What is the Stock Market? Definition, Types, and Significance for Investors

Stock Market Definition and Types

A stock market is where the buyer and seller meet to trade stocks. Stocks (shares) of publicly traded companies are sold and bought in stock markets. You get a fraction of ownership of that company which makes the buyer a shareholder when you buy a stock., You earn money when the price of the share increases and lose money when the price decreases. Price fluctuations in stock trading are determined by the theory of supply and demand. The theory says that the more the demand, the more the price which means stock prices are fluctuated and traded in a stock market according to the supply and demand balance. Stock market algorithms automatically detect prices for ease of trade. 

The size of the stock market is gauged by the market capitalization of the companies that are listed on the stock exchange. In total, there are 60 stock exchanges worldwide. There are currently no stock exchanges in 40 nations. Market cap is defined as the total value of all the shares of the company. The size of the stock market is about $93.7 trillion as of early 2022. This is almost double when it is compared to $2.5 trillion in the late 1970s. According to market capitalization, the Mongolian Stock Exchange was the smallest stock exchange in the world as of 2006. 

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The oldest stock market in Asia, according to reports, the first organized stock exchange in India opened its doors in Bombay in 1875. The Ahmedabad Stock Exchange was established in 1894 to promote the trading of shares of the region’s textile mills. As the nation’s first dematerialized electronic exchange, NSE was founded in 1992. The NSE was the first exchange in the nation to offer a cutting-edge, completely automated screen-based electronic trading system that provided simple trading options to investors dispersed throughout the whole nation. As of August 2021, the National Stock Exchange ranked as the ninth-largest stock exchange in the world with a total market capitalization of more than US$3.4 trillion. As of August 2021, the National Stock Exchange ranked as the ninth-largest stock exchange in the world with a total market capitalization of more than US$3.4 trillion.

What is a Stock Exchange?

A stock exchange is a place where different securities like stocks, bonds, currencies, and commodities are bought and sold. A stock exchange is often referred to as Bourse (a french word) in European countries.

stock exchange
Stock Exchange

Stocks of publicly held companies are traded on a stock exchange. The only exception is the over-the-counter stocks. Over-the-counter stocks are traded through a network of brokers instead of a stock exchange. 

India has two leading stock exchanges – The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). An investor takes a position in the stock exchange to enter a trade. A position is when you buy a stock or a stock instrument-like option. You exit a position when you complete the trade by selling the instrument. 

The primary function of a stock market is to ensure the trades happen fairly to help companies to raise money while making investors to join the economic ecosystem.. The stock exchange ensures enough infrastructure such as trading algorithms, seller and buyer matching systems for a better investment and financial growth for the macro and microeconomics

Three main instruments are traded in the stock market, including equities, bonds, commodities, etc.Of which, the five most essential instruments are equities, bonds, commodities, Exchange-traded funds, and some mutual funds.

Equities: An equity share, sometimes referred to as an ordinary share, is a form of fractional ownership that carries with it the greatest amount of entrepreneurial risk for a trading firm. These shareholders have the ability to cast ballots in any organization.

Debt:  Debt instruments provide for a specific payment to be made to the owner, typically with interest. Mortgages and government or corporate bonds are two examples of debt instruments. The market for trading equity instruments is known as the equity market

Derivatives: Financial derivatives are financial instruments that are tied to a particular financial instrument, indicator, or commodity and allow for the independent trading of particular financial risks on financial markets.

Mutual funds: Mutual funds an investment option designed to simplify investing. With the help of other investors, you can pool your cash through mutual funds to buy a variety of stocks, bonds, or other securities that might be challenging for you to compile on your own. This is frequently called a portfolio. The entire value of the securities in the portfolio, divided by the number of outstanding shares of the fund, yields the mutual fund’s price, commonly known as its net asset value (NAV).

Exchange-traded funds: An ETF is a collection of securities that you can purchase or sell on a stock market through a brokerage company. Almost any asset class imaginable, including traditional investments and so-called unconventional assets like commodities or currencies, is available as an ETF. Innovative ETF structures also enable investors to obtain leverage, short markets, and avoid paying short-term capital gains taxes.

What are the responsibilities of a Stock Exchange?

The responsibilities of the stock exchange are to ensure the smooth running of multiple factors related to the buying and selling of securities, including shares.

responsibilities of a Stock Exchange
Responsibilities of a Stock Exchange

There are five primary responsibilities a stock exchange has. They are –

  1. Increasing the mobilization of investment – Millions of potential investors have trillions of money for investment. The stock exchange should function in such a way that it can win the confidence of such investors and tempt them to invest in the stock market.
  2. Valuation of securities – The stock exchange must use its algorithms based on supply and demand to value security accurately. 
  1. Transactional safety – Ensure the safety of all transactions by double-checking the price and the numbers before every transaction while making sure the speed is not compromised. 
  1. Public awareness – Make the public aware of the opportunity investing provides.
  2. Facilitates liquidity – Ensure there are no hiccups for the buyer and seller to commit their trade. 

Apart from these a stock exchange’s primary socioeconomic function is to value stocks and provide a well-functioning market for the purchase and sale of securities by investors. Because it provides guidance for the distribution of limited financial resources, the “correct” valuation of securities is crucial. The ability of investors to participate in the profits of publicly traded corporations is the secondary function of the stock market.

One of two approaches exists for investors to gain from stock purchases. Some stocks offer consistent dividends. Investors can also make money from their stock purchases by selling their shares at a profit if the price of the stock rises from the price at which they bought them. The reorganization of the country’s economy and the growth of the industrial sector in particular are both significantly aided by stock exchanges.

India is an emerging nation, and in those nations, these exchanges are essential. In addition to time that they help to mobilize savings, they also ensure safety. The level of wealth creation is promoted by these mobilizations.

What types of Securities Stock Exchanges cover?

Any financial instrument that can be traded is considered to be a security. The characteristics of what can and cannot be classified as securities typically depend on the legal system of the country where the assets are exchanged.

Types of Securities
Types of Securities

Below are four types of securities commonly traded in the stock market.

