What is a stock market and how does it work?

What is a stock market and how does it work?

The truth is that investing in the stock market is risky, but when done correctly, it may be one of the most effective methods to increase one’s net worth. Let’s start with the definition of a stock market and its many varieties in order to comprehend the stock market’s mechanics.

Existing owners can deal with potential purchasers on stock exchanges, which are secondary markets. It’s vital to remember that companies that trade on stock exchanges don’t purchase and sell their own stock on a regular basis. Companies may buy back stock or issue new shares, but these are not day-to-day activities and frequently take place outside of an exchange’s structure.

So, when you purchase stock on the stock market, you’re not purchasing it from the firm; instead, you’re buying it from another shareholder. When you sell your stock, you don’t sell it back to the firm; instead, you sell it to another investor.

Important points to remember

  • Stocks reflect a company’s ownership equity and provide shareholders with voting rights as well as a residual claim on profits in the form of capital gains and dividends.
  • On stock exchanges, individual and institutional investors come together to purchase and sell shares in a public setting.
  • As buyers and sellers submit orders, supply and demand determine share prices.
  • To promote an orderly and fair market, professionals or market makers frequently control order flow and bid-ask spreads.
  • Companies that list on exchanges may benefit from improved liquidity and the capacity to obtain money, but they may also face higher fees and regulations.

Stocks of various kinds

While there are two forms of stock: common and preferred, the word “equities” refers to common shares since their aggregate market value and trading volumes are many orders of magnitude more than preferred shares.

The main difference between the two is that common shares usually come with voting rights, allowing common shareholders to participate in corporate meetings (such as the annual general meeting or AGM) where issues like board of director election and auditor appointment are voted on, whereas preferred shares usually don’t. Preferred shares are so titled because preferred shareholders get dividends and assets before common shareholders in the event of a liquidation. Want to invest in shares? Then 5paisa can be your best companion. 

Why Do Corporations Issue Stock?

Today’s corporate behemoth was most likely founded as a modest private company by a visionary entrepreneur a few decades ago.  One can easily enjoy trading in stocks and earning money. You can make it a part of your passive income and enjoy earning easily with some understanding. 


Developing at such a fast pace, however, demands a massive inflow of capital. An entrepreneur will need to rent an office or factory, recruit people, acquire equipment and raw materials, and build up a sales and distribution network, among other things, to turn a concept into a working business. These resources will require a significant amount of cash, depending on the size and scope of the company.

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