Are you looking to know about What is actually a share market and how actually it works? If yes then you came to article.
In this article you will get to know about What is actually a share market and how it works.
The share market, also known as the stock market or equity market, is a platform where individuals and institutions can buy and sell shares of publicly traded companies. It provides a way for companies to raise capital by issuing shares, and for investors to participate in the ownership and potential profits of those companies.
The term “share market” refers to a marketplace where individuals and institutions buy and sell shares or stocks of publicly traded companies. It is also known as the stock market or equity market.
Shares represent ownership in a company. When a company goes public, it offers a portion of its ownership by issuing shares to the public through an initial public offering (IPO). These shares are then listed on stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ, where investors can trade them. Investors participate in the share market by buying and selling shares. They can place orders through brokerage firms or online trading platforms. The share market provides a platform for companies to raise capital and for investors to potentially profit from the performance of those companies.
The value of shares in the share market fluctuates based on various factors such as company earnings, economic conditions, investor sentiment, and market dynamics. Investors aim to generate returns through capital appreciation (selling shares at a higher price than the purchase price) and dividends (share of company profits distributed to shareholders).
The share market is an essential component of the global financial system, enabling companies to access capital and investors to allocate their funds for potential growth and wealth accumulation. However, it’s important to note that investing in the share market carries risks, and investors should carefully research and consider their investment decisions.
How the share market works:
Companies Go Public: When a company decides to go public, it offers its shares to the public through an initial public offering (IPO). This is the first time the company’s shares are made available for trading on a stock exchange.
Stock Exchanges: Stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ, provide the marketplace for buying and selling shares. These exchanges have listing requirements that companies must meet to be traded on their platforms.
Investors: Investors, including individuals, institutional investors (such as mutual funds or pension funds), and traders, can buy and sell shares in the stock market. They can place orders through brokerage firms or online trading platforms.
Buying and Selling Shares: Investors place orders to buy or sell shares at a specific price. When a buyer’s bid matches a seller’s ask price, a trade occurs, and shares change ownership. This process is facilitated by brokers who match buy and sell orders.
Stock Price Movements: The price of a stock is determined by supply and demand dynamics in the market. If there are more buyers than sellers, the price tends to rise, and vice versa. Various factors, such as company performance, economic conditions, and investor sentiment, influence stock prices.
Stock Indices: Stock indices, like the S&P 500 or Dow Jones Industrial Average, track the performance of a group of stocks. They provide a benchmark for the overall market and specific sectors.
Long term Investing and Speculation: Investors can take a long-term approach, investing in companies they believe will grow over time and generate returns through dividends or capital appreciation. Speculators, on the other hand, aim to profit from short-term price fluctuations by buying low and selling high without necessarily focusing on long-term fundamentals.
It’s important to note that investing in the stock market carries risks. Stock prices can be volatile, and the value of investments can fluctuate. It’s advisable to conduct thorough research, diversify investments, and consider seeking professional advice when entering the share market.
Let’s consider an example to illustrate how the share market works:
Company ABC is a successful tech company that decides to go public and offers its shares to the public through an initial public offering (IPO). The IPO price is set at $20 per share, and the company issues 10 million shares.
Once the IPO is completed, Company ABC’s shares are listed on a stock exchange, such as the New York Stock Exchange (NYSE). Investors can now trade these shares on the exchange.
Investor A, who believes in the potential of Company ABC, decides to buy 500 shares at a price of $22 per share. Investor B, on the other hand, wants to sell 200 shares and places a sell order at $25 per share.
The stock market facilitates the matching of buy and sell orders. In this case, Investor A’s buy order matches with Investor B’s sell order since they are willing to transact at the same price. As a result, the trade is executed, and Investor A becomes the new owner of 200 shares of Company ABC at a price of $25 per share.
Now, let’s say that a positive news announcement about Company ABC’s new product leads to increased investor demand. As a result, the buying interest in the company’s shares increases, and more investors are willing to pay a higher price.
Investor C sees the upward momentum and decides to buy 300 shares at the current market price of $30 per share. Investor D also wants to take advantage of the price increase and sells 100 shares at the market price.
In this scenario, the stock price of Company ABC has experienced an increase from the initial IPO price of $20 per share to $30 per share due to the higher demand. Investors who bought shares earlier at a lower price could potentially make a capital gain if they sell their shares at the current market price.
Companies often distribute a portion of their profits to shareholders in the form of dividends. If Company ABC decides to issue a dividend, shareholders who own the company’s shares will receive a share of those profits based on their ownership percentage.
CONCLUSION:
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