Explained: How Share Market works

Explained: How Share Market works
Bombay Stock Exchange (BSE). (File Photo: IANS)

Share market is where investments are bought and sold. Share market provides a forum for the investors to connect with public companies and buy shares of ownership. In practical terms, the terms share market and stock market mean the same and are used interchangeably.

What is the stock market?

When we say “stock market”, the term often refers to any one of the major stock indexes. It is very difficult to keep track of every single stock. Hence these indexes include a given section of the stock market. In this case, the performance of the particular index is considered as the representative performance of the whole market.

Every day, you would have come across news headlines that say that the stock market has moved up or low or that it has closed up or down at the end of the day. This will mean that the sticks within the particular index have either gained or lost on the whole in their value. This kind of movement in the stick prices enable the investors to make profits while they buy and sell the stocks.

How does the stock market work?

The concept underlying the working of the stock market is very simple to understand. It works similar to how an auction house works. In the stock market, the buyers and sellers negotiate the prices and trade on the stocks.

The stock market functions through a network of exchanges. Companies that have gone public list their stocks on an exchange. This is meant to raise the capital to run their business. Investors get to purchase these stocks. These investors, in turn, buy and sell the stocks among themselves. The exchange tracks the supply and demand of each of the stocks listed.

This supply and demand are the factors that decide on the price of the securities or the levels the stakeholders in a stock market are willing to buy or sell. Most of these calculations in the stock market are done by computer algorithms.

The buyers propose a bid which means the highest amount they shall be willing to pay. This value is in most cases lower than the amount that the sellers ask for in exchange. This difference is usually called the bid-ask spread. For a trade to happen, either a buyer must increase his price or the seller must be willing to decrease his.

Stock market investments

Like any other investments, stock market investments also carry a lot of risks. However, they also have good potential for a reward. The history of gains in a market will increase in its value over a period of time. At the same time, it is not uncommon for the stocks to face sudden dips. An index fund is a kind of mutual fund which is also called an exchange-traded fund. The objective of these funds is to reflect the performance of a given index by holding all of the investments or stocks in that index. Hence. Investing in an index fund is a way to build a diversified portfolio that rules out the need to purchase a number of independent stocks. In this way, the risks associated with independent stocks are also minimized to a great extent.