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Stock Markets – Decrypted

My first experience with the stock market was when one day I unintentionally swiped my TV channel to CNBC. I wondered how people really make money using a band of fancy names and lots of greens and reds. I tried listening to the anchor and the first two lines sounded like this to me

“BLAH BLAH BLAH SOME VERY FANCY WORD BLAH BLAH BLAH ANOTHER JARGON”.

I am sure many people will be in a position to understand my agony. So for all of those people let’s try and understand what really is the stock market and how can we make money out of it.

Like any other market the stock market is a place where a certain product is bought and sold by the players of the market. So if we understand how this market works, who are these Players what all are the products and how do they decide when and what to buy and when and what to sell. Volla we might have a chance of making some money.

The Market

Stock market is the place (physical or virtual) where shares of companies are issued, bought and sold. The most important role that the stock market plays is that it determines the price at which these shares can be traded i.e. a price at which a buyer is willing to buy and a seller is willing to sell. The movements in the overall stock market i.e. the reds and the greens represent the change in the price of the shares from its last trading session a green indicates an upward movement – an increase in price while the red means the opposite. The movement of the overall market is tracked by the movement in the price of the index say NASDAQ, NYSE, S&P etc. So basically you can consider a stock market as say a fruit market supposedly you are willing to buy bananas by selling oranges; you go to this place meet a buyer of oranges agree upon a price, take the money go to the seller of bananas give the money and go home have a tasty banana shake that simple. So where does this index fit in our example. You can say that this index is the price of an entire fruit plate. While the cost of your fruit plate will be calculated using the weight proportion of each fruit in the plate, the index will be calculated using the market capitalization of each share forming the part of the index. You are now officially the Cub of Wall Street.

The Product

But wait we are not dealing with oranges or apples are we what we are dealing with here is shares. So what sort of a product is this? What is its use? Can we make a milkshake out of it? Well, you definitely can't.

A share or a common stock is a part of the equity of the company so when you buy a company’s stock you become one of the owners of the company- “Now that is something worth boasting about”. These financial instruments can be used to park your surplus and earn some return on it just like your bank deposits. Above that these instruments can also be used for speculation.

The Players

There are multiple bifurcations possible however the most commonly heard are Bulls and bears. Bulls are people who predict that the stock market will go upwards from its current state and hence are engaged in buying while the bears predict that the stock market will fall and hence are engaged in selling.

So how do they decide whether to buy or sell and what to buy or sell?? There are various methods of determining the same while the crude and the popular ones are tips from say stock brokers there are more scientific approaches which deal with forecasting of past price trends (technical analysis) or understanding the future prospects of the company (fundamental analysis).

So what are we waiting for go call your broker open a trading account invest money and become….

Written by Shaunak Bhatt.

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