A stock market is a public market that enables issuing, buying and selling of stocks. Stock Markets work on a network of exchanges- like Bombay Stock Exchange or BSE. Companies list their shares under an exchange, that the common public can trade.
A stock market is a secondary market where investors buy from existing shareholders and sellers transact with potential buyers. The exchange regulates such trades in the stock market.
What’s in it for Businesses?
One word: Capital. Every business needs capital to expand and grow. To avoid borrowing money and incurring debts, and paying interest over debts, a company can go public. It can offer shares of the company up for sale. Say a company issues one million shares of stock to the public is offering a share at INR 10, it can raise 10 million of capital that can be used for growing the business.
What’s in it for Investors?
The return on investment (ROI) a stock provides. These returns are a share of the profit the company provides. When an investor buys a share, he is also purchasing a proportion of profits on that share. The company can retain a part of these earnings (on behalf of the investor) for reinvestment and can distribute the others as dividends.
The Stock Pricing:
In an ideal scenario, the company uses the capital from shares for investment, expands business for profit and a part of the profit goes to the investor. The value of a company is determined by market capitalization, which is the stock price multiplied by the number of shares outstanding.
The value of a stock or security is basically based on the demand and supply: if more people are willing to purchase a stock (demand) than trade it (supply), then the price goes up. On the other hand, if more people want to trade a stock than purchase it, there would be more supply than demand, and the price would come down.
The demand and supply of stock are based on several market forces which in turn determine the value of a stock.
- Internal Developments:
People are willing to invest in companies with potential growth. Introduction of a new product, releasing earnings and profits, division of dividends securing a large contract, anticipated merger or employee hiring and layoffs, frauds or scandals tell more about the company’s internal developments, and hence the prices of the stock.
- The Investor Sentiment
The investors need to have confidence in the stock market. If the stock market is a bull market, i.e. stock prices are on a rise, the investors will feel safe to invest. Whereas in a bear market, i.e. where stock prices are falling, the investors’ confidence keeps fading.
The economy and changes in economic factors also play a pivotal role in stock pricing. If the economy is ‘good’, people will be more willing to invest anticipating more future profits. If the economy is ‘poor’, people will be hesitant to invest in the market.
Changes in economic policies like interest rates of banks, inflation, deflation, a new government in power, changes in economic policies also affect the stock pricing. The value of the currency can also affect stock prices. If the value of Indian Rupee rises, the countries who import goods from India will need to spend more money on goods, sales drop and the stock prices reduce.