Questions Business and Entrepreneurship

How does stock exchange work?

Airtract

Arden Yook

Build yourself

A company needs capital to grow and flourish. When a company is in need of capital, it lists the shares of the stock exchange, in the form of IPO (Initial Public Offering) which means the company shares are open to the general public for buying, and the price of the IPO is determined by the net worth of the company and the number of shares launched. Buying shares of a company mean owning a part of the company. The cost of the percentage goes to the company, and the profits reaped from buying or selling of stocks go to the shareholder. The value of shares fluctuates on the stock market depending upon their net worth and demand.

If there are too many buyers for a specific stock than the number of sellers than the price of that stock will increase. In such scenarios, the shares may be sold to the highest bidder that is the person willing to offer the highest for the specific commodity.

Alternatively, if the number of sellers is more than the buyers, the buyers can coerce the sellers to sell the stocks at a lower price. Sometimes investors invest in forgotten stocks of companies or industries they think will have massive demand in the future and wait for the stock prices to go up. Investors can hire stock brokers. Stockbrokers are trained in stock trading, and they can be hired investors for investing in stocks.

If you provide the number of shares you want to buy, the type of stocks and the price range, the stockbroker can procure the commodities at a fair price. Similarly, if you have many shares to sell, the brokers can sell your stocks for you. These days, the concept of the stockbroker is being replaced by electronic trading systems that are being used to match buyers and sellers.

Stocks are bought with the objectives of making money, to gain ownership of a company which in turn makes them a key person in shaping the company’s decisions, to stay ahead during times of inflation or to earn payments on the dividends (share of the company’s profit). Stocks can be sold for gaining en-cashing, for buying others stocks or if a particular stock poses a risk of falling prices. The stocks are classified into 11 sectors as per the Global Industry Classification Standard (GICS):

  1. Industrial

  2. Materials

  3. Energy

  4. Consumer Discretionary

  5. Financial performance

  6. Medical Care

  7. Consumer Staples

  8. IT

  9. Real estate.

  10. Utilities

  11. Communication media

This allows the investor to analyze the stocks better and invest in the ones of their preference. According to studies, shares are the best assets that provide higher returns over a long period compared to other assets. One may invest in stocks depending upon one's interests and needs. Suppose if one expects stable returns or dividends with minimum risk one can invest in conservative stock options like healthcare or consumer staples. On the contrary, if you are open to volatile stock options, you could go for Information Technology, Financials, etc. Such stocks yield higher returns and pose more risk of price fluctuations.

Read more:  What happens when the stock market crashes?

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