HOW DOES THE STOCK MARKET WORK?

By Moksha Grover

Are you scared of investing in the stock market too? Have you heard of people losing all their money by investing in the stock market? If it is so, then you are not alone. There are many individuals with limited experience who are scared to invest in stocks after hearing the horror stories of investors losing 50% of their portfolio value[1]. The reality is that investing in the stock market carries some amount of risk. But it is one of the best methods to increase one’s net worth if carried out in a disciplined manner. Today, most rich and affluent people have the majority of their wealth from investment in stocks.

WHAT IS THE STOCK MARKET?

The stock market is where investors connect to buy and sell investments — most commonly, stocks, which are shares of ownership in a public company. ` When you purchase a public company’s stock you get entitled to the stock ownership of that particular company that is you become a shareholder. Stock ownership implies that the shareholder owns a slice of the company equal to the number of shares held as a proportion of the company’s total outstanding shares. For instance, an individual or entity that owns 100,000 shares of a company with one million outstanding shares would have a 10% ownership stake in it.[2] Most companies have outstanding shares that run into the millions or billions[3]. Anyone with a brokerage account can easily buy stocks online through the stock market. Most of the stock trades take place between investors. If we buy shares of a company, we are not buying these shares from the company itself. We are buying shares of another investor who has decided to sell his shares.

TYPES OF STOCKS

There are mainly two types of stocks that are common stocks and preferred stocks.

COMMON STOCKS

Common stock is a security that represents ownership in a corporation. Holders of the common stock vote on corporate policies and elect the board of directors. Common stock is further classified on the basis of voting rights. The basic proposition of common shares is that they should have equal rights –one vote per share system. But some companies have multiple classes of stocks, wherein each class of stock has different voting rights. In such a dual-class structure, Class A shares, for example, may have 10 votes per share, while the Class B “subordinate voting” shares may only have one vote per share. Dual- or multiple-class share structures are designed to enable the founders of a company to control its fortunes, strategic direction and ability to innovate[4].

PREFERRED STOCKS

Preferred stocks are a class of stocks that are granted rights different from common stocks. They usually have higher claims over dividends and asset distribution. Preferred stocks have limited or no voting rights in corporate governance. Preferred stocks have more priority to investors than common stocks as they possess characteristics of both bonds and common stocks.

HOW THE STOCK MARKET WORKS?

The stock market works in a very simple and easy way. In a stock market, buyers and sellers negotiate the prices of stocks and make trades. This process is carried out with the help of a network of exchange. When companies list shares of their stock on an exchange then this process is called Initial Public Offering or IPO. Investors buy and sell stocks among themselves. The supply and demand of stocks are determined by exchange networks like the New York Stock Exchange or the Nasdaq. Supply-demand helps to determine the price of the security. Price is determined by the investors and traders willing to buy or sell. Bidding by the buyer for the highest amount is done. The amount that the buyer is willing to pay is often lower than the amount sellers ask for. The difference in the amounts is called the bid-ask spread. The bid-ask concept is not much of a concern for beginner and long-term investors as the amount differs by pennies.

The working of the stock market is a fascinating example of the law of supply and demand, in real-time. If there are more buyers than sellers, then the price of stocks trends up. If there are more sellers than buyers, then the price falls down. The stock market serves two very important purposes both for the companies and the investors. For the companies, the stock market helps to raise funds from the public and helps in their funding operations. It also helps in the development and growth of the company and further expands its projects and business. As the companies grow and expand their business, shares bought by investors become more valuable, thus helping them to gain more capital. In addition to this, investors also receive dividends from the company as their profits. Public companies selling their shares need to disclose all the material information required and also give a say in how their business works to the investors.

All these processes that help in the working of the stock market seem to be complicated, but in reality, these have become relatively easy with the help of computer algorithms that help in price-setting calculations. Bid, ask and bid-ask all are available on the broker’s website with the required information. Today, the stock market is considered to be one of the most reliable ways of making money.

WHAT IS THE STOCK MARKET DOING TODAY?

Anyone can look at the performance of the stock market with the help of market indexes like the S&P 500 or the DJIA. Previously, when the covid-19 cases in India were at a hike, the stock market fell drastically. But now, in the current scenario around 3.2 per cent of the 1,216 listed companies on the National Stock Exchange that have reported their June quarter earnings have managed to defy the odds by expanding their operating margins on a sequential basis for four consecutive quarters[5]. In India, currently, there are 40 stocks that are defying a widespread trend[6].

HOW TO INVEST IN THE STOCK MARKET?

Decide the kind of account which you want to open: –

The first step to investing in the stock market is to decide the kind of account you want to open. Investment accounts can be opened for anything ranging from short-term goals to long, retirement savings to college savings etc.