  • Equities – Equity shares are offered to the general public and have no redeeming features. It provides long-term finance for businesses. Ordinary shares sometimes referred to as equity shares, provide each stockholder a portion of ownership in the company. Equity shareholders have the ability to vote, get a portion of the company’s profits, and seize its assets.
  • Debt – An agreement known as a debt instrument permits one party to lend money to another party, who agrees to return the loan principal and interest. Because the lender receives a defined rate of interest during the course of the instrument, debt instruments are also known as fixed-income assets.
  • Derivatives – Financial instruments known as derivatives derive their value from one or more underlying securities or assets (e.g., a stock, bond, currency, or index).
  • Hybrids – A security with characteristics of both hybrid and equity.

These are the main types of securities that have a monetary value and can be traded on the stock exchanges. 

Banks, insurance companies, pension funds, or hedge funds are the main investors in stock markets. The definition and explanation of the main stock market investors are listed below.

Who does Invest in Stock Exchanges?

  1. Banks: A bank is a financial institution that deposits the public’s money and offers them lending options. Banks invest in stock markets to appreciate their capital.
  2. Insurance companies: Insurance companies have plans that help people invest as well. In such cases, their money is invested in stock exchanges as well.
  3. Pension funds: Pension fund helps investors create a retirement corpus. Pension funds invest in the stock exchange for capital appreciation and protection.
  4. Hedge funds: Hedge funds are institutional investors’ mutual funds. Institutional investors invest large sums of money, unlike retail investors, who invest comparatively lower sums of money. Hedge funds invest in stock exchanges to grow institutional investors’ money. 
  5. Mutual funds: Mutual funds are a type of fund that has a preset portfolio. Mutual funds are designed to make investing easier. A mutual fund will invest in stock exchanges to create its portfolio.
  6. Retail investors: Retail investors are individual investors who buy and sell stocks on the stock exchanges. They are the largest in terms of quantity. Retail investors’ participation is the most prominent in the stock market. 

The investors in different stock markets, also known as market participants, work together to ensure the smooth functioning of the same. These participants are not connected entities, they have a reasonable comprehension of the asset or liability, they are able to participate into a trade to buy or sell the item, and they are motivated to do so. They invest in different security types in stock market.

What are the Stock Exchange Physical Features?

The physical features of stock exchanges are a thing of the past. In the olden days, it was a physical entity where the stockbrokers, sellers, and buyers would come together and make their trade. This was similar to a physical marketplace. 

Nowadays, physical stock exchanges are rare. Only some exchanges like the NYSE have highly limited physical functionalities. That, too, is kept for some institutional investors who still prefer traditional methods of trading.  

Are there non-physical stock exchanges?

Stock exchanges exist in physical forms today. Stock exchanges are able to migrate to physical form because they exist in different servers now. The servers will have data on everything related to transactions. This data available in the stock exchange servers are made available with limitations to every entity, such as the seller, buyer, etc. so that the trade is made smoothly. Examples of this are plenty.

The biggest stock exchanges in the world, The New York Stock Exchange and the NASDAQ, are completely online, with only a small portion of operations at NYSE kept physical to reminisce the old process. In India, both National Stock Exchange and Bombay Stock Exchange have completely shifted online. 

Do the Stock Exchange work over a computer network?

Yes, modern technologies allow stock exchanges to work completely over computer networks. Investors get access to the network through stockbrokers. Stockbrokers allow access through trading accounts. A trading account gives an investor complete access to their trading activities. They can sell, buy, open or close a position, and much more.

Stock exchanges work online through the use of computer servers. Working includes not only selling and buying shares but also the pricing of the shares. Pricing is done using computer algorithms that stock exchanges use. This algorithm work by gauging the demand and supply stock is seeing. Most exchanges now use advanced safelight communication technology to ensure accuracy and speed. 

What is an Open Outcry Exchange?

An open outcry system is when hand and voice signals are used in stock exchanges to communicate trading signals. Trading signals given by traders are used to execute trades. For instance, a sell signal gives the go-ahead to sell a particular security. The traders who use open outcry exchange are called floor traders. 

Open Outcry Exchange
Open Outcry Exchange

An open outcry system was used before the current electronic system. Today, if you want to buy or sell a share, you need to login into your trading account and just click a button. 

Back then, the open outcry system ensured smooth trading. Here, investors, traders, and brokers would be physically present in the stock exchange and communicate using the signals. Today, only a minuscule portion of the whole stock market activity is done through open outcry.

What is a Hybrid Stock Exchange?

A hybrid stock exchange is where both online and offline trading is done simultaneously. In a hybrid stock exchange, traders can choose between using the modern electronic form of trading and the traditional floor trading using an open outcry system. 

Both electronic and traditional trading methods have their advantages and disadvantages. Electronic trading can make it easier for you to trade. Here, you don’t have to be physically present in exchange. You can trade online without even leaving the conform of your bedroom. At the same time, in floor trading, you can use human judgments faster and in real-time as the stock prices move. Most retail investors now rely on electronic trading. Floor trading is still used by some institutional investors who have larger investment net worth. 

The stock exchanges where you can use floor trading are fewer too. One of the prominent stock exchanges where you can use floor trading is the New York Stock Exchange. NYSE, since 2007 has allowed all trading activities to be done online, but there still exists a minimal form of floor trading. 

Both systems are at your disposal if you are a trader that trades in a hybrid stock exchange. Although, if you are a retail investor, the online method could be more beneficial for you. 

How do buying and selling happen on the stock exchange?

In a stock exchange, buying and selling happen completely electronically. Stock exchanges use electronic matching technology to enable buying and selling. Electronic matching is a technology where sellers are automatically connected with the stock exchange. For instance, person A wants to buy a share, and person B wants to sell. When person A place the order to buy, this automatically gets matched with the order of person B, who wants to sell. This is the modern technology that stock exchanges use. But it has advanced a lot from there. In the 20th century, traders had to be physically present in the stock market to participate.

The new technology has helped increase participation in the market. But this has also increased the changes in volatility and other technical difficulties. Volatility is when the stock prices move quickly due to huge levels of buying and selling. Authorities have introduced different mechanisms to reduce volatility. For example, the Securities and Exchange commission’s (SEC) margin requirements and the circuit breaker that the New York Stock and Chicago Mercantile Exchanges introduced.

Market makers also help the market battle volatility and run smoothly. Market makers are individuals or companies that help the stock exchanges keep the liquidity of stocks high. For this, market makers act as both buyers and sellers for all the stocks that are listed on a stock exchange.  

