How Stocks work ?

How Stocks Trade ??
Most stocks are traded on stock exchanges as already mentioned(in India Bombay Stock Exchange and National Stock Exchange of India), which are places where buyers and sellers meet and decide on a price.

Before we go on, let's distinguish between the primary market and the secondary market. The primary market is where securities are created (by means of an IPO) while, in the secondary market is what people are referring to when they talk about the stock market. It is important to understand that the trading of a company's stock does not directly involve that company.

What Causes Stock Prices To Change ?
Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up.

Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative.

That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth. Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding.

The most important factor that affects the value of a company is its earnings,its profits,and in the long run no company can survive without them. It makes sense when you think about it and try to analyse it. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall.

The important things to grasp about this subject are the following:

1. At the most fundamental level(involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets), supply and demand in the market determines stock price.

2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.



3. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that
Thanks... ultimately affect stock prices.

4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.
I will try to discuss the things further on regular basis...
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