A Guide To How The Stock Market Works

Stock Market is an investment for the smart and shrewd investor who loves taking risk and benefitting from it. But this skill is acquired through continuous learning and experience gained over years and years of buying and selling stocks.

Contrary to modern beliefs, stock market trading is not a gamble. While it involves certain degrees of risk and upto some extent luck, success in this trade is rooted only from knowing the game inside out. Knowing more about the basics of how the stock market works can govern the decisions during trade which can eventually result in a gain or loss.

What is a Stock?

Often people use the terms, ‘stock’ and ‘shares’ alternatively but they have quite different meanings. Every organization issues shares of itself to the public and a stock is essentially the ownership of the share. Companies issue its shares through an Initial Public Offering or an IPO and it is usually done to raise money from people who purchase these shares.

The price of the shares is determined based on the company’s value, and it varies according to how the company is performing and the direction to which it is headed to.

How is the price of a stock determined?

The factors that determine the price of a stock not be necessarily be only dependent on the performance of the company. Most importantly, it is governed by the rates of supply and demand, performance of the industry, success of the company in the recent times and also even plain popularity due to a viral marketing campaign.

So, how does it work?

Stock trading like any other form of trading involves buyers and sellers. A trader may buy some stocks of the company by investing the portion of money which would be the cost of each stock multiplied by the quantity he / she purchases.

The perceived value of company changes over time and the cash gained and lost is founded on this alternating value. The buyer may sell the stock when the value of the company increases and that brings a profit in the margin of difference.

If the value of the stock of a company dips down, sellers tend to sell their stocks hastily in order to reduce the loss margin. As the price further dips down, there would come a point where the demand from buyers would increase which in turn raises the stock price.

The bottom line is that stocks have been a vital source of investment for companies. Buying and selling of stocks happens at Stock Exchanges which are connected together globally. The New York Stock Exchange, Bombay Stock Exchange are some of the most prominent stock exchanges currently.

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