Adverse selection should also be controlled by the stock exchanges. Adverse selection happens when one party, between buyer and seller, has access to more information than the other. 

What is the electronic matching engine?

The electronic matching engine (order matching system) is a key element in the stock exchange that helps the exchange run smoothly. An electronic order matching system does this by automatically matching buy and sell orders.

For example, suppose person X wants to sell a share of company ABC. Person Y wants to buy the same. Here, once person X and Y place the order, the electronic matching engine matches the order so that both the buy order and sell order are fulfilled. 

Electronic Matching
Electronic Matching

There are mainly two types of matching algorithms that electronic matching engines use. The first one is the Price/Time algorithm, and the second one is the Pro-Rata algorithm.

The price/time algorithm prioritizes based on the time. For instance, X and Y place the same order, and if X had placed the order even one second before Y, X’s order would be completed first in the price/time algorithm.

In the pro-rata algorithm, orders are matched with the best price. For example, A and B place a sell order, and if A’s price is more than B’s, B’s order will be fulfilled first. The pro-rata algorithm is used only in low-volatility intraday conditions. 

Electronic matching was introduced in the 1980s in the United States to help with trading. 

How does SEC modify margin requirements to decrease the volatility of stock prices?

Margin trading is a credit facility available to investors where they can borrow money from the broker to conduct the trade. In margin trading, the stocks that the investor buy becomes the collateral. This way, margin trading enables traders to participate in the stock market without having to load funds to their accounts frequently. 

But one drawback of margin trading is that traders could misuse the same, and this could increase the number of trades. This, in turn, could increase the volatility. Volatility happens when the stock prices change a lot within a short span of time.  This happens due to increased trade volume.  Margin requirements are used to compact this volatility. 

In the U.S., SEC announces margin requirements. SEC Definition– The SEC is a federal government agency that oversees everything related to the stock market in the U.S. Hence, the SEC has the authority to control margin trading as well. 

The SEC also ensures that these margin requirements are modified every once in a while. This is because the changing economic situation changes the situation in the stock market, too, and margin requirements have to be updated to keep up with the changes. 

How do The New York Stock and Chicago Mercantile Exchanges Introduce Circuit Breakers?

A circuit breaker is a tool used by the New York Stock Exchange and the Chicago Mercantile Exchange to curb high volatility. A circuit breaker takes care of two main factors – panic buying and panic selling. Panic selling occurs when investors are afraid of a stock price drop and tries to minimize their losses by selling the stocks in bulk. Panic buying occurs when investors buy in bulk a stock that shows immediate potential growth. Both panic buying and panic selling could induce high volatility. To reduce this, circuit breakers in New York Stock Exchange halt the trade of the affected stock for some time when certain thresholds are crossed. 

Circuit breakers are used for both individual stocks and indices. A stock market index is a collection of stocks that represent the growth of the whole stock market or a particular sector. An example of a stock market index that uses a circuit breaker is S&P 500 index. There are three levels of circuit breakers in the S&P 500 index – at 7%, 13%, and 20%. The first circuit breaker was used in 1987 when the Dow Jones Industrial Average index dropped 23% during a crisis.

What is the responsibility of the Designated Market Maker in the Stock Exchange?

A market maker is an individual or an organization that buys and sells the same stocks to increase liquidity in the market. Market markers are usually contracted by the stock exchange itself to ensure liquidity is kept at optimal levels.

Here, liquidity is the measure of ease of buying and selling stocks in an exchange. The easiness of buying and selling increases when there are enough buyers and sellers available in the market. Designated Market Marker simulates such an optimal situation by trading on their own. 

Market makers profit from this practice when they are able to sell stocks at a higher price than they bought. The most common type of market maker is brokerage firms. Brokerage firms are entities that act as mediators between the investor and the stock exchange for a trade to happen. 

How does a Stock Exchange prevent Adverse Selection?

Adverse selection in stock markets happens when one party (buyer or seller) has more information regarding a stock than the other. For example, the stock ABC may be facing a legal action that could impair its performance. Here the seller knows about this but not the buyer. Hence, the buyer may be buying the stock without proper information, causing adverse selection. 

Adverse selection causes inequality in the stock market, and it has to be prevented. One way that stock exchanges prevent adverse selection is by regulations. Stock exchanges have made it mandatory for all companies to announce all details and news regarding their operations to the public. Stock exchanges do this to ensure more transparency which will reduce adverse selection. 

Is Dark Pool a dangerous thing for stock market investors?

A dark pool is a private stock exchange where participation is limited to certain entities. Dark pool trading sometimes consists of stocks that are already listed in a public stock exchange that are sold in this way. Hence, the price of a stock in the dark pool could be different from the price in the public markets. This creates a form of adverse selection. This way, dark pool trading puts investors who trade in the public markets at a disadvantage. 

Despite their ominous appearance, dark pools are not illegal by default. They are used by large institutional investors to reduce volatility after a large trade. For example, if a large trade is made in the stock market, the price could move a lot, creating high volatility. This is avoided through the dark pool trade. But this creates a disadvantage for the normal trader as they are kept blinded about such trades. 

Who are the Stock Market Participants?

A stock market participant is any individual or organization that takes part in the process of stock market trading. Stock market participants include not only retail investors but a number of funds and institutions that invest in the stock market.

Stock Market Participants
Stock Market Participants

There are eight main types of market participants like that.

1. Pension funds

Pension funds are investment options that are meant to help you create a retirement corpus. You can invest in pension funds through smaller installments every month to slowly yet steadily create a considerable corpus. 

The money you invest in pension funds is also invested in stocks of different companies to give your capital appreciation. This makes pension funds one of the stock market participants. 

2. Insurance Companies

Insurance companies are known for selling insurance covers, but they are also market participants. There are two ways insurance companies invest in the stock market. The first is through direct investment. Insurance companies invest the premiums you pay in stock markets to appreciate their capital. Secondly, in certain insurance policies that offer an investment component as well, the investors’ capital is also invested. A perfect example of this is the unit-linked insurance scheme (ULIP). ULIP invests a portion of your investment in different securities, while the rest is used as the charge for the coverage. 

3. Mutual Funds

Mutual funds are an investment option that is designed to make investing easier for investors. In mutual funds, instead of the investor having to create a portfolio of their own, they can invest in a preset portfolio. Each mutual fund will have a different portfolio according to the theme of the fund. For instance, an aggressive mutual fund may have more equity presence.

