The Capricious market (How does a stock market work)
Updated: Apr 13, 2022
Markets form an essential part of our lives. They involve millions of buyers and sellers in a perpetual cycle of money. One such market we hear about every day is the stock market. It is a market for buying and selling stock in its literal meaning. Whenever we hear someone saying, the market is doing well, what does it mean? Essentially, to understand this vast topic of modern-day markets, delving into the core definition of stock gives a coherent idea.
If you have recently opened a new business, like shark tank, you might ask the investor for money in exchange for a percentage of your ownership. The invested money sponsors the company’s initial public offering or IPO. This would launch your company in the official public market. In the public market, people who believe the business could be profitable might buy a stock.
What essentially is a stock?
If you own a part of the business, you get to share both the success and downfall of a company. Owning a part of the company, is what is called owning stocks. These are a company's equity- a slice of the company equal to the number of shares held. This indeed involves buying and selling, like that of a regular market. The basics of economics are a crucial way to describe its functioning; the trading of these stocks is in turn governed by demand and supply.
The expanding venture
Let's say, your company is doing exceedingly well in the business. The demand for a part-ownership will hence increase, and so does the price of the stocks: in return increasing the cost for prospective buyers. This happens the same for the stocks that people already own. Simultaneously, the already owned stocks also see a rise in their investment. For your company, it means that you can now expand your venture, and the value for the company has increased, with an increase in the willingness of people to invest.
Sunny day with clouds
If suddenly, the company becomes less profitable, investors ought to leap into action and sell the stocks with the hope of still making a profit in times of uncertainty. The demand for stocks goes down, the price falls and so does the market value of your company. Does this mean the investors will completely lose out on their money? Filled with precariousness, the company might be able to regain its initial profit level.
Human confidence prevails in the stock market, and can indeed trigger economic booms or financial crises. It is a variable, hence partly, most investors like common households rely on long term investments over the urge to make millions in a day. With the onset of the internet era, one can easily buy or sell the stock with just one click on their phone. As more and more people are becoming aware of this system, trading has increased manifold, supporting the businesses they believe in, at the same time pursuing their financial goals.