The stock market is an electronic market place where Buyers and sellers

The Stock Markets

 

What is the Stock Market?

 

Having understood the IPO process and what really goes behind the company’s transition from primary to secondary market we are now set to explore the stock markets a step further.

 

By virtue of being a public company, the company is now liable to disclose all information related to the company to the public. The shares of a public limited company are traded on the stock exchanges on a daily basis. There are few reasons why market participants trade stocks.

 

The stock market is an electronic market place. Buyers and sellers meet and trade their point of view. The stock market is a place where market participants can access any publicly listed company and trade from their point of view, as long as there are other participants who have an opposing point of view. After all, different opinions are what make a market.

 

Each market participant has his or her own unique style to participate in the market. Their style evolves as and when they progress and witness market cycles. Their style is also defined by the kind of risk they are willing to take in the market. Irrespective of what they do, they can be categorized as either a trader or an investor.

 

A trader is a person who spots an opportunity and initiates the trade with an expectation of profitably exiting the trade at the earliest given opportunity. A trader usually has a short term view on markets. A trader is alert and on his toes during market hours constantly evaluating opportunities based on risk and reward. He is unbiased toward going long or going short. We will discuss what going long or short means at a later stage.

 

There are different types of traders:

 

Day Trader – A day trader initiates and closes the position during the day. He does not carry forward his positions. He is risk averse and does not like taking overnight risk.

 

Scalper – A type of a day trader. He usually trades very large quantities of shares and holds the stock for very less time with an intention to make a small but quick profit.

 

Swing Trader – A swing trader holds on to his trade for slightly longer time duration, the duration can run into anywhere between few days to weeks. He is typically more open to taking risks.

 

An investor is a person who buys a stock expecting a significant appreciation in the stock. He is willing to wait for his investment to evolve. The typical holding period of investors usually runs into a few years.

 

There are two popular types of investors…

 

Growth Investors – The objective here is to identify companies which are expected to grow significantly because of emerging industry and macro trends. A classic example in the Indian context would be buying Hindustan Unilever, Infosys, and Gillette India back in 1990s. These companies witnessed huge growth because of the change in the industry landscape thereby creating massive wealth for its shareholders.

 

Value Investors – The objective here is to identify good companies irrespective of whether they are in growth phase or mature phase but beaten down significantly due to the short term market sentiment thereby making a great value buy.

 

 

The Key Takeaways:

 

1. A stock market is a place where a trader or an investor can transact (buy, sell) in shares

2. A stock market is a place where the buyer and seller meet electronically

3. Different opinions make a market

4. The stock exchange electronically facilitate the meeting of buyers, and sellers

5. News and events moves the stock prices on a daily basis

6. Demand supply mismatch also makes the stock prices move

7. When you own a stock you get corporate privileges like bonus, dividends, rights etc

8. Holding period is defined as the period during which you hold your shares

9. Use absolute returns when the holding period is 1 year or less. Use CAGR to identify the growth rate over multiple years

10. Traders and investors differ on two counts – risk taking ability and the holding period.