Mutual funds become stock market participants by investing the investors’ money directly in the stock market. 

4. Index funds

Index funds are mutual funds that track an index as it is. An index is a scale that measures the performance of the stock market. An index contains the top stocks of the stock market. When you invest in an index fund, you invest in the same composition as that of the index. 

5. Exchange funds

An exchange fund is an arrangement that allows investors to swap a concentrated stock position with a diversified basket.

6. Hedge funds

Hedge funds are mutual funds built for institutional investors. Hedge funds pool money from institutional investors and invest them in several securities according to their investment choices. Hedge funds become market participants as they invest in stocks as well.

7. Banks

Banks are institutions that accept deposits and provide credit products to the public. Banks invest their deposits in different avenues to increase their profit. This includes stock markets, making them market participants as well. 

8. Financial institutions 

Non-banking financial institutions also accept deposits from people. Many financial institutions invest this money in stock markets to amplify their profits. This makes Institutional Investor market participants as well. 

What are the sizes of Stock Markets?

The size of the stock is measured using market capitalization. The New York Stock Market (NYSE) is the biggest stock market in the world. NYSE’s market cap is $ 25.8 trillion.

On the other hand, the Mongolian stock market is the smallest in the world, with a market cap of over $1800 million.

The Indian stock market,  which comprises two exchanges – the National Stock Exchange and the Bombay Stock Exchange, has a market cap of $3.4 trillion.

How to Indian Stock Market Size changed over the years?

The Indian stock market’s size has seen tremendous growth over the last two decades. The Indian stock market ended the 2001-2002 financial year with a market cap of just over Rs. 6,12,224 crores. This is compared to about Rs.2,75,28,171 crores in the current financial year. 

The below table shows how the Indian Stock Market Statistics has grown over the past 20 years.

YearTotal (in Rupees) 

What are the Investment Types in Stock Market?

Stock markets are vast, and it provides you with an opportunity to invest in different ways. A type of investment in the stock market refers to the way in which you invest in a stock market. The type of investment can differ in three ways. They can differ according to the length of the term, the amount of money invested, and the type of traded asset type. 

In terms of the length of the term, there are both short-term investment options and long-term investment options. Short-term options refer to stock market investing for a lesser term. This is usually less than one year. On the other hand, the longer term is when you stay invested for at least more than one year. Long-term investments can be as long as decades even. 

The type of investment can also depend on the amount of money invested. You can either invest a corpus that you already have in the stock market or through monthly installments using tools like systematic investment plans. (SIP).

Finally, the type of investment can differ according to the asset class as well. The asset class is a grouping of different securities that share similar characteristics.

Investment Types in Stock Market
Investment Types in Stock Market

The four common asset classes usually traded are

  • Equities (stocks of different companies)
  • Fixed-income instruments (bonds, other debt instruments)
  • Cash and cash equivalents (rupee, dollar etc.)
  • Commodities (gold, silver etc.)

Furthermore, you can invest in stock markets directly and indirectly. Direct investment is when you pick and buy stocks yourself. Indirect investment is when you invest through instruments such as a mutual fund. 

What is Direct Investment in Stock Market?

Direct investment in stock markets is when you directly buy stocks through a broker. In the case of direct investment, you are in charge of researching and picking stocks. You will also have to monitor the performance of your investment and make necessary changes every now and then in direct investment.

For example, when you want to invest in a stock, you go to your broker’s website and directly make an individual stock investment. This is a direct investment.

What is Indirect Investment in Stock Market?

Indirect investment in the stock market happens when you invest in stock markets through a fund or similar intermediary. Indirect investments are mostly made through instruments like mutual funds, retirement accounts, pension funds, etc.

For example, instead of directly investing in stocks, if you invest in a fund that invests in the stock market. Indirect investment is usually made, so that managing investments become easier. Here, instead of you managing your investment, mutual funds will have an experienced fund manager to take care of your investment.

What do the Demographics of the Stock Market mean?

Demographics of the stock market imply the distribution of stock market participation among different demographic groups. The study of demographics of the stock market aims at finding how investment habits and participation change according to changing demographic groups. 

For example, the business standard reported in 2021 that female investors in India are below the global average. Hence, this demographic study shows the participation percentage of women in stock markets in India. 

Similar to this, different demographic groups based on four main factors such as race, gender, age, and religion, have different levels of participation in the stock market both in U.S and India. 

How does Participation by race and gender change in Stock Market?

Participation in stock markets can be different based on race and gender. Factors such as history, politics, etc., affect how these demographic groups participate in the stock market. In the olden days, the percentage of participation by certain gender and race groups was minimal. But as the world progresses, we see a change in direction in the number.

A 2020 report shows that, even though the black community in the U.S is still lagging behind, the number of new stock participants from these communities is increasing. In the year 2020, the number of new black investors in the U.S. increased by 15%, while the number of new white investors only increased by 4%.

The gender demographics also show positive trend changes. 67% of American women are now investing as of 2022, compared to 44% in 2018.

What are the Demographics of the USA Stock Market?

Since the U.S. has the largest stock market in the world, the demographics of the area are viewed keenly. 

Even though we have seen greater strides when it comes to gender participation in the U.S stock markets, overall female participation still lags behind. Only 48% of women invest in the stock market today in the U.S, compared to 66% of men.

The case with race demographics is similar. While 61% of white,non-Hispanic families owned stocks as of 2019, only 34% of Hispanic, black Americans did. 

Age has a key role to play in the demographics too. In the U.S., 43% of the stock market is owned by investors who are older than 65 years. 

Another key factor that plays a crucial role is income level. 92% of people who are in the top 10% of income levels own stocks compared to 56% among the middle class.

What is the Hispanic Percentage in Stock Market?

Only 28% of Hispanic households own stocks in America compared to 61% in the U.S. This is backed by different surveys that track the same.

What is the Black Households percentage in the Stock market?

Only 34% of black households have equity investments.  The average value of the stocks black Americans own is about $14,400. The value of stocks that While Americans own is almost four times this figure. 

What is the White Households percentage in Stock Market?

Almost 66% of white households own stocks. This is compared to 34% for black households and 28% for Hispanic households.

How is the Demographics of Indian Stock Market?

