Stock market

Stock market is known as the cradle of capitalism. It is a place where companies come to raise their share capital and investors go to invest their surplus funds. Stock market essentially discharges the functions of "the invisible hand" that channels investment into the most productive ventures so as to optimize the overall productivity of the economy.

Stock Market is a place where financial instruments like shares, debentures, commercial papers, bonds etc are bought and sold.  Stock markets are popularly known as stock exchanges.  There are many popular stock markets in the world. NASDQ, Tokyo Stock Exchange, London Stock Exchange are the most popular of the lot.  There are many participants in a stock market.  Investors, Speculators, Arbitrators, Traders are different type of participants of a Stock Market.  Brokers are intermediaries who bring together various participants in a Stock Market.

Most important function of the stock market is to facilitate trading of financial instruments.  Brokers submit a quote at the stock market on behalf of their clients.  Quotes are specific to the scrip.  The quote of the buyer is matched to the quote of the seller and the transaction takes place.  All transactions entered in a stock market are guaranteed by the Stock Exchange.  That means if the buyer or seller fails to meet his obligation, the stock exchange steps in and meets the commitment of the participant. This instills a lot of confidence and credibility about the sanctity of the transaction amongst the investing public. That is the reason why a stock exchange is preferred by investing public to a gray market in shares even though the latter has much lower transaction cost.

All the participants in the stock market have the same objective i.e. to make a profit. Investors invest in the stock market with the hope that market value of their investment will go up and they will be able to make higher returns than in bank deposits.  Arbitrages buy in one market and sell in another market with an objective of making a profit. For example if the shares of Caltex are quoting at a lesser price at Amsterdam Stock Exchange in comparison to London Stock Exchange, arbitrages will buy at Amsterdam and sell at London.  This will result in a rise in share price at Amsterdam and fall in share price at London, thus bringing in price equilibrium among various stock markets in the world.

Speculators operate in the stock market with an objective to make quick money by guessing the direction of the stock market.  If they expect the market to rise, they buy shares with a very small investment horizon. Similarly if they expect a correction in stock market, they sell shares, thus imparting an essential element of liquidity in the market. Those who expect a rise in the stock market and buy relentlessly are known as bulls.  Bulls keep the buying pressure and attempt to take the stock market to dizzy heights.  Bull market is a market scenario where bulls have complete control over the stock markets.  When bull market reaches its peak, investors will make huge profit. Many investors start booking their profit by selling the investments.  Slowly the bulls find that there are more shares than they could perhaps buy in the stock market.  When supply of shares exceeds the demand in the stock market prices start coming down.  This is called correction.  Correction is a normal phenomenon in any bull market.  Some times if the sellers are huge in numbers, a negative sentiment takes over the stock market.  Every one attempts to sell their investments with an objective to salvage profit or reduce losses.  When this phase set in, bulls loose control.  Sellers will control stock market.  This phase is popularly known are bear run.  Bull and Bear runs follow a cyclical pattern in a stock market.

Normally in a booming economy, companies make huge profits, so markets tend to be bullish.  When the trend of the economy reverses Stock Market experience a bear hug. Thus the Stock markets reflect the health if the economy and are often called as "barometers" of the economy.

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