Open a brokerage account: –

After deciding the kind of account you want to open, you have to open an account at a provider called a brokerage. When you choose a company, do look at their fees and available investment opportunities.

Depositing Money: –

To further continue with the investing process, you have to make an initial deposit. You can also set up recurring deposits to automate your investments going forward.

Choose your investments: –

Once you are done with the above-mentioned steps. You can buy and sell securities. You can take up mutual funds, exchange-traded funds (ETFs), individual stocks and bonds etc. These include hundreds of individual securities. It is recommended to have a diversified fund-based approach as it reduces the risk of losses and bad investments.

Purchasing chosen investments: –

After choosing what you want to buy simply enter the ticker symbol in the buy field and indicate how many shares you want to buy.

STOCK MARKET VS STOCK EXCHANGE

The stock market and stock exchange are two very different things but they are often interchanged with each other. The stock market is a wider term than the stock exchange. In fact, the stock exchange is a part of the stock market. The stock market includes many stock exchanges such as the Nasdaq or New York Stock Exchange (NYSE) in the U.S and NSE – National Stock Exchange in India.

We might have heard people talking about the performance of the stock market. When they talk about performance they mean thousands of public companies listed on multiple stock exchanges. In general, too stock market is a very broad term which comprises all the terms like mutual funds, ETFs, bonds and other securities beyond just stocks.

[1] Adam Hayes, ‘How Does the Stock Market Work?’, Investopedia (1^st June 2021) < https://www.investopedia.com/articles/investing/082614/how-stock-market-works.asp> accessed 1st September 2022

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Chiranjivi Chakraborty, ’40 Stocks that are Defying a Widespread Trend in India Inc right now, The Economic Times (1st September 2021) <https://economictimes.indiatimes.com/markets/stocks/news/40-stocks-that-are-defying-a-widespread-trend-in-india-inc-right-now/articleshow/85822852.cms > accessed 1st September 2021

[6] Ibid.

Impact of Covid-19 on the Corporate Sector in India

The impact of coronavirus pandemic on India has been largely disruptive in terms of economic activity as well as a loss of human lives. Almost all the sectors have been adversely affected as domestic demand and exports sharply plummeted with some notable exceptions where high growth was observed. An attempt is made to analyze the impact and possible solutions for some key sectors.

Food & Agriculture

Since agriculture is the backbone of the country and a part of the government announced essential category, the impact is likely to be low on both primary agricultural production and usage of agro-inputs. Several state governments have already allowed free movement of fruits, vegetables, milk etc. Online food grocery platforms are heavily impacted due to unclear restrictions on movements and stoppage of logistics vehicles. RBI and Finance Minister announced measures will help the industry and the employees in the short term. Insulating the rural food production areas in the coming weeks will hold a great answer to the macro impact of COVID-19 on Indian food sector as well as larger economy.

Aviation & Tourism

The contribution of the Aviation Sector and Tourism to our GDP stands at about 2.4% and 9.2% respectively. The Tourism sector served approximately 43 million people in FY 18-19. Aviation and Tourism were the first industries that were hit significantly by the pandemic. The common consensus seems to be that COVID will hit these industries harder than 9/11 and the Financial Crisis of 2008. These two industries have been dealing with severe cash flow issues since the start of the pandemic and are staring at a potential 38 million lay-offs, which translates to 70 per cent of the total workforce. The impact is going to fall on both, White and Blue collar jobs. According to IATO estimates, these industries may incur losses of about 85 billion Rupees due to travel restrictions. The Pandemic has also brought about a wave of innovation in the fields of contactless boarding and travel technologies.

Telecom

There has been a significant amount of changes in the telecom sector of India even before the Covid-19 due to brief price wars between the service providers. Most essential services and sectors have continued to run during the pandemic thanks to the implementation of the ‘work from home’ due to restrictions. With over 1 billion connections as of 2019, the telecom sector contributes about 6.5 per cent of GDP and employs almost 4 million people. Increased broadband usage had a direct impact and resulted in pressure on the network. Demand has been increased by about 10%. However, the Telco’s are bracing for a sharp drop in adding new subscribers. As a policy recommendation, the government can aid the sector by relaxing the regulatory compliances and provide moratorium for spectrum dues, which can be used for network expansions by the companies.

Pharmaceuticals

The pharmaceutical industry has been on the rise since the start of the Covid-19 pandemic, especially in India, the largest producer of generic drugs globally. With a market size of $55 billion during the beginning of 2020, it has been surging in India, exporting Hydroxychloroquine to the world, esp. to the US, UK, Canada, and the Middle-East.