India is a developing country, and the demographics of Indian stock markets are also developing. Indians are known to be conservative investors. Their love for buying gold is world-famous. Coming from there, Indians have to break a lot of ice to be able to trust stock market investments. Right now, only 10% of Indians directly invest in equities, according to the consumer spending 2022 outlook report. 31% of Indians choose indirect stock market investments such as mutual funds. 

When it comes to states, over 80% of retail investors in India are concentrated in the top 10 states. They are Maharastra, Gujarat, Uttar Pradesh, Tamil Nadu, Karnataka, West Bengal, Delhi, Andhra Pradesh, Rajasthan, and Madhya Pradesh. 

Gender disparity is still common in India when it comes to Demography and Stock Investment, with only 1 in 5 investors being a woman. But the number of new woman investors in India is increasing. Data reveals data that about 30% of new investors in 2021 were women.

How does Education Level Affect Stock Market Participation?

Education level is a factor that will affect stock market participation. If a person has a higher level of education, they may be able to understand stock markets better, and it may promote stock market participation. Below are two research data that prove the same.

First is a study titled ‘The Effect of Education on Equity Holdings’ by Dmytro Hryshko, Mar´ıa Jos´e Luengo-Prado, and Bent E. Sørensen. It says that households with a head that is educated are more likely to invest in stocks. The study attributes two reasons for the same. The first is the logic that educated households will have more money to invest. The second is that education brings about knowledge about factors that show the need for investing. 

The second study by Sandra E. Black, Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi looks at the correlation between education and risk-taking in stock markets. Here, the most important finding is that higher education has a positive effect on risk-taking, especially for men. The study also says that 37.1% of households headed by college graduates participated in the stock market,

What is the History of the Stock Market?

The stock markets have a rich history that dates back to the late 13th century.. The beginning of trade was a landmark in the case of human civilization. It marked the beginning of markets. It was known that throughout the middle ages, merchants would meet in the middle of the town to trade goods, and the same were priced according to the demand and availability – much like today’s stock market. 

In the late 1400s, in modern Belgium, there was a trend of traders buying goods to sell later at a higher price, expecting a price rise.

It took another two centuries to officially form a stock market. In 1611, the Amsterdam stock exchange was created, with the Dutch East India Company being the first publicly traded company. 

The late 1700s became the next milestone in the history of stock market when Buttonwood Tree Agreement was formed. According to this agreement, a bunch of merchants would meet daily to buy and sell different securities such as stocks, bonds etc. This practice eventually led to the creation of the New York Stock Exchange, the biggest stock exchange today. 

The Dow Jones industrial average was created in 1896, marking another key milestone in the history of stock markets. The Dow Jones industrial average is an index that measures the performance of the U.S stock markets as a whole. Initially, the index only had 12 components. Today, it has 30.

Another key event that happened in the history of stock markets was its crash in 2008. The stock market has faced crises before, but the magnitude of this was unmatchable. Billions of dollars were wiped away from the markets, with many losing their hard-earned money. But the markets have managed to grow after that. 

What is the origin of the Stock Market?

The origin of stock markets can be traced back to modern-day Belgium.  A lot of information regarding the origin of the stock market in Belgium can be found in the books of Italian writer and merchant Lodovico Guicciardini. It is said in the early 1300s, even before the creation of stock exchanges, traders and merchants would meet in certain designated places like Bruges to sell financial instruments such as bonds, debt securities etc.  Even before that, in Belgium, merchants would buy goods not for consumption but to sell later at a higher price in the hope that the price would go up. This became the basic concept of stock markets in the later centuries. 

What is the first description of the Stock Market?

The first publicly traded company was the Dutch East India Company. The company was notorious for its hand in slavery but also paved the way for modern-day stock exchanges. 

To list the company’s stocks, the first stock exchange was started in Amsterdam, named the Amsterdam stock exchange. 

The rules of investing were rather simple back then, with very few regulations. In the case of the Dutch East India Company, there were no minimum or maximum restrictions on the number of shares one could own. The responsibility of a stock exchange was limited to hosting the trade.

But as the economy grew, so did the stock markets. By the time the New York Stock Exchange was formed in 1896, more rules were formed, and limitations were placed as to who could list in the stock market and who could trade. Even then, stock trading was mostly limited to merchants who were modern-day institutional investors. 

The 1929 stock market crash in the U.S was an eye-opener for many. Known as the great crash, the crisis that October caused the Dow Jones Industrial Average to drop from 305.85 points to 230.07 points – nearly 25%. Experts believed what caused this crash was the increase of retail investors who invested, eying a huge profit. Many people invested their savings and even borrowed to invest, inflating the stock prices. Once the threshold was reached, the stock market crash happened. This also leads to the great depression.  This led to rule changes, especially regarding retail investments in the market.

From that point on, the rules and responsibilities of the stock markets have changed to help protect the interest of both investors and companies. Today, stock markets have become a more or less safe environment with laws guiding the processes completely. These laws help control factors such as volatility, insider trading, adverse selection etc. 

Recently, the securities and exchanges commission has proposed several rule changes that could change the way many things work in a stock market. The rules are meant to bring more transparency to how the markets work. 

Similarly, the stock markets have adapted and will continue to adapt according to changing market and economic conditions. 

How does “Bruges Bourse” spread across Europe?

Most of the trades in Bruges were run by the Van der Buerse family in their Ter Buerse inn trade center. Each country would have a nation house in Ter Buerse inn for ease of trade. The contribution of the Buerse family in enabling the trade in the early days was rewarded with the creation of a new word, “beurs”, or “bourse” which means stock market in French. 

Bruges Bourse was the Italian stock exchange that is considered the first stock exchange in the world by many experts. The Bruges Bourse developed due to the high trading activity in the Antwerp ( Germany) and Bruges ports developed during the 1300s. As the city became a hub for many exports, it became the hub for trading as well.

Why is the Concept of the Stock Market much more advanced in the Italian City States?

The concept of trading was much advanced in Italian cities such as Bruges much before the rest of the world. This is mainly because of Italy’s place on the world map,  which made the cities like Bruges trading hubs. The  Bruges port became the epicenter of a lot of trading activities. This gave Italy the advantage when it came to the development of stock markets. 

What is the first Joint-stock Company?

A joint-stock company is an entity whose stocks can be bought and sold by traders. A stock exchange is made up of numerous joint-stock companies whose stocks are traded by their shareholders. The first joint-stock company in the world is the Dutch East India Company. 

