Stock Market Trading & Investing
Take a look at the many ways by which you can learn share market
1. Read books
2. Follow a mentor
3. Take online courses
4. Get expert advice
5. Analyse the market
6. Open a demat and trading account
Read Books
Make a habit of reading books on stock markets, investment strategies, etc. By systematic and continuous learning, you can get a grip on the subject. Books such as “Basics of Financial Market” and “A Guide for Intelligent Investment” authored by Mr. Rajiv Ranjan Singh give you a very clear understanding about the way the market functions. Written in simple language, it takes you through the world of investments.
Follow a mentor
Its always essential to follow the footsteps of a mentor in the chosen field. Get guidance regarding investments and learn the tricks of the trade. A mentor can be a person who has more years of experience in investment. It can be your relative or neighbour or teacher or anyone for that matter. You can get nuggets of wisdom from the mentor as he or she would know the ins and outs of the stock market.
Take online courses
There are many online sites that provide courses and certifications in stock market trading. If you really want to get an edge over others, join these courses and get equipped with the essentials of stock market.
You can be a trader or investor
Traders hold stocks for a short period of time whereas investors hold stocks for a longer duration. As per your financial needs, you can choose the investment product.
Get expert advice
There are financial experts who can help you in your financial planning and provide you with personalized investment solutions. Take their advice to make smarter investment decisions.
Analyse the market
Always keep yourself updated with stock market news. Analyse the past trends and learn the pattern in which share market functions. Stock market is affected by political, economic and global factors. Look at the way the market reacted to each and every event. For example, take a particular stock and see its performance for a period of 5 or 10 years. By this, you can understand what all factors caused the price of stock to rise and the causes that made it fall.
The stock market broadly refers to the collection of exchanges and other venues where the buying, selling, and issuance of shares of publicly held companies take place. Such financial activities are conducted through institutionalized formal exchanges (whether physical or electronic) or via over-the-counter (OTC) marketplaces that operate under a defined set of regulations.
While both the terms “stock market” and “stock exchange” are often used interchangeably, the latter term generally comprises a subset of the former. If one trades in the stock market, it means that they buy or sell shares on one (or more) of the stock exchange(s) that are part of the overall stock market. A given country or region may have one or more exchanges comprising their stock market. The leading U.S. stock exchanges include the New York Stock Exchange (NYSE) and the Nasdaq. These leading national exchanges, along with several other exchanges operating in the country, form the stock market of the United States.
Understanding the Stock Market
The stock market allows numerous buyers and sellers of securities to meet, interact, and transact. Stock markets allow for price discovery for shares of corporations and serve as a barometer for the overall economy. Since the number of stock market participants is huge, one can often be assured of a fair price and a high degree of liquidity as various market participants compete with one another for the best price.
A stock market is a regulated and controlled environment. In the United States, the main regulators include the Securities and Exchange Commission (SEC) and market participants under the purview of the Financial Industry Regulatory Authority (FINRA).21 Since the stock market brings together hundreds of thousands of market participants who wish to buy and sell shares, it ensures fair pricing practices and transparency in transactions. While earlier stock markets used to issue and deal in paper-based physical share certificates, the modern-day computerized stock markets operate electronically.
How the Stock Market Works
In a nutshell, stock markets provide a secure and regulated environment where market participants can transact in shares and other eligible financial instruments with confidence, with zero to low operational risk. Operating under the defined rules as stated by the regulator, the stock markets act as primary markets and secondary markets.3
As a primary market, the stock market allows companies to issue and sell their shares to the common public for the first time through the process of an initial public offering (IPO). This activity helps companies raise necessary capital from investors. It essentially means that a company divides itself into a number of shares (for example, 20 million shares) and sells a part of those shares (say, 5 million shares) to the public at a price (for instance, $10 per share).
To facilitate this process, a company needs a marketplace where these shares can be sold. This marketplace is provided by the stock market. If everything goes according to plan, then the company will successfully sell the 5 million shares at a price of $10 per share and collect $50 million worth of funds. Investors will get the company shares, which they can expect to hold for their preferred duration, in anticipation of rising in share price and any potential income in the form of dividend payments. The stock exchange acts as a facilitator for this capital-raising process and receives a fee for its services from the company and its financial partners.
Special Considerations
The stock exchange shoulders the responsibility of ensuring price transparency, liquidity, price discovery, and fair dealings in such trading activities. As almost all major stock markets across the globe now operate electronically, the exchange maintains trading systems that efficiently manage the buy and sell orders from various market participants. They perform the price-matching function to facilitate trade execution at a price that is fair to both buyers and sellers.
A listed company may also offer new, additional shares through other offerings at a later stage, such as through rights issues or follow-on offerings. They may even buy back or delist their shares. The stock exchange facilitates such transactions.
The stock exchange often creates and maintains various market-level and sector-specific indicators, like the S&P (Standard & Poor’s) 500 index or the Nasdaq 100 index, which provide a measure to track the movement of the overall market. Other methods include the Stochastic Oscillator and the Stochastic Momentum Index.
The stock exchanges also maintain all company news, announcements, and financial reporting, which can usually be accessed on their official websites. A stock exchange also supports various other corporate-level, transaction-related activities. For instance, profitable companies may reward investors by paying dividends that usually come from part of the company’s earnings. The exchange maintains all such information and may support its processing to a certain extent.
Functions of a Stock Market
A stock market primarily serves the following main functions:
Fair Dealing in Securities Transactions
Depending on the standard rules of supply and demand, the stock exchange needs to ensure that all interested market participants have instant access to data for all buy and sell orders, thereby helping in the fair and transparent pricing of securities. Additionally, it should also perform efficient matching of appropriate buy and sell orders.4
For example, there may be three buyers who have placed orders for buying Microsoft shares at $100, $105, and $110, and there may be four sellers who are willing to sell Microsoft shares at $110, $112, $115, and $120. The exchange (through automated trading systems) needs to ensure that the best buy and the best sell are matched, which in this case is at $110 for the given quantity of trade.
