What is the Stock Market and How does a Stock Market Work?
If the thought of investing in the stock made you scared, you are not alone. Trust me, we have all been through that. While buying our first stocks, our hearts pounding fast. We recognize that feeling.
But the moment we all bought our first stock and had that enormous confidence in ourselves, It’s just mesmerizing.
We all know how important investing is for our future. Investing in the right avenues to grow wealth.
And certainly, Investing in Stock Market is surely a great way of creating wealth over time.
A stock market refers to the major indexes where investors come to trade in financial instruments like shares. But a stock market is just not restricted to stocks, one can also trade bonds and derivatives.
Some of the Major Stock Market Indexes are NASDAQ, NSE, SENSEX, Shanghai Stock Exchange.
And one can trade in any stock market in the world from anywhere in the world.
So How does the share market work?
The concept behind how the stock market works is pretty straightforward. The stock market ensures the presence of buyers and sellers and lets them negotiate prices and make trades.
Firstly a company gets listed on a stock exchange through an initial public offering or an IPO. And by offering these shares, companies add the capital they need to operate and that too without increasing their debt.
Then Through this, Investors invest their money by purchasing the shares, which allows the company to raise money and grow their business.
Investors then buy and sell these stocks among themselves, and the exchange keeps track of the Demand and Supply of each listed stock.
The Demand and Supply of the shares help the market to determine the price of each security or the levels at which the investors and traders are willing to buy or sell.
Because of the numerousness of investors, it is difficult to have them all at one location. Therefore, to conduct a comfortable trade, stockbrokers and brokerage firms come into the picture.
When you order to buy any share at a given rate, the broker processes it at the exchange.
Then Buyers offer a bid, or the highest amount they’re willing to pay, which is usually lower than the amount sellers ask for in exchange. This difference is called the bid-ask spread. For a trade to occur, a buyer has to increase his price or a seller needs to decrease hers.
Once the price is finalized, the exchange confirms the details to ensure that there is no error in the transaction.
Then the exchange transfers the ownership of the shares which is known as Settlement.
This all may sound complicated, but generally, computer algorithms do most of the pricing.
When buying stock, you’ll see the bid, ask, and bid-ask spread on the broker's website, but in many cases, the difference will be pennies, and won’t be of much concern for beginner and long-term investors.
The process generally takes up to a day or two. One is informed when the transaction is completed and the shares deposited in your Demat account.