The Dutch East India Company became public as Joint-stock company by offering shares to merchants who helped finance their voyages. The formation of the Dutch East India Company also led to the creation of the first formal stock exchange in Antwerp, Germany, as the investors needed a safe place to trade. 

The Dutch East India Company also lead to the beginning of short selling. Short selling is when an investor banks on the stock price to go down. Isaac le Maire, who was on the board of directors of the Dutch East India Company, is the first short seller in history. He tried to bring the stock price down as a vengeance toward the company after he was removed from the board of directors. To bring the stock price down, he convinced nine investors to sell the company shares for future delivery. This practice is called short selling today. 

What are the Main Benefits of the Stock Market?

The stock market mainly benefits five entities, including investors, governments, companies, banks, and countries. Below are some of its benefits.

  • It helps investors by helping them grow their wealth.
  • It helps companies raise money for their development.
  • It helps governments by accelerating economic growth.
  • It helps countries better their international relations.
  • It helps banks grow their money.

These benefits make stock markets a key element in the economy of a country. 

How do Companies use Stock Market to raise money?

Companies use stock markets to raise money. Raising money in the stock market simply means companies selling their shares to the public for money. The money raised through stock markets can be used for the company’s development.

A company raises money in the stock market by going public. Going public refers to becoming a public company where the public owns its shares from a private company, where share ownership is restricted to a few people. Companies do this through an initial public offering (IPO). The public has the opportunity to buy the shares of the company during an IPO. The money that the company gets from selling the shares is the money raised by the company. 

For instance, A company will raise Rs.1 core if it sells 1 lakh shares at a price of Rs.100.

How does Stock Market affect the Macroeconomics of a Country?

Macroeconomics is a branch of study in economics that deals with the performance of the overall economy of a country. Stock markets have a key role in shaping the macroeconomics of a country. Stock markets facilitate growth. The macroeconomy is positively affected when more companies raise money and grow. A good functioning stock market can thus boost the economy of a country.

Stock markets also help retail investors grow their wealth. Retail investors are individual investors. The growth of individuals’ wealth will also impact the economy positively as the same will help the public deal with macro economics problems such as inflation. 

What is the relation between Central Bank and Stock Market Prices?

A central bank is a regulatory body that controls all the banking activities in a country. The central bank has great power over the economy of the country. Actions by the central bank affect the stock prices, too, as the changes in the economy directly affect the stock prices as well.

For example, when the central bank raises interest rates, the stock market prices usually go down. One reason for this could be higher interest rates would mean lending becomes costlier for companies. A company’s profit may be affected if it has to pay higher interest rates. 

The central bank’s decision on monetary policies, lending and borrowing rules etc. also affect the stock prices. 

How do Government actions Affect Stock Market?

Governments have a key role in the policies of a country. The government’s outlook toward the market and different policy changes affect stock markets as well. 

For instance, governments have a crucial role in enabling and limiting inflation. Inflation is the increase of living prices that erodes the value of money.

The government would want to increase the inflation rate on occasion as it will boost the growth of the economy in the shorter term. This is because the companies are able to profit more from increasing prices. 

But, at the same time, high inflation often means lower returns. This could tempt investors to divest from the stock market, which will negatively affect the prices.

At the same time, the government help protect the stock markets. A good functioning stock market is a key to a booming economy, and hence the government will always want the stock markets to perform well. Hence, the government will even try to protect the stock market during a crash using monetary policy changes.

How does Stock Market Help for Economical Growth?

A booming stock market plays a vital role in economic growth. More companies would start operating when the stock markets are performing well. This means more money inflow, jobs, and export. The main incentive for production increase to the government is an increase in the tax revenue. A higher tax revenue helps a country grow faster. 

Moreover, investors and companies have more wealth when the stock market is performing well. Economic growth increases the overall spending within the country, further helping the economy grow. 

How does Stock Market Microstructure prevent Systemic Risk?

Market microstructure is an economic study that looks at how information affects the price. Market microstructure helps prevent systemic risk. Systemic risk is the risk of an entire financial system failing. By studying micro factors, authorities and experts 

What are the Stock Market Price Factors?

Stock price refers to the current price for which a buyer purchases a share of stock from the seller. The stock price depends on a number of factors, but in the end, it is the demand and supply in the market that determines the price of the stock. Any factor that affects the demand and supply in the market affects the stock prices as well.

According to the prominent economist Adam Smith, it is the ‘invisible hand’ that ultimately drives and decides stock market prices. The invisible hand refers to the unseen forces that drive the demand and supply in a free market to help the two meet and reach an equilibrium. These forces are unobservable, and therefore, there exists no clear-cut formula to determine the stock market price factors.

However, there are a few indicators that provide information about how stock prices tend to behave. An indicator is a tool that investors and traders utilize to analyze financial data in order to predict how a factor will affect the stock market price. Market indicators use statistical formulas to predict future trends and prices in the stock market, taking into account the various factors that affect market prices.

Stock Market Price Factors
Stock Market Price Factors

Stock market price factors are those forces that can affect stock market prices. Stock market price factors can include fundamental factors, technical factors,  sentimental factors, or other external factors. The most commonly seen factors that influence stock prices are inflation, perceived risk of the stock, socioeconomic factors, supply and demand relation, market indicators, technological changes, wars and international conflicts, natural disasters, level of trust in the legal system, corporate performance data, government monetary policy, regulations and deregulations, confidence index, greed index, changes in GDP and immigration. 

1. Inflation 

Inflation refers to the rate at which the prices of goods and services increase. Inflation can also be interpreted as the rate of decrease in purchasing power. As the purchasing power decreases, the price of goods and services reflects an increase. Inflation creates an atmosphere of speculation about future prices. This makes the market highly volatile and subject to price variations easily. The effect of inflation on stock prices is complex and depends on the kind of stock. 

Value stocks tend to perform well during periods of inflation, with the price of value stocks having a direct correlation with the rate of inflation. Value stocks are stocks of companies that are currently being traded at prices less than their real worth. Inflation positively affects value stocks, as it drives the prices of the value stock to prices closer to what is believed to be their original worth. The price of growth stocks, on the other hand, falls with an increase in the rate of inflation. Growth stocks are stocks of companies that are in their growing stage. Growth stocks are priced higher than their current worth as it is assumed that they will outperform the market in the future owing to their potential. Inflation negatively impacts growth stocks as when the value of money falls, the company’s profit also decreases, thereby bringing down the stock prices. 