There has been a recent rise in the prices of raw materials imported from China due to the pandemic. Generic drugs are the most impacted due to heavy reliance on imports, disrupted supply-chain, and labour unavailability in the industry, caused by social distancing. Simultaneously, the pharmaceutical industry is struggling because of the government-imposed bans on the export of critical drugs, equipment, and PPE kits to ensure sufficient quantities for the country. The increasing demand for these drugs, coupled with hindered accessibility is making things harder. Easing the financial stress on the pharmaceutical companies, tax-relaxations, and addressing the labour force shortage could be the differentiating factors in such a desperate time.

Oil and Gas

The Indian Oil & Gas industry is quite significant in the global context – it is the third-largest energy consumer only behind USA and Chine and contributes to 5.2% of the global oil demand. The complete lockdown across the country slowed down the demand of transport fuels (accounting for 2/3rd demand in oil & gas sector) as auto & industrial manufacturing declined and goods & passenger movement (both bulk & personal) fell. Though the crude prices dipped in this period, the government increased the excise and special excise duty to make up for the revenue loss, additionally, road cess was raised too. As a policy recommendation, the government may think of passing on the benefits of decreased crude prices to end consumers at retail outlets to stimulate demand.

Beyond Covid: The new normal

In view of the scale of disruption caused by the pandemic, it is evident that the current downturn is fundamentally different from recessions. The sudden shrinkage in demand & increased unemployment is going to alter the business landscape. Adopting new principles like ‘shift towards localization, cash conservation, supply chain resilience and innovation’ will help businesses in treading a new path in this uncertain environment.

Coronavirus (COVID-19), a virus that grew stealthily has become one of the deadliest viruses that are killing people worldwide. This virus took birth in Wuhan city of China and since then have traveled to more than 160 countries. The World Health Organization (WHO) has declared Coronavirus as a pandemic. It has become a mass scare and is leading to the deaths of thousands of people in numerous countries including China, Italy, Iran, Spain, the US, and many more. In India, this pandemic started on 30 January 2020 by affecting an individual who had a travel history from Wuhan, China.

The world economy is seeing its greatest fall ever. Coronavirus has largely impacted the growth of almost every country and is responsible for the slump in GDP worldwide. Like other countries, India is also impacted by this virus but not largely. Almost every industry sector has seen a fall in their sales and revenue. India’s GDP growth has fallen to 4.7% in the third quarter of 2020.

Inflation and Affected Industry:

China is one of the largest exporters of many raw materials to India. Shutting down of factories has damaged the supply chain resulting in a drastic surge in the prices of raw materials. Some of the other products that have seen a rise in their prices are gold, masks, sanitizers, smartphones, medicines, consumer durables, etc. The aviation sector and automobile companies are the hardest hit among the rest. With no airplane landings or take-offs globally and restricted travel has brought the aviation and travel industry to a halt.

Slump in Share market:
Share markets that include Sensex and Nifty are on nose dive since the occurrence of this pandemic (COVID-19). Sensex has declined close to 8000 points in a month. As of 12 March 2020, share market investors have lost approximately Rs. 33 lakh crore rupees in a month. This could be the beginning of a recession that the Indian market will never want to witness. Investors are advised to stay safe and invested in this virus-infected stock market. Few industries that can benefit from novel coronavirus during the time of the market crash are pharmaceuticals, healthcare, and Fast Moving Consumer Goods (FMCG).

Cash flow Issue:
Due to this outbreak, almost 80% of Indian companies have witnessed cash flow difficulty and over 50% of companies are facing operations issues. As per the Federation of Indian Chambers of Commerce and Industry (FICCI), 53% of companies are impacted by COVID-19. Slow economic activity is resulting in cash flow problems eventually impacting repayments, interest, taxes, etc.

Coronavirus (COVID-19), a virus that grew stealthily has become one of the deadliest viruses that are killing people worldwide. This virus took birth in Wuhan city of China and since then have traveled to more than 160 countries. The World Health Organization (WHO) has declared Coronavirus as a pandemic. It has become a mass scare and is leading to the deaths of thousands of people in numerous countries including China, Italy, Iran, Spain, the US, and many more. In India, this pandemic started on 30 January 2020 by affecting an individual who had a travel history from Wuhan, China.

The world economy is seeing its greatest fall ever. Coronavirus has largely impacted the growth of almost every country and is responsible for the slump in GDP worldwide. Like other countries, India is also impacted by this virus but not largely. Almost every industry sector has seen a fall in their sales and revenue. India’s GDP growth has fallen to 4.7% in the third quarter of 2020.

Efforts from CII and Govt. of India:
Confederation of Indian Industry (CII) has suggested the RBI reduce repo rate up to 50 basis points and also asked for a reduction of 50 basis points on the cash reserve ratio. The government is planning to set up an amount to support MSMEs to overcome the crisis during this phase of shut down, cash flow difficulty, and working capital issues.

Written by: Ananya Kaushal