Efficient Price Discovery
Stock markets need to support an efficient mechanism for price discovery, which refers to the act of deciding the proper price of a security and is usually performed by assessing market supply and demand and other factors associated with the transactions.
Let’s say a U.S.-based software company is trading at a price of $100 and has a market capitalization of $5 billion. A news item comes in that the European Union (EU) regulator has imposed a $2 billion fine on the company, which essentially means that 40% of the company’s value may be wiped out. While the stock market may have imposed a trading price range of $90 and $110 on the company’s share price, it should efficiently change the permissible trading price limit to accommodate for the possible changes in the share price, or else shareholders may struggle to trade at a fair price.
Liquidity Maintenance
While getting the number of buyers and sellers for a particular financial security are out of control for the stock market, it needs to ensure that whoever is qualified and willing to trade gets instant access to place orders that should get executed at a fair price.
Security and Validity of Transactions
While more participants are important for the efficient working of a market, the same market needs to ensure that all participants are verified and remain compliant with the necessary rules and regulations, leaving no room for default by any of the parties. Additionally, it should ensure that all associated entities operating in the market adhere to the rules and work within the legal framework given by the regulator.
Support All Eligible Types of Market Participants
A marketplace is made up of a variety of participants, which include market makers, investors, traders, speculators, and hedgers. All of these participants operate in the stock market, with different roles and functions. For instance, an investor may buy stocks and hold them for the long term, spanning many years, while a trader may enter and exit a position within seconds. A market maker provides necessary liquidity in the market, while a hedger may like to trade in derivatives for mitigating the risk involved in investments. The stock market should ensure that all such participants are able to operate seamlessly, fulfilling their desired roles to ensure that the market continues to operate efficiently.
Investor Protection
Along with wealthy and institutional investors, a very large number of small investors are also served by the stock market for their small amount of investments. These investors may have limited financial knowledge and not be fully aware of the pitfalls of investing in stocks and other listed instruments. The stock exchange must implement necessary measures to offer the necessary protection to such investors to shield them from financial loss and ensure customer trust.
For instance, a stock exchange may categorize stocks in various segments depending on their risk profiles and allow limited or no trading by common investors in high-risk stocks. Exchanges often impose restrictions to prevent individuals with limited income and knowledge from getting into risky bets of derivatives.
Balanced Regulation
Listed companies are largely regulated, and their dealings are monitored by market regulators, such as the above-mentioned SEC. Additionally, exchanges mandate certain requirements for example, timely filing of quarterly financial reports and instant reporting of any relevant developments to ensure that all market participants become aware of corporate happenings. Failure to adhere to the regulations can lead to suspension of trading by the exchanges and other disciplinary measures.
Regulating the Stock Market
A local financial regulator or competent monetary authority or institute is assigned the task of regulating the stock market of a country. The SEC is the regulatory body charged with overseeing the U.S. stock markets. The SEC is a federal agency that works independently of the government and political pressure. The mission of the SEC is stated as “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.”
Stock Market Participants
Along with long-term investors and short-term traders, many different types of players are associated with the stock market. Each has a unique role, but many of the roles are intertwined and depend on each other to make the market run effectively.
Stockbrokers, also known as registered representatives in the United States, are licensed professionals who buy and sell securities on behalf of investors. The brokers act as intermediaries between the stock exchanges and the investors by buying and selling stocks on behalf of the investors. An account with a retail broker is needed to gain access to the markets.
Portfolio managers are professionals who invest portfolios, or collections of securities, for clients. These managers get recommendations from analysts and make the buy or sell decisions for the portfolio. Mutual fund companies, hedge funds, and pension plans use portfolio managers to make decisions and set the investment strategies for the money that they hold.
Investment bankers represent companies in various capacities, such as private companies that want to go public via an IPO or companies that are involved in pending mergers and acquisitions. They take care of the listing process in compliance with the regulatory requirements of the stock market.
Custodians and depot service providers are institutions that hold on to customers’ securities for safekeeping to minimize the risk of their theft or loss. These institutions also operate in sync with the exchange to transfer shares to/from the respective accounts of transacting parties based on trading on the stock market.
Market makers are broker-dealers who facilitate the trading of shares by posting bid and ask prices and maintaining an inventory of shares. They ensure sufficient liquidity in the market for a particular (set of) share(s) and profit from the difference between the bid and the ask price that they quote.
Speculators engage in directional bets in the market with individual stocks or broader indexes. Speculators can take long positions by buying shares, or a short position by short selling. Some speculators hold on to their positions for a relatively long time based on fundamental or technical analysis. Others trade quickly and often, as in the case of day traders.
Arbitrageurs are traders who identify mispricing in the market for relatively low-risk profits. By doing so, they keep the market more efficient. Algorithmic and high-frequency trading (HFT) programs are often engaged in this type of arbitrage.
Stock exchanges operate as for-profit institutes and charge a fee for their services. The primary source of income for these stock exchanges is the revenue from the transaction fees that are charged for each trade carried out on its platform. Additionally, exchanges earn revenue from the listing fee charged to companies during the IPO process and other follow-on offerings. An exchange also earns from selling market data generated on its platform such as real-time data, historical data, summary data, and reference data which is vital for equity research and other uses. Many exchanges will also sell technology products, such as a trading terminal and dedicated network connection to the exchange, to the interested parties for a suitable fee.
Competition Faced by Stock Markets
While individual stock exchanges compete against each other to get maximum transaction volume, stock markets as a whole may be facing competitive threats on two fronts.