The impact and effect of inflation on stock prices, therefore, depends on the kind of stock. Inflation tends to have a stronger impact on the price of a value stock when compared to a growth stock. The impact of inflation on value stock also tends to be positive, while that on growth stock tends to be negative. 

2. Perceived risk of stock 

Risk refers to the possibility of the actual returns from an investment being different from the expected returns. Risk can lead to the investors losing all or a part of their original investment amount. Perceived risk of stock refers to a trader’s or investor’s perception of the amount of risk that is involved in investing in a particular stock. Perceived risk is primarily a psychological factor that is driven by the investor’s fear of incurring losses through wrong investment choices and decisions. An investor’s perception of the risk that is involved in investing in a stock influences the price of the stock.

Stocks and securities that are perceived as being less risky are more in demand and traded at significantly higher prices. Stocks that are perceived as involving more amount of risk, on the other hand, trade at lower prices. When the perceived risk of a stock is low, it can affect the stock prices positively by driving the prices higher. Meanwhile, when the perception of the risk involved is high, it can affect the prices negatively by lowering them. The perceived risk of a stock is, therefore, a strong influencer that drives the stock prices.  

3. Socioeconomic conditions 

Socioeconomic factors refer to those social circumstances of an individual or a group of people that impacts and shapes economic factors. Socioeconomic factors include a range of factors from income and occupation to education, lifestyle, employment, etc. These socioeconomic factors have an influence on the economy, which in turn affects the stock market and stock prices. Companies that sell their stock on the stock market are dependent on the economic environment around them. When the economic environment is in an expanding phase, people are more willing to invest, thereby affecting the stock prices positively.

On the other hand, when the economy is in a struggling phase, people tend to avoid spending, thereby creating a decline in the demand for stock as well as stock prices. Socioeconomic factors are indicators of the current economic conditions. When the socioeconomic factors reflect distress in the societal circumstances, it is also reflected in the economic environment. Socioeconomic factors, therefore, play a fairly significant role in impacting stock prices. For example, a high unemployment rate indicates that a large section of the population is on the lookout for jobs but are unable to get it. This implies that the economy is in a state of distress and leads to a lack of confidence in the economy, which in turn leads to a negative impact on the stock prices. 

4. Supply and Demand Relation 

The law of supply and demand explains the relationship between the desire for a product or service, its availability and its price. The law of supply and demand is the fundamental theory that regulates and determines the prices of stock and other securities in the financial market. When many people desire to buy a stock, the demand for the stock increases. This means that more people want to buy the stock than sell the stock, resulting in the demand being higher than the supply.

Situations where the demand is more than the supply impact stock prices positively by increasing them. On the contrary, when more people want to sell a particular stock, the supply becomes greater than the demand, thereby impacting the stock prices negatively by driving them down. While high demand and low availability can drive the stock prices higher, a low demand and high availability lead to a decline in the stock market prices. The demand and supply relation at any point, is a very important and determining factor with respect to stock prices. 

5. Market Indicators

Market indicators are certain tools used by investors and traders to study and interpret financial data and make predictions about upcoming market trends. Market indicators apply statistical formulas and ratios on financial data from many securities to forecast movements in the stock market. There are two types of market indicators – those that measure investor sentiments and those that measure fundamental factors such as supply and demand. The forecasts made by a market indicator have the potential to make an impact on stock prices.

When a market indicator forecasts a strong market, it impacts the stock prices positively by driving them up. This is because a strong market implies better chances of making a profit thereby creating a greater demand for the securities. On the other hand, the stock market prices are impacted negatively if the market indicator forecasts a downtrend or weak market. This is because a weak market is indicative of a market where the supply is greater than the demand, thereby implying a very slim or no possibility of making a profit. 

6. War and International Conflict 

War and international conflict are external factors that have an impact on many socioeconomic conditions as well as other sectors such as international trade, travel, energy etc. War and international conflict tend to affect the trade between countries and create shortages in commodities, thereby leading to inflation where the prices of goods and services increase. The manner in which war and international conflict affect stock prices depends on the types of stock. Stocks of travel and leisure companies generally tend to fall during times of war and international conflict as these affect and place restrictions on the movement of people.

Bank stocks and stocks of mortgage finance companies also portray a tendency to fall as the inflation that is created by the conflict tends to push the interest rates higher. Defense stock, on the other hand, tends to perform better in times of war and conflict. The increase in energy and crude oil prices, which is a commonly seen result of war and internet can also prove conducive to oil and gas stocks. It has however been observed that the effect of wars on most other stocks is limited and often short-lived.  

7. Natural Disasters

A natural disaster is a catastrophic event resulting from natural causes that create large-scale damage or loss of life. A natural disaster can include floods, earthquakes, hurricanes, tsunamis, landslides etc. Natural disasters apart from affecting the environment and the lives of people, also have an impact on the economy. Natural disasters tend to cause massive damage to a nation’s economy.

This impact on the economy is also reflected on the stock market. The highest impact on the stock prices is found to be on the day of the natural disaster, as the stock index falls. This impact lasts over the next two days, after which it declines and the prices tend to rise again. Although natural disasters have a negative impact on the stock market, it is found to be short-lived.

The legal system refers to the laws of a country and the manner in which they are enforced. The legal system of a country also includes civil laws, civil courts and other market regulators. The level of trust in the legal system refers to the people’s faith in the quality and efficiency of the laws of the country and their enforcement. It is the legal system that renders support to other systems in the country such as the education system, the healthcare system, the financial system etc. In the case of stock markets, it is the legal system that protects the rights of investors and traders as well as the companies whose stocks are traded on the stock market.

By having clear-cut laws that place regulations on illegal and unethical trading practices, the legal system promotes transparency in transactions. A high level of trust in the legal system leads to more confidence in investors and traders to make investments. A sound faith in the legal system assures the investors of the laws that are  in place to protect their rights. Such a situation is conducive to stock prices and impacts them positively. On the other hand, a lack of trust in the legal system can lead to a reluctance in investors and traders to make purchases in the stock market. This impacts the stock market prices negatively. 

