Stock markets: What does it mean and why should you invest in it?

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Stock market is one of the key investment areas that attract money managers. It is looked upon as a long-term hack to multiply your wealth. However, such investment tools are still considered risky and often intimidating too. The confusing jargons surrounding stock markets often forces people to show resentment to such financial practices.

So for those who only have word-of-mouth information about stocks, here’s a quick breakdown explaining this investment route.

What is a stock market?

The stock market isn’t a single market but a collective entity of stock exchanges spread across the globe where traders and investors buy and sell shares of listed companies as well as exchange-traded funds (ETFs). The price of each share in a stock exchange fluctuates as a response to the law of supply and demand. This law is affected by several political, geopolitical, and economic factors.

One share is like the tiniest ownership stake in a huge public corporation. The higher price of a particular stock only reflects the expectations of its investors on organization’s future earnings.

Stock markets are subject to government regulations and have their own set of rules as well. India has two major bourses—BSE (formerly known as the Bombay Stock Exchange) and National Stock Exchange (NSE).

Globally, New York Stock Exchange (NYSE) and Nasdaq are the world’s biggest stock exchanges.

What is a primary stock market?

As soon as a company goes public via an initial public offer (IPO), it is open for the primary market wherein companies directly sell shares of stock to interested investors. Typically, these aren’t individual investors but institutional investors.

What is a secondary stock market?

The secondary market space involves only the investors and no companies. Individual investors can buy stocks of individual companies in an ETF. This is the space where people actually invest their money in stocks. They buy and sell according to the market scenario.

What are bull & bear markets?

After a significant duration of falling stock prices, when the market witnessed a 20% uptick – it is called a bull market. A thrust of optimism in the overall economy leads to a bull market situation.

When things look positive, investors pour in a lot of money into the markets as there is a strong chance of higher returns. A bull market stays for until a major downturn is experienced.

Meanwhile, when the market experiences a 20% downtick – it is called a bear market. Economic distress might be one of the many reasons for market sentiments going haywire. For example, the rising cases of coronavirus dampened the stock market in March 2020.

In such scenarios, the only way forward is to have patience and wait for the markets to recover.

Why invest in stock markets?

Anyone who believes that a strong economy will automatically help companies increase earnings would like to invest in stock markets. Optimism says developing countries like India have a high growth potential which means the country’s economy will soar higher in times to come.

This is a good enough reason to invest in the Indian stock market as a smart investment strategy for long-term financial goals.