How Does Stock Trading Work?
The stock market is where the appreciation of investors about a particular company plays a key role.
Stock trading is one of the oldest markets in the modern economy. In the stock markets, hundreds of buyers and sellers of stocks look to each other to trade. And this trade is independent of the company that those shares represent. Let’s get into stock trading and learn more about this crazy world of finance.
What are Stock Trading and Stock Markets?
If we talk about the stock markets, they are represented by a massive group of people. However, representation of stock trading and stock markets is changing, as the virtual world and the internet make everything possible from a distance.
When a company makes an Initial Public Offering, IPO, that company and its shares become public, and its papers begin to be sold on the different stock exchanges.
Stock exchanges, such as the New York Stock Exchange, located on Wall Street, are the places where investors or their intermediary operators meet to buy and sell shares.
Traders refer to stock markets as secondary markets. Why do we say this? Because those who participate in buying and selling shares are the current holders or those who want to be. The companies that issue the shares do not go to those markets to buy or sell their shares regularly.
Of course, there are exceptions. When a company decides to increase its capital, it issues new shares and puts them up for sale in the markets where shares are traded. Similarly, the shareholders’ meeting may decide, exceptionally, to carry out a buyback of its shares in the market.
How to Determine a Share Price
Trading in stocks that takes place on the stock markets allows the stock price to be set by auction. Buyers and sellers bid on the share price. There are precise terms for these operations. A bid is an offer that buyers make and how much they are willing to pay for a particular action. Ask is the offer of a seller, through which he says how much he intends to receive for that action.
The price of stocks is changeable. These changes can occur for a variety of reasons and usually happen in a matter of minutes. The perception that investors have of a particular company will make them want to buy or sell shares. In other words, the share price is basically governed by the principles of supply and demand. But, in turn, offers and demands become influenced by news and company results. The stock markets ultimately reflect the behaviour of investors. With fundamentals like information, the company’s behaviour, the launch of new products, earnings reports, etc., investors jump into stock trading and determine the stock market value.
We already know that the par value for shares represents a “portion” of the value of a company. When shares are issued, the simple formula for par value is the company’s value divided by the number of shares that are issued. This results in the unit and the nominal price of a share.
But, once a company goes public, and its shares are traded on the stock markets, its price will vary according to investors’ enthusiasm for those papers. If there is strong interest from investors’ part to obtain shares of a company, we are facing a demand. If that demand exceeds supply – investors who want to sell – the share price will go up. On the contrary, if more investors are willing to sell, and the supply exceeds the demand, they will fall.