The global stock market works on the demand and supply chain of any stock. The company that has good potential in the future, their stock demand will increase, and the prices of stocks will rise. And the company will issue more stocks to generate more capital so the company can grow.
What Is Stock?
A stock is a proportion of any company or corporation’s ownership. It is a financial instrument that means that the stockholder can claim the proportion of the earnings or assets of that corporation or company. Stocks are called shares or equity.
Why does a Company Issue Shares?
The answer is simple, and that is to generate capital. However, let’s imagine a scenario where you have started a small company, and day by day, it is doing well and growing. Now, you want to expand your company. But wait, you will need a large amount of capital. The reason is simple, you will need a factory for production, lease an office, hire employees, buy equipment and raw materials so that you can expand, and there are many other expenses that are involved.
To fulfill all the expenses and get all the necessary things, you will need a vast amount of capital. That’s where the “Share” comes. At that time, you will issue shares and sell some portion of your company’s ownership so that you can generate that capital from people.
What Is Stock Exchange?
The stock exchange is a secondary stock market where shares are bought and sold. Investors buy and sell stocks in this market within a fixed hour. All the shares enter the stock market from the primary market. And, there are lots of investors who exchange shares to themselves an infinite number of times.
But, it’s a very crucial fact that the company that issued shares can’t buy the shares from the stock exchange. The shares can issue new shares or can perform a stock buyback, but they can’t buy the stocks back from the stock exchange directly. In the meantime, investors can’t buy or sell the stocks to the company either. They have bought the stocks from an investor, and they will also sell the stocks to an investor as well.
How Are Stock Prices Set?
The most common methods for setting stock prices are:
It is a traditional way where people come together and auction the shares. You have to understand two terms for stock auction: 1. Bid, 2. Ask. Now, the bid is the price that the buyer makes for the stock, and the ask is the price that the seller makes to sell the stock. The overall auction is controlled by a middleman who is a stockbroker. A stockbroker also provides the platform to all the traders.
Supply and Demand
The stock price is also determined by the supply and demand from that supply. Suppose there are more buyers for a stock than the number of sellers, and that stock’s price will go up. On the other hand, if the number of sellers is greater than the number of buyers, then the price of that stock will go down. So, demand and supply play a key role in setting stock prices.
The stock market initially depends on the supply and demand of the stocks of any particular company. If the stocks are in demand, then their price will rise, and if they are not in demand, the price will go down.