What is Stock Market?
A stock market or secondary market is a place where buyers and sellers of listed securities come together. This market is one of the important components of financial markets. In order to understand stock markets in detail, we shall understand the structure of the financial market in an economy.
Table of Contents
Sections of this unit explain briefly the financial markets, components of financial markets, nature and functions of the stock market, its Organization and statutory regulations for listing securities on stock markets.
Trading Methods in Stock Market
we need to understand what kind of the risks stock market can make before starting investment. Following are trading methods in the stock market:
- Stock Market Trading Method
- Short Term Trading Method
- Intermediate Term Trading Method
- Long Term Trading Method
- Doubling the Dow
Stock Market Trading Method
First, you have to find out how to make a trade by investing in stocks. In a simple way to describe this is you can break down the investment into three steps. In the first step, you have to look for the stocks you are interested in, and decide the stocks you want to buy.
On the second, you would like to keep your eye on the stocks you have invested in. On the final, you have to find out the best time to sell your stocks. You have to find out how long you would like to hold the stocks. What kind of terms your goal is. While you are holding the stocks, you would like to know any kind of news that is about the companies you have just invested in.
This news may change your decision of buying the stocks or selling them. When the price is getting down, there are three options to do, buy, sell, or keep whatever you have. For buying more stocks when the price gets down, you can lower down the price of the stocks on your hand, so if the stocks climb back higher than the price you have, you may earn more.
For selling the stocks you are holding when the price gets down, you can reduce the money you have just lost. You can also decide to keep your stocks longer and sell them when the price is higher. These three options do not have right or wrong answers, it is all depended on your decisions.
Short Term Trading Method
Short-term is the period that is less than one or two years. If you do not have spare cash, or you are hurry to get some money for some payment, stay away from the stock market, and do not even think that the stock market can solve the debt you have in short term.
Because sometimes the stocks can be unexpected in the short term, it is not a good idea for short term consideration. Short term traders buy and sell the stocks very quickly, so the profit and loss they made from the stocks is not a lot. Day trading is to hold the stocks within a day, Swing trading holds stocks within a few days, and position trading holds stocks within a few months.
Intermediate Term Trading Method
Intermediate-term is the period that is reached within five years. You have to watch out for intermediate-term investments because not all stocks are good investments for intermediate-term [3]. There are many types and kinds of stocks.
The stocks are from larger or established companies may be fairly stable and hold their values well. The stocks of untested companies may not do as well as the stocks of larger or established companies. If your goal is an intermediate-term investment, you would like to choose larger, established companies or much-needed industries of dividend-paying companies, which are like the drink, food or electric companies.
The dividend is a good income in the intermediate term. The company that pays the owner dividends has more stable stock prices as well.
Long Term Trading Method
Long-term is a period that is longer than five years. Long-term investments can beat out financial investments, which are like bonds or bank investments, in ten year period. But, even the stocks are shine in long term; you still have to do your homework to choose the right stocks.
You can still lose money when the companies you have invested in go out of business after a few years.
Doubling the Dow
The Dow dividend strategy is a way to beat the Dow. ProFunds had introduced a leveraged mutual fund, called UltraDow 30, in 2002. UltraDow 30 is not trying to beat the Dow by choosing the most undervalued companies but leverages the whole Dow to double its performance. UltraDow 30 is not like the dividend strategies, which does not require trading annually. It is for making lower tax bills.
The Dow Jones Industrial Average (DJIA) was created by Charles H. Dow in 1884. The Dow is a benchmark in the whole stock market in United State. It is not a perfect one, but it is a very popular cause of its simplicity. The Dow has the highest percentage returning in the stock market.
Each of the 30 Dow companies is powerful enough to stand for its competitors which are not listed on the Dow. The Dow is like a mini senate representing the different parts of the United State’s economy.
Stock Exchange
A stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception. NSE was incorporated as a national stock exchange.
Characteristics of Stock Exchange
- Association
- Mechanism
- Organized Market
- Market for Old Securities
- Deals With Listed Securities
- Only the Members Allowed Dealing
- Ensures Free Transferability of Securities
Association
Association: The stock market is an association of persons that may be incorporated or not.
Mechanism
Mechanism: It provides a place or mechanism through which industry and government securities may be bought and sold.
Organized Market
Organized market: It is an organized market for securities. It allows trading in securities subject to certain regulations.
Market for Old Securities
The market for old securities: It provides the ready market for old securities that have been already issued by the companies to the public. It does not deal in the fresh shares, debentures and bonds to be issued by the companies or government agencies to the public. In the stock market transactions in old securities of companies are carried on without the involvement of companies.
Deals With Listed Securities
Deals with listed securities: It offers trading facilities only for those securities that are listed by the companies or issuing agencies with the exchange. If a company has not complied with the listing procedure of a stock market then its securities are not allowed to be traded on such a stock market.
Only the Members Allowed Dealing
Only the members allowed dealing: These stock markets allow only their members to transact the business in the market. Outsiders or nonmembers cannot purchase or sell the securities on these stock exchanges.
Membership of a 2 particular stock exchange (say Bombay Stock Exchange or National Stock Exchange or Bangalore Stock Exchange) is acquired by individuals and firms only on payment of the membership fees prescribed by that stock exchange.
Ensures Free Transferability of Securities
Ensures free transferability of securities and securities evaluation: Stock exchange provides a mechanism for the free transfer of industrial securities and also makes continuous evaluation of securities traded in the market.
Functions of Stock Exchange
The functions of stock exchange can be as follow:
- Provides Ready and Continuous Market
- Provides Information About Prices and Sales
- Provides Safety to Dealings and Investment
- Evaluation of Securities
- Mobilizes Savings
- Healthy Speculation
- Mobility of Funds
- Stock Exchange Helps Capital Formation
- Liquidity in Stock Exchange
- Economic Barometer
- Control on Companies
- Attracts Foreign Capital
- Monetary and Fiscal Policies
- Proper Canalization of Capital
- Regulation of Company Management
- Barometer of Business Progress
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