What Is The Stock Market And How It Works

To know about the stock market one must know about stocks. Stocks are certificates of ownership of a company. A company breaks its ownership into many parts which are sold to gain more capital and most probably to expand the business.

Stock Market - The Thought Tree (T3)

Top 10 stock market exchanges in the world. 

  1. New York stock exchange (NYSE) 
  2. Nasdaq 
  3. Shanghai stock exchange (SSE) 
  4. Japan stock exchange (JPX) 
  5. Shenzhen stock exchange (SZSE) 
  6. Hong Kong stock exchange (SEHK) 
  7. EURONEXT 
  8. LSE group 
  9. National stock exchange (NSE) 
  10. Toronto stock exchange

Exploring the Market

Now that we know what stocks are let’s also explore the market. A stock market is a place where many markets and exchanges combinedly keep buying and selling shares of companies being held publicly. 

The institutionalized formal exchange keeps a track of these financial activities. The stock trading venues generally allow transactions in securities and stocks, many such venues can be found in a country or a region. 

There are many stock exchanges which include New York Stock Exchange(NYSE), Nasdaq, Dow and Jones, and S&p 500; these are some most widely followed exchanges.

History of Trading 

Stocks and trading as many people find it a new field of interest but trading dates back to a time when there was no modern technology. 

People used to have securities, trades, bonds and agreements on paper, let’s see how that worked. 

Let’s go back in time when Antwerp, what we call Belgium today, became the centre of international trade during the late 1400s

Rise of a New Investment Model 

Different countries like Britain and French gave charters to numerous companies among which the East India Company was the mightiest alliance. 

These were the early days of the rising stock market, where groups of businesses combined their funds to send ships across the globe through major sea routes, during those years the sea voyages were very risky due to storms and pirates around. 

The ship owners used to make collaterals with the investors to avoid risk factors. After each successful voyage, the investors would receive some monetary profits, while goods were readily available for sale. 

This is a perfect example of limited liability companies (LLCs) 

Establishment of NYSE and Other Stock Exchanges 

After the London Stock Exchange (LSE), The New York Stock Exchange was the most dominant market. There was a mere competition for NYSE in the entire United States, many other stock exchanges were still trying to fit in, while the London stock exchange was in its full glory in Europe.

The NYSE became huge by giving requirements to list up companies and rather than just charging extensively. 

Also Read: How to Invest in the US Stock Market from India

The Beginning of Modern-Day Trading 

At the beginning of the 20th century, the technology sector boosted so Nasdaq made trading web-based which was so widely accepted because of its time saving and cost savings methods. This brought great competition to all other stock exchanges including NYSE. 

After facing such high competition NYSE allied with Euronext in 2000 which also had allied with Brussels, Paris, and Amsterdam exchanges.

Terminologies 

● Initial public offering (IPO) 

It is a procedure by which any private company can sell their shares to the general public. The shares are sold to retail or institutional investors, then the investment bank lists the shares of the company in various stock exchanges which can be further sold by the investor in the secondary market. 

● Dividend 

When a company distributes some of its earnings to investors, by the decision of the board members of the company and also as a reward for actively investing in the company. This dividend can be in the form of cash or a set of additional stocks. 

● Price transparency 

Price transparency refers to the information given for bid price and ask- price for a particular stock and generally depends upon the extent to which the information is available. 

Price transparency also helps an investor in determining the true value of the market in terms of information being provided. 

Also Read: STOCK MARKET TERMINOLOGY FOR BEGINNERS

● Liquidity 

Liquidity is a term used to describe how easily an asset or security can be converted to cash without bringing changes in the market price.

liquidity in Stock Market - The Thought Tree (T3)

There are two main types of liquidity:

1. Market liquidity 

The market liquidity is a degree to which a country’s market or a real estate market brings up assets to be bought up and sold at stable and transparent prices. Stock Market shows high market liquidity. Whereas the real estate market has less liquidity in comparison to the stock market. 

2. Accounting liquidity 

It’s an ability to clear debts as the due dates close by, where a company or an individual can face their financial obligations with all liquid assets accessible to them.

How to measure liquidity? 

There are many tools to measure accounting liquidity, these tools are used by analysts, and investors to compare the companies with strong liquidity, and also to measure the depth. 

● Current ratios 

The current ratio is used to measure current assets that have a high potential to get converted to cash within a year against the liabilities,

This ratio is the best in terms of simplicity and least strictness. 

It is formulated as: 

Current ratio = Current assets / Current liability 

● Quick ratios 

Quick ratios measure the ability of a company to face short-term obligations along with the liquid assets it has. it indicates short term liquidity of the company. 

Quick ratios are also called acid-test ratios.

The formula for finding the quick ratio is given by: 

Quick Ratio = Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable / Current Liabilities 

Working of the market

The stock market has a huge history of itself and has brought benefits to people from the very start. Many people find trading very difficult but actually if we see it carefully, it’s a fool’s play. 

You don’t need to worry even if you are a newbie and trying to make a presence in the market, ultimately everyone’s got their strategies to dodge risk in the market. Some may have huge losses and maybe at the life turning phase, but things here depend on one’s very own decision. So say strong and determined. 

● Primary market 

The company first needs to enlist itself in the primary market by an IPO. In the document the details of the company and stocks to be issued. The stocks are then given to the investors. 

● Secondary market 

After the enlistment, the stocks can be traded throughout the secondary market. Buyers and sellers in this market carry out transactions. 

First, you need to purchase or place your bid. The broker reviews your order and sends it to the exchange, then the exchange confirms details of buyer and seller. This process of settling the shares is called settlement. 

The exchange confirms the purchase with the broker and then the broker credits or debits accordingly from your Demat account. 

The process of settlement usually takes 2 days to confirm then after these two days the buyer gets actual ownership of the company he invested in.

Also Read: TOP 10 STOCK MARKET BOOKS FOR BEGINNERS

Stock Market - The thought tree (t3)

Now let’s summarise what we’ve seen so far: 

  • What are Stocks 
  • Top 10 stock exchanges in the world 
  • Exploring the market 
  • History of trading 
  • Rise of a new investment model 
  • Establishment of NYSE and other stock exchanges 
  • Beginning of modern-day trading 
  • Terminologies 
  • Initial public offering (IPO) 
  • Dividend 
  • Price transparency 
  • Liquidity 

■ Market liquidity 

■ Accounting liquidity

● How to measure liquidity? 

○ Current ratios 

○ Quick ratios 

● Working of the market 

○ Primary market 

○ Secondary market

Conclusion 

Now that we have learned about stocks and how it works, we should also remember that stocks and trading are not that hard 

As I mentioned earlier it’s an easy deal to go with, one just needs a detailed analysis of the stocks running in indexes and correct decisions. 

Thanks for reading my article. I appreciate it.