies are different.

      Reply
  • July 10, 2015 at 7:12 pm
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    I think I can make a point here, it would be worth investing in the shares which are supposed to grow high in future and that really depends on how they are being projected in Media, bcs the end consumer has the things from media only. Keep the track of companies via News and accordingly invest and play into the market wisely.

    Reply
  • July 29, 2015 at 6:14 pm
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    Hi man, This was a fantastic page for such a hard subject to speak
    about. I look forward to reading a lot more great posts such as these.
    Thanks.

    Reply
  • August 30, 2015 at 9:21 am
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    This is my first time pay a quick visit at
    here and i am really pleassant to read all at alone place.
    8006ea07e0a086a3e0381c36e0d96446

    Reply

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