Everyone knows that investing in the stock market carries risk, but when it’s approached in a disciplined and organized way, it is one of the best ways to earn passive income. But do you know how the market works in real?
Most of the wealthy people that you see today have invested their wealth in stocks.
The stock market is where investors come to buy and sell investments — called stocks which are shares of ownership in a public company.
The concept behind how the stock market works can be compared to that of an auction house, the stock market enables buyers and sellers to negotiate prices and make trades.
But this price cannot be fixed by sellers of the shares, rather the value of the shares depends entirely on how the market is behaving.
If the market shows some positive sign the price of the shares starts increasing and in case of any negative behavior the market starts to fall leading to a decrease in the price of each share.
Understand how the market works.
Let us understand this.
You got an exciting and never-happened-before idea and excited to bring that idea into reality.
You start taking action, working on that with some hard work you launched your business into the market and luckily it started running successfully.
Then you see huge demands of your product or services, you have a huge opportunity there to scale your business to a larger extent and expand more.
You started thinking of opening new branches in your city and with the profits made you opened more new branches locally and in a particular state.
Further, you planned to take it to other states or countries but you require an enormous amount for that, the bank can not provide you with so much money.
You reach out to investors they can offer you money but their conditions do not make you happy. You thought rather than giving this single person (investor) so much stake and profits. why can’t we go public?
This simply means you are planning to list your company in the share market and raise more money to expand internationally.
with all formalities, your company got listed and people can buy shares announced by your company which can be in millions and now you have enough money to grow your business internationally.
But if your business model is good and profitable then only people will love to buy shares of your company, thinking the company will give a good return in the near future.
This is the basic concept or reason why companies go public or list on the stock exchange.
Network of exchanges
The stock market works through a network of exchanges for trading in financial products— for example, the New York Stock Exchange or The Bombay Stock Exchange. The companies (listing their shares), brokers, traders, and investors must register with the exchange before trading.
Initial Public Offering (IPO)
Companies list shares of their stock on an exchange through a process called an Initial Public Offering (IPO)
When a company establishes itself, it may need access to much larger amounts of capital than it can get from ongoing operations or a traditional bank loan. It can do so by selling shares to the public through an IPO.
The companies file a draft offer document with the Exchange Board. The document will contain all the information about the company—shares being diluted, price band, and other details. On approval from the exchange board, the company offers its shares to investors through an IPO on the primary market.
The IPO also offers early investors in the company an opportunity to take out part of their stake, which will often give very good rewards in the process.
The investors in this way, purchase those shares and help businesses to raise money for business growth.
A stock or share or equity is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets and earnings.
Stock ownership implies that the stockholder owns a slice of the company equal to the number of shares held as a proportion of the company’s total shares.
For example, an individual who owns 10,000 shares of a company with 50,000 outstanding shares would have a 20% ownership stake in it. Most companies have outstanding shares that run into the worth of millions to billions.
Investors can buy and sell the shares among themselves which is tracked by the stock exchange board.
The one who wishes to buy will offer a “bid,” which is basically the highest amount they’re willing to pay, and which is also usually lower than the amount sellers “ask” for in exchange.
This difference between the seller and the buyer is called the bid-ask spread. For a trade to happen, a buyer needs to increase his price or a seller needs to decrease his.
That supply and demand help determine the price for each commodity at which stock market participants — investors and traders — are willing to buy or sell. Computer algorithms generally do most of these calculations.
Types of Stocks – Common and Preferred Stock
Mainly there are two main types of stock – common and preferred.
In Common shares, there is usually carry voting rights that enable the shareholders to have a say in meetings such as the Annual General Meetings—where matters such as election to the Board of Directors or any other appointment are voted upon.
Preferred shares generally do not have voting rights.
They are so named because they have preference over the common shares in a company to receive dividends that are the distribution of a portion of the company’s earnings, as well as assets in the event of a liquidation that is bringing a business to an end and distributing its assets to claimants.
Why does a Company issue Shares?
All the billionaire companies that you see today were built as a small company.
Jack Ma started Alibaba Group Holding Limited from his apartment in Hangzhou, China, in 1999.
Mark Zuckerberg started Facebook, Inc. from his Harvard University dorm room in 2004.
They have become the biggest companies in the world within a couple of decades due to the concept of share markets.
To grow at such a quick pace you need a massive amount of capital. In order to make the transition from an idea germinating in your brain to an operating company, you need to have workspace, inventory place workers and much more.
How Share Prices Are Set?
The prices of shares on a stock market are set in many different ways, but the most common way is through an auction process where buyers and sellers place bids and offers to buy or sell.
A bid is the price at which somebody wishes to buy, and an offer is the price at which somebody wishes to sell.
When the bid and offer coincide, a trade is made.
Stock Market Supply and Demand
Stock Market works on the basic principle of the law of supply and demand. For every transaction to take place there should be a buyer and seller.
If there are more buyers than the actual commodity then the stock price will increase.
Similarly, if there are more sellers than the actual buyers then the stock price will decrease.
All these companies grow internationally and expand more, taking the help of the share market by listing on the stock exchange and raise money by issuing shares to the public.
These shareholders earn good returns once the company grows more making companies to distribute their profits among stakeholders.
Now that you are familiar with the information on how the market works. Feel free to leave your valuable comments down.