What are stocks and how do the stock market work?

The World Of Bulls And Bears

4 Min Read |  May 07, 2021

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‘Risk comes from not knowing what you’re doing.’ - Warren Buffett                          

Stocks are for the Richies, said every human who assumes stocks to be gambling. But, it has been clear over time that the economy booms when the stock market is booming. What are stocks? Why does the market always rise and fall? 

I hear you ask. 

To understand the working of stocks, it helps to understand a very simple business.

Let’s take an example, say Tara, a baker who creates magic with homemade delicacies. With all the encouragement received, Tara wanted to try her luck in setting up her own bakery. To assemble the required funds, she had decided to take out a loan which was unfortunately refused to her. 

After searching for other ways of owning a business, she decided to welcome people who were interested to own a part of her business. Soon there were about 10 people interested in investing. With all the investments received, she has opened franchises in various cities and has seen some green stalks in the market soon. As a token of gratitude, she thought that it would be great to share the profits among the initial investors of her bakery.  

Here, the investors are called Primary Shareholders since they directly participated in the transactions of the organization. With a goal to hitch their wagon, she has issued an initial public offering.

Note:- IPO is a process where shares of a private company are offered to the public. This gives an opportunity for the company to gain capital by issuing shares through the primary market.

Evolution of Stocks

Would you believe if I say that during 1400 -1500 the world’s first stock market began without stocks? 

Yes, as illogical as it sounds, Bruges, Flanders, Ghent, and Rotterdam in the Netherlands started their own stock market without using stocks. Instead, they dealt with government affairs and debt. Throughout history, it has been accepted that Antwerp had the world’s first stock market system. Since then it has been the commercial centre of Belgium. 

But the evidence of trading in India takes us back to the 1850s when 22 stockbrokers would gather under banyan trees in front of Bombay Town Hall. The location of these meetings changed multiple times to accommodate an increasing number of brokers.                                                                   

In India, the most prominent stock exchange is the Bombay Stock Exchange in Dalal Street, Mumbai. It was established in 1875 and is the oldest and first stock exchange in Asia. It was formerly known by the name of– Native Share & Stock Brokers Association. Another leading government-owned stock exchange centre in India is the NSE.

NSE started trading in 1994. Though it is considered that NSE is India’s largest stock exchange centre, the BSE holds the position of Asia’s oldest stock exchange centre and also stands seventh in the world stock exchange centres with a huge market capitalisation. 

Earlier, the stocks were sold in the form of certificates of ownership, which is now handled virtually on a large basis. Apps like Groww, Upstocks etc. have taken over the interests of budding investors. 

The Bear, the Bull and the History

If you’re someone who spends some time observing the trends of the market, you must have either seen an animation of a bull or a bear popping on the screen during the market closing.  To know more about their significance, let’s turn to the pages of the Gold Rush Era in California, USA. There has been evidence of a wild sport enjoyed by the miners there. This involved pitting bears and bulls together in a fighting ring. This sport was later made illegal, but the strength of these two animals was metaphors according to the modern stock market usage. The bull's tendency to slash upward and the bear's tendency to strike downward have taken the terms up and down respectively in the Wall Street stock market.

The Bull market represents taking the price to a top-notch over a period of time. This can be weeks, months or years. Usually, the average time period of a bull market is about 97 months. A bull market is observed when the economy is rising and inflation is tame.

For example, there have been 5 bull runs in the history of the Indian market since 1985. Out of these 5, the longest and the slowest bull was between 2013-2019. This lasted for about 72 months which gave returns of about 220%.                                                                                               

Bear markets have a shorter period of time compared to bull markets. This is usually present for 18 months. There are some other terms popular among Wall Street as well as other stock market giants known as ‘Pull backs’ and ‘corrections’ which are put into use when there’s a fall in the market for about a few weeks or months. 

India had experienced four bear markets to date. Out of which, the fourth one is being driven by the novel corona virus’s effect on the economy.

When do the Stock Exchanges Take Place in India? 

We’re all well aware of the importance of time, but do you know that every minute is important in a stock market. Let’s know more about these timings that will help us not let go of any opportune moment. The stock market sessions in India are generally divided into three sessions, i.e.

  1. The pre-Opening session:-The first session starts at 9:00 A.M and closes at 9:15 A.M. These 15 minutes might just occupy a quarter of your watch, but they play a crucial role in controlling the volatility of the market. This session is further divided into 3 other sessions namely:- 

  • Order entry session: -Occurs between 9:00 A.M – 9:08 A.M for placing orders to buy or sell stocks.

  • Order matching session:-Occurs between 9:08 A.M- 9:12 A.M for matching the orders, which means that when the bid or share price of the buyer is equal to or more than that of the seller. This session checks the compatibility of the orders.

  • Buffer: - Occurs between 9:12 A.M to 9:15 A.M for a smooth transition to the normal session.

A question might arise here. 

Even after a planned schedule why does the market appear volatile? 

Well, that is because these 15 minutes are usually ignored by the investors since an average investor is not generally aware of the benefits of this time.

  1. Normal Session: - The normal session begins after the pre-opening session and this is when most of the stock exchanges take place. The market ends at 3:30 P.M. Ten minutes past this time the closing prices of the market are determined.

  2. Post- Closing Session: - The third session begins at 3:40 P.M and ends at 4:00 P.M. The investors and the sellers continue to trade even during this session.

To know more about the stock market sessions in India click here.

Stock Market and the Pandemic 

The new normal has paved a long way for digitalisation all over the world. The strange behaviour of the market was observed when the coronavirus (COVID-19) had been declared as a pandemic in February 2020. The spread of the virus has crushed the stock market, but to the surprise of all stock market gurus, the market bounced back in an unimaginable way. 

But on the other hand, many small businesses have been struggling, and more than 10.7 million people are unemployed, according to Labor Department monthly data. It’s proved that it's not the real value of a company that drives its stock prices but it’s the most popular story people believe about these companies. They’re no less than a success mantra that’s driving the world’s economy. 

By the way, have you started investing?

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