What is stock market ?
The stock market is a complex system where investors buy and sell shares of publicly traded companies. Here's an overview of how it works and its key components:
How the Stock Market Works
The stock market operates through a network of exchanges where companies list their shares for public trading. It consists of two main parts:
- Primary market: Where new stocks are issued through initial public offerings (IPOs).
- Secondary market: Where existing shares are bought and sold among investors.
Buyers and sellers come together to trade shares, with prices fluctuating based on supply and demand.
What is a Stock?
A stock represents a slice of ownership in a company. When a company issues stocks, it divides its total capital into shares, each representing a percentage of ownership. Stocks typically come with voting rights and the potential for profits through dividends or capital appreciation.
Stock Market Basics
- Companies issue stocks to raise capital for business operations or expansion.
- Investors can buy and sell stocks through brokers or electronic trading platforms.
- Stock exchanges like the Tokyo Stock Exchange (TSE), New York Stock Exchange (NYSE) or NASDAQ provide the infrastructure for trades.
- Various participants, including individual investors, institutional investors, traders, and market makers, contribute to market functioning.
Price Determination in the Stock Market
Stock prices are primarily determined by supply and demand. When more people want to buy a stock than sell it, the price typically rises, and vice versa. Factors influencing stock prices include:
- Fundamental factors: Company earnings, profitability, and overall financial health.
- Technical factors: Price history, chart patterns, and trading momentum.
- Market sentiment: Investor emotions and overall market perception.
Role of Market Makers
Market makers ensure liquidity in the stock market by always being ready to buy or sell particular stocks[1]. They provide bid and ask prices, facilitating smooth trading and helping to narrow the bid-ask spread.
Buying a Stock
When you buy a stock, you're purchasing a small piece of ownership in a company. The transaction occurs through a broker, who matches your buy order with a sell order from another investor. Once the trade is executed, you become a shareholder of the company.
Stock Indices
Stock indices track the performance of a specific group of stocks, providing a snapshot of market or sector performance. They are calculated using various methods, such as:
- Price-weighted: Based on the prices of constituent stocks.
- Market-capitalization-weighted: Based on the total market value of constituent stocks.
Examples include the Nikkei, S&P 500, Dow Jones Industrial Average, and NASDAQ Composite.
Stock Markets, Exchanges, and Indices
- Stock market: The broader concept of the system where stocks are traded.
- Stock exchanges: Specific marketplaces where trading occurs, like the TSE, NYSE or NASDAQ.
- Stock indices: Statistical measures that track the performance of a group of stocks, such as the S&P 500 or Dow Jones Industrial Average.
In summary, the stock market is a complex ecosystem that facilitates the buying and selling of company shares, with prices determined by various factors and market participants working together to ensure efficient trading.