Basics of Stock Market
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Arun KCBasics of Stock Market
Uploaded by
Arun KC- Basics of Stock Market
- Functioning of the Stock Market
- Primary and Secondary Markets
- Why Trade in the Stock Market
- Equity Investment
- Conclusion
Common questions
Powered by AIThe high-risk, high-reward nature of stock investments can lead to significant volatility in investor portfolios, posing a potential drawback. Unlike bonds that guarantee returns, stock investments carry uncertainties such as market downturns, company-specific risks, and economic cycles, which can result in total capital loss. This unpredictability requires a higher rate of return as compensation, demanding a comprehensive understanding and tolerance for risk. For some investors, especially those with lower risk appetites, this can be a substantial disadvantage compared to more stable investment options like bonds or fixed income securities .
Stock markets facilitate economic productivity and investment allocation by acting as a "cradle of capitalism," where they channel investment into the most productive ventures. This is achieved through an "invisible hand" mechanism that optimizes the overall productivity of the economy. Companies use stock markets to raise share capital, while investors use them to invest surplus funds. By listing on stock exchanges, companies can access a broader base of potential investors, thus acquiring the necessary capital for growth and operations .
Arbitrage in stock markets involves buying a security in one market where the price is lower and simultaneously selling it in another market where the price is higher, seeking to profit from the price differential. This action helps bring about price equilibrium as it reduces the price in the higher-priced market while increasing the price in the lower-priced market, thereby balancing out prices across different stock exchanges .
Stock market trading offers several advantages over investments like real estate or conventional businesses. First, it requires less upfront capital compared to buying property, which generally involves substantial mortgage commitments. Second, it demands minimal time investment compared to running a business. Third, stock markets allow for quick liquidity, enabling investors to convert holdings into cash more easily than selling property or a business. Additionally, learning to profit from stock markets is considered relatively straightforward, attracting new investors .
The primary stock market is where new securities are sold directly by issuers to raise capital. Companies and governments issue securities here, allowing them to meet investment needs or discharge obligations. These securities might be issued at face value, discount, or premium . In contrast, the secondary market facilitates the trading of already-issued securities among investors, providing liquidity and enabling price discovery through supply and demand dynamics. While the primary market involves issuers and initial buyers, the secondary market involves trading among existing shareholders .
Equities, or stocks, represent ownership in a company, allowing shareholders to claim assets and earnings, as well as voting rights. They offer potential rewards through capital appreciation and dividends, but they come with risks, including the possibility of losing the entire investment. Compared to bonds, which offer guaranteed returns and higher claims on assets, stocks are riskier. As such, they can yield higher returns to compensate for the higher risk. The volatility and potential for both significant gains and losses make equities more challenging yet potentially rewarding .
Stock exchanges ensure the integrity and confidence in transactions through mechanisms such as transaction guarantees. If a buyer or seller fails to fulfill their obligation, the stock exchange steps in to meet the commitment, instilling confidence in the transaction’s sanctity. This reliability is crucial for investors who prefer secure environments over gray markets with lower transaction costs but higher risks. Trust in these systems encourages more significant participation and capital flow into stock markets .
Stock prices are primarily influenced by supply and demand dynamics. When the demand for a stock exceeds supply, prices rise, and conversely, prices fall when supply exceeds demand. Other influential factors include company earnings, investor sentiment, economic indicators, and geopolitical events. Additionally, speculation and arbitrage activities can swiftly alter supply-demand balance, affecting prices unexpectedly. Understanding these variable influences aids investors in predicting and responding to market movements .
Market speculation contributes to liquidity in stock markets by involving traders who buy and sell shares based on market direction predictions. Speculators increase the volume of trades, which helps in price discovery and ensures a continuous flow of transactions, thus promoting market liquidity. However, excessive speculation can lead to price volatility and bubbles, where prices become detached from fundamental values, potentially destabilizing financial systems if a sharp correction occurs .
Bull markets and bear markets serve as indicators of economic conditions. Bull markets occur when investors are optimistic, leading to rising stock prices as more shares are bought. This phase often corresponds to booming economic conditions where companies report high profits . Conversely, bear markets occur when investors are pessimistic, resulting in falling stock prices due to increased selling pressures. This phase often aligns with economic downturns or recessions. These markets reflect the health of the economy, acting as "barometers" that indicate broader economic trends .
