Do you know how the Stock Market works?

How does stock market works is one of the most talked and confusing concepts, in this blog it is made clear in a simple way. Compound Interest being the 8^th wonder of the world as proven by many philosophers and investors, one of the greatest examples is Mr. Warren Buffet who compounded his wealth from the market over a period of time, if not compound interest Mr. Buffet would be a billionaire. So many people started showing interest and looking for ways to achieve it.

We will see in this article about how the stock market works…

Definition of ‘Stock’

A stock or a share is a financial instrument that represents a part ownership of the company or a corporation which can claim on its assets and earnings. Stock ownership implies that the shareholder owns just a slice of the company equal to the number of shares held as a proportion of the company’s total outstanding shares.

This may change from company to company as they put out their only limited number of shares for a small percentage in their company.

What most people refer as ‘Stock Market’

The term ‘stock market’ is often referred to as any major market indexes present in that country or where mostly stocks are traded or listed, in India its NSE and BSE, U.S. its S&P 500, China its Shanghai SE Composite Index, London its FTSE AIM UK 50 Index and many more.

Many people have seen headline that the stock market has gone up or gone down or stayed stable (that’s most unlikely to happen) during the whole day, which implies the movement of the indexes throughout the day.

But how does it work?

There are various participants that come into play like SEBI (Security and Exchange board of India), Stock Exchanges, Brokers, Traders and Investors. It is a place where various kinds of people and companies meet to exchange which can be redeemed in a monetary form which can be for making profit or for wealth creation.

Let’s understand the movement of the price with the help of Demand and Supply

Let’s assume ‘Ameya’ has a tomato farm and he go out to sell, in Peak Season as the supply of the same product (tomato) in the market is more the price ‘Ameya’ would get is low (low demand for Ameya’s Tomato) i.e., the fall in the price of the tomato.In Off Season as the supply in the market is less the price ‘Ameya’ would get is high (high demand for Ameya’s Tomato) i.e., the increase in the price of the tomato.

Similarly, like the Ameya’s Tomato the stock price of the stock is influenced by the Rising Demand – stock prices would go up and with Falling Demand – stock prices go down.

In a Nut Shell stock market works on pure demand and supply principles, there are various factors that helps in determining the demand and supply of a stock such as Profit and Loss A/c, Positive and Negative announcements, Management Style, National Trend and many more.

Now that you have seen how does it work would you or a person invest in the stock market which has given a CAGR(Compound Annual Growth Rate) of 13% in the past 15 Years(in case of Nifty 50 Index)?