What Is Stock Market?
We all know that companies use the stock market to raise capital, and investors buy and sell shares in publicly traded companies. The term "stock market" refers to the multiple stock exchanges responsible for buying and selling publicly held companies' shares.
Stock market and stock exchange do not imply the same meaning.
The stock exchange is a marketplace where stocks are traded between buyers and sellers. On the other hand, the stock market is the big picture. That means the stock market encompasses all the exchanges and trading platforms and is collectively addressed as a "stock market."
Types of Stock Market
The stock market is divided into two categories.
- Primary Market
- Secondary Market
Primary Market
In the primary market, business companies issue new stock and company securities to raise capital for new ventures or expansions. Companies take the help of investment banks to underwrite.
Initial public offering (IPO) or stock launch processing to the public in the primary market. After the public offering, these shares are sold to the investors through the investment banks (underwriters) at a fixed price.
Secondary Market
In the secondary market, previously issued shares are bought and sold among investors. London Stock Exchange (LSE), New York Stock Exchange (NYSE), NASDAQ, and Over-the-counter (OTC) are examples of secondary markets. The stock price varies in the secondary market depending on supply and demand.
How Does Stock Market Work?
When a business intends to go public, it offers its ownership as a share in exchange for capital. These shares are traded in exchange by buyers and sellers. So that means when someone buys a share of stock, they buy a small amount of ownership of the company. The value of the share increases or decreases over time, depending on how profitable the company is.
The share price may also rise on certain factors, such as market supply and demand. On a specific stock, suppose more people want to buy, and fewer people want to sell; in this case, the share price goes up. On the other hand, when more people want to sell but fewer people want to buy, the price goes down.
Other factors affect the stock market, such as strong economic conditions, political events, market trends, etc. For example, political instability might lead to decreased business profit and low stock prices, whereas a strong economy can lead to a higher stock price and increased profit.
Risk and Return in Stock Market
Compared to bonds investing in stock is considered riskier. It's because the value of the stock can fluctuate depending on various factors. However, investing in the stock market has the potential over the long run. One effective strategy that investors follow is diversifying their portfolio of stocks over the long term, and can earn higher returns compared to short-term price fluctuations in the stock market.
On a final note, it is essential to consider the stock market's volatility. There's no guarantee of returns, and investors must have the mentality of risk tolerance and a clear investment goal before investing.
In Sentences
- The relationship between risk and return in the stock market is fundamental in investing.
- Before investing in the stock market, conducting research and understanding the dangers is critical.