HOW DOES THE STOCK MARKET WORK? (PART I)

Stock market

Does the thought of investing in the stock market scare you? Do you think that you need a lot of technical knowledge before investing? Do you think that you need to have a lot and a lot of money? 

Then you are wrong, but you are not alone. Many people stay away from the stock market due to these reasons and miss this wonderful opportunity of creating wealth over the long term. 

But the good news is that anyone can learn about how to get into the stock market. 

Now, there are many technical terms that are used in the stock market that you need to know. Learning them is easy. Just make sure to be open to learning. 

We will take a look at how the stock market works so that you take your first step towards understanding the stock market.

What is a Share?

A share of a stock represents a part of a company. You literally become a part-owner of the company in which you are buying shares. You also get the voting rights in the company. 

Consider Company A that has a total of 10,000 shares available in the market to buy and sell. So, if you buy 100 shares of this company, you own 1% of the company. A share is as simple as this. Many people just get freaked out by listening to these words.

NOTE: You can only buy shares of companies that are listed on the stock market. Listing on the stock market is a cumbersome process and we will take a look at it later.

Some of the top listed companies in the stock market include Apple Inc., Reliance Industries, Microsoft, etc. 

whereas you can’t invest in companies like AMUL, Saudi Aramco, Cargill, etc. because they are private and not listed with the stock market.

What is the Stock Exchange?

A Stock Exchange is the place where individual investors, as well as big investors, come together for buying or selling the shares of the companies. 

Remember that when you are buying shares of the company, you are not buying it directly from the company. 

Instead, you are buying it from someone who already has the share of the particular company and wants to sell it.

The Stock Market is as easy as this!

Let’s understand by comparing the stock market with the vegetable market that we visit quite often. 

The stock market is not completely similar to the vegetable market but we can understand a lot by considering this analogy. There are a lot of vegetable sellers in the market and you have the right to choose at your own will. 

No one forces you to buy only from a certain seller and you will only buy from the one who sells the best quality and at the same time, at a reasonable price. 

You won’t buy vegetables at a very high price no matter how best quality its quality is.

Similarly, there are thousands of companies in the stock market that you can choose to invest in. No one forces you to buy shares of only a particular company. You can research independently and see which company is the best and at the same time available at a bargain price. 

“You have thousands of companies available to invest in. Make your investments wisely and don’t believe in tips.”

Demand and Supply

When there is a huge demand for onions, we observe that the sellers increase the price of onions because they know that people are still going to buy it. 

Similarly, when the sellers understand that the demand has decreased and people are reducing the consumption of onions, they decrease the price so that people start buying it.

Compare this to the stock market. Consider a company, for example, Netflix.

People are quite positive about the company and thus they start buying its shares in more and more quantity which results in increasing demand for its share, which in turn increases the share price. 

However, if in the future people think that Netflix can’t grow any further, the demand will decrease and thus the share price will come down. 

“Stock Prices fluctuate a lot depending on the emotions among the investors. Invest for the long term to overcome the emotion factor.”

Buyers and Sellers

As you know while buying vegetables from the market, you and the seller negotiate a lot. The seller tries to sell you as higher as he/she can whereas you want to buy the vegetables at the lowest cost possible.

The same thing happens in the stock market. The buyer wants to buy their favorite stocks at as much less price as possible. 

At the same time, the seller wants to sell his/her shares at the highest possible price. This constant fight between the buyers and sellers is what happens in the stock market each second.

“An investor’s worst enemy is not the stock market but his own emotions.”

95% of investors lose their money in the stock market!

This is a very true fact that 95% of investors lose their money in the stock market. But don’t get discouraged by this. People lose money because of some reasons like:

  • Lack of patience
  • Wanting to get rich quick
  • Not devoting time to know about the company they are investing in
  • Terrified when the prices of shares they buy fall

One of the main things you got to have is patience!

The importance of patience can’t be emphasized enough. Great investors like Warren Buffet, Rakesh Jhunjhunwala, etc. all have got rich by being patient and investing for a very very long term.

Investing in the stock market is not a get rich quick scheme. Avoid listening to anyone who offers you such a scheme because it will take years for you to create wealth from the stock market. 

My suggestion to all people who want to start investing is that never invest for the short term, never invest all of your money in stocks, have an investing goal, follow the discipline, and never stop learning.

You can never understand the stock market completely but you will keep gaining experience and learn many valuable lessons in your investing career.

CONCLUSION

Once you understand how the stock market works, it’s very easy to know the other terms that are used. Investing in the Stock Market is way easier than you think. It’s as simple as ABC. 

Personally having no background in stock markets, I have learned about stock markets by reading books and blogs and gaining as much knowledge as I can, and apply it in my investing career. 

Remember that anyone can invest in stock markets. You just have to be willing to learn. Stock Markets can be a great way for creating wealth so start learning and don’t miss this good opportunity of creating an alternative income stream. 

Check out the next part to know more as I don’t want you to get confused by reading so much in one go.

Related Blogs

Quick Inquire

Pulse Project