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WHAT IS A STOCK MARKET?

Stock Market

Basic explanation of stock market:

It is a place where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. In the stock market, one can also trade in financial instruments such as derivatives, bonds, mutual funds, along with shares of a listed company.

A stock exchange is the meeting place for buyers and sellers for trade. In India, the prime stock exchanges are the National Stock Exchange and the Bombay Stock Exchange.

Types of markets:

One can trade in either one of the two market segments: the primary market and secondary market.

Primary market:

The primary market is where a company first gets registered to raise money and issues a certain number of shares or bonds. It's in this market that firms float new stocks and bonds to the public for the first time. When a company decides to list its shares for the first time this is known as an initial public offer (IPO).

Another way for a company can raise capital in the primary market is through rights offering or issues. A rights offering (issue) allows companies to raise additional equity through the primary market after having securities in the secondary market.

Secondary market:

After stocks or securities of a company have been sold in the primary market, they are then traded in the secondary market. Investors trade previously issued securities without the companies' involvement. In the secondary market, the investor buys shares from another investor at the prevailing market price or whatever price both the buyer and seller agree upon.

In India, primary and secondary markets are governed by the Security and Exchange Board of India (Sebi).

What is traded in the stock market?

In the stock market, various kinds of financial instruments are traded which are shares, bonds, mutual funds, derivatives.

A share is a single unit of ownership in a company or financial asset.

Bonds are a way in which a company opts to borrow funds from a variety of investors, which is also paid off through timely interest payments.

Mutual funds are investments that allow one to indirectly invest in the share market.

Derivatives are instruments that allow one to trade at a price that has been fixed by the person trading. It means that one enters an agreement where they choose to either sell or buy a share or any other instrument at a certain fixed price.

What is a bull market?

A bull market means the share market is rising and investor sentiment is confident, further encouraging other investors to buy. Generally when the sharemarket is ‘bullish’, the economy is strong and unemployment is low.

What is a bear market?

Essentially a bear market is the opposite of a bull market. That means if the market falls by 20% or more from the 52 week high, it has become a bear market. A bear market is generally marked by investor pessimism which can cause prices to continue falling, adding to further negative sentiment.

What is a stock market correction?

Sometimes a steep fall in market prices can be a market correction rather than a bear market. Generally speaking, a fall of 10-20% is considered a market correction, with a fall beneath 20% considered a bear market.

However, whereas a bear market is usually a sign of negative investor sentiment, a market correction is often a temporary price reversal before the market continues moving upwards.

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