If you want to invest in stock market, first you should understand how the stock market works in India. Buying a share or stock of a company simply means you are buying a unit of the company. Investors are able to buy the stocks of the company once the company share is launched in the market. Share is unit of ownership of company and offered for sale in the market when company needs to raise money for growth. The shares in the market are launched in the form of initial public offering (IPO).
Let’s take a closer look at how the stock market works, and how you can make it work to your advantage as a trader or investor.
What Is a Stock or Share?
When a company wants to raise money for expansion, it “goes public” by making an initial public offering (IPO) of common stock. In its most basic form, this process is how the stock market works for trading in most companies. The company gets to keep the money raised to grow its business, while the shares (also called stocks) continue to trade on an exchange.
Traders and investors continue to buy and sell the stock of the company on the exchange, although the company itself no longer receives any money from this type of trading. The company only receives money from the IPO.
What Determines Stock Price?
Once the offering is completed, the stock price can move independent of the actual company’s success; a current example is the sky-high stock price for Tesla (ticker: TSLA), a company that may be years from profitability. Price changes reflect supply and demand, so when a stock is deemed desirable for whatever reason recent success, a strong industry sector, or just plain faddishness and popularity then its price goes up. At the other end of the spectrum, “value”investors like Warren Buffett specialize in finding unpopular stocks in forgotten industries that still have strong earnings and a solid future, buying them (or buying the entire company, as Buffett often does) and waiting for the price to rise.
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How Does the Stock Market Work?
For the stock market to work there must be buyers and sellers. These buyers and sellers trade existing, previously issued shares which are offered by one investor and bought by another. The fact that they are previously existing shares means that most stock trading has no direct impact on the company being traded. The buyer can place a “market” order to purchase at the current price, or a “limit” order to purchase if the stock reaches a certain price (which can be lower or higher, depending on the trading strategy). That order is matched up with a seller who has put shares up for sale.
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