What is Share Market?
Share Market is a public exchange where buy and sell shares of companies and works on the priciples of demand and supply of shares. People are willing to pay a certain amount for an asset (stock, in this case) and they are willing to sell off something they have to a certain price. Therefore, each asset has a value – which is an individual’s preference and price – which is the market’s determination of the asset’s value. The stock market works on the principle that one person’s selling price might be another person’s buying price and it tries to match it.
How Does the Stock Market Work?
To understand how the stock market works, let us first dwell somewhat into the economics of supply and demand. After all, the stock market is a demand-supply matcher and without proper demand and supply, there is no stock market.
Demand and Supply Curve:
The line ‘D’ is the demand and ‘S’ is supply with a horizontal axis being the quantity (q) and the vertical axis (p) being the price. We can see that, as price increases, supply increases, and demand decreases. The point of the stock market is to find a midpoint and proceed with the transaction.
The current price of the stock.
The stock market works like an anonymous auctioning machine – one-person auctions his assets and waits for other people to bid the right amount. When the selling price matches the buying price, the transaction happens and the stock market gets a cut.
When multiple buyers want to buy a stock, they bid for the stock and the highest price is called as the bid price.
When multiple sellers start selling the stock, they ask for a certain price. the lowest of such price is called an ask price.
The transaction happens when the highest bid price and the lowest ask price meets.
Example of Stock Market and Their Sizes
Let’s take an example of the stock market.
We can find the entire list of the stock market and their respective sizes over here. Us has the world’s two largest stock exchanges – The New York Stock Exchange which holds companies of about 30 trillion market cap in total and NASDAQ which is one third the size of NYSE. Japan comes after NYSE and NASDAQ with about 6.5 trillion USD in total capitalization of stocks and Shanghai and Hong Kong come later with 4 and 3 trillion each. Just by looking at the size of their stock markets, we can assume and take a decision on how big the companies are going to be. It gives us a general idea about what the size of the economy might be.
India has two stock markets – National Stock Exchange and Bombay Stock Exchange which, each, has 2 trillion USD in capitalized stocks. Remember that just because there are 2 exchanges doesn’t mean we can add them to get the total number of companies that have IPO’ed. Most of the companies are common in BSE and NSE, and combinedly the community is called a share market.
Also, event shares that are being traded privately are a part of the share market and once the market opens, the price reflects the non-OTC (Over The Counter) transactions that happened across the non-trading time.
Advantages of Share Market
Some of the advantages are as follows:
- Share market is the primary bridge between an investor and a company. It helps in facilitating the movement of money in one direction and the ownership via shares in another direction.
- The ability to know how people value a company is very valuable information for the owners of the company to pursue their future. Managers can gather public perception; CEOs can make strategic decisions and financial heads can look for different ways to raise money in the most efficient way.
- Stock market balances the regulations which are necessary for a proper flow of the economy.
- Share market guarantees the investor on the ownership of their shares.
- Share markets act without any prejudice – it doesn’t look at caste, creed or financial status. it holds equal opportunity for everyone.
- Share market maintains enough liquidity for the flow of information.
Limitations of Share Market
Since there are no disadvantages of share market, let us discuss the limitations of it.
- The process of IPO is tiresome and mundane – the process of debt, comparatively, is much more simple and easier.
- The process charges are sometimes small, but sometimes large too. Not all the transactions are free.
- The information flow is necessary for the analysis of how a company is doing, but because of such importance, people in power try to manipulate that information.
- There are multiple cases where share markets have been frauded for the benefit of the smart and at the expense of the common man.
Share market is like most markets – a place to exchange things and unlike most markets – because of the regulations, checks and transaction costs. It has enabled companies to grow, and people to become rich. The share market has made people who are smart and patient one of the richest – warren buffet, but also people like Jordan Belfort – a fraud, rich. Share market enabled Jeff Bezos to conduct his business by raising money. The importance of share market cannot be overstated, but it has to be kept in control.
This has been a guide to what is share market and its definition. Here we discuss components in a stock market, how does share market work along with an example, advantages and limitations. You can learn more about corporate finance from the following articles –