9. Corporate Performance Data 

Corporate Performance Data refers to the set of data on the assessment parameters of a company. Corporate performance data primarily focuses on financial aspects pertaining to market performance and shareholder performance. The health of a company is usually reflected in its performance data. This information is used by analysts, investors and traders before deciding whether or not to invest in the stocks of that company.

The demand for the company’s stocks rises, if the company performance data reflects good stock performance. Such a situation impacts the stock prices positively. On the other hand, a poor stock performance that is reflected on the corporate performance data will lead to a decrease in demand and a subsequent decrease in the stock prices.

10. Government Monetary Policy 

Monetary policy refers to the guidelines that are framed by a country’s government to control the money supply and promote economic growth. The monetary policy includes various strategies aimed at achieving economic growth, such as adjusting the interest rates or making changes to bank reserve requirements. Monetary policy is of primarily two kinds – expansionary or contractionary. Expansionary monetary policies are those policies that are aimed at promoting economic growth. Expansionary monetary policies include policies that reduce interest rates and increase the money flow.

Contractionary monetary policy, on the other hand, refers to those strategies that are framed to limit or slow economic growth. The contractionary monetary policy includes policies that increase rates and limit the flow of money. Monetary policies affect the stock market and stock prices depending on whether it is expansionary or contractionary.  Expansionary monetary policies positively impact stock prices as it reduces the interest rates and increases the money flow. Contractionary monetary policies negatively impact stock prices as they are designed to limit economic growth. 

11. Confidence Index

Confidence index is a measure of the level of optimism or pessimism in a consumer regarding their financial prospects. Confidence indexes can give insights into economic conditions and forecast purchase decisions consumers are likely to make. The confidence index is influenced by economic conditions such as inflation rates, unemployment rates etc. The confidence index directly relates to the supply and demand relation.

A high confidence index reflects a high level of optimism in the consumers, which implies that they are likely to spend more money. This increases the demand for the goods and services, thereby increasing stock prices. A low confidence index indicates a low level of optimism in the consumers thereby reducing their spending and creating a drop in the demand for goods or services. This results in a drop in the stock’s prices.

12. Greed Index

A greed index is a tool that is used to measure the predominant mood of the market. The greed index was created by CNNMoney along with its counterpart, the fear index to measure the two predominant emotions that are said to drive investor decisions. Greed and fear are considered to be two persuasive emotions that can coerce investors into making decisions against their better judgment. The fear and greed indices are sentimental indicators that give insight into the investor’s psychology and thinking.

At any point in time, these indices can reflect how much money an investor is willing to spend on a particular stock. A high greed index indicates that investors are willing to spend more than the real worth of the stock. A high fear index, on the other hand, indicates that there is excessive fear in the minds of investors, thereby lowering the price of the stock from what it may be actually worth. A high greed index drives the stock prices higher, while a high fear index drives the prices lower. 

13. Changes in GDP 

Gross Domestic Product (GDP) is defined as the total value of goods and services that have been produced within a particular country within a specified time period. GDP serves as a measure of the country’s economic condition at any given point in time as it reflects the total production in the country. As the GDP reflects the economic health of a country, it plays a vital role in the demand and supply relationships.

Any change in the GDP signifies a change in the country’s economic growth rate and impacts the demand and supply curve. The GDP thus shares a direct correlation with the stock market. A high GDP value means that the consumption of goods and services and cash flow are high. This leads to higher stock prices. On the contrary, a low value of GDP signifies that consumption is less and that the cash flow is also on the decline. Such a situation leads to a decline in economic growth and impacts stock prices negatively as well. 

14. Immigration

Immigration refers to the movement of people to foreign countries for settlement purposes. Immigration in a country leads to an increase in the availability of manpower and labor, which is of an advantage to industries that are labor intensive. Labor-intensive industries are those industries that require a large number of laborers including construction, agriculture, manufacturing etc. An increase in the rate of immigration leads to better performance by labor intrinsic sectors.

Immigration, thus, apart from having an impact on several aspects of the economy such as employment rates, GDP and income levels also impacts the stock market. In the case of companies in the labor intrinsic sectors, an increase in the immigration rates leads to a better company and stock performance and higher stock prices. A decrease in the immigration rates, on the other hand, leads to a decline in the company’s performance which results in a decline in stock prices. 

What does Efficient Market Hypothesis (EMH) Explain?

The Efficient Market Hypothesis (EMH) is a theory based on the stock market. EMH explains that the market is fairly priced, and there is no way to make an extra amount of money. EMH believes that a share price is a reflection of all possible information. 

EMH views the stock market as a perfectly balanced place, and stocks always trade at their fair value. This makes it impossible for investors to buy undervalued stocks. Undervalued stocks are those which have a current stock price below their intrinsic value. 

Hence, the only way to achieve success in stock markets is by taking higher risks. 

What does Rational Choice Theory Explain for Stock Market?

The rational choice theory defines that individuals make rational decisions based on rational thinking, and the outcome of events is based on their personal objectives. The rational choice theory also believes the choices an individual makes are aligned with their personal interests. The rational choice theory is used for assumptions in economics as well since it is considered a base of human thinking and decision-making. Thus, it helps in predicting investors’ stock market behavior. For example, more investors will try to sell their stocks when the stock market is facing a big downturn, as it may be the most rational decision to make. 

What does Theory of Market Equilibrium Explain for Stock Trading?

Equilibrium is a stage where the demand and supply of a market reach the same level. Equilibrium makes the price of a security stable. 

Generally, in the stock market, the price increases when demand increases and supply decreases. And price decreases when the demand decreases and there is a larger supply. The stock prices will remain stable when an equilibrium is reached. 

Prices always tend to go towards achieving equilibrium. For example, stock prices tend to go up after a period of rising and vice-versa. But the stock market will never be able to meet perfect equilibrium. 

How to Predict Market Anomalies in Stock Market Behaviors?

A market anomaly is a stock price movement that contradicts what is expected. Market anomaly makes it harder for the investor to gain out their investment. But they are also an opportunity. This is because some anomalies may not reappear, but some do, and they create a pattern making it easier to understand how a stock market would behave after an anomaly.

Market anomalies are often seen in charts and graphs. Investors look for these in the graph and try to find patterns. This is the base of technical analysis. Technician analysis is a study of the prediction of stock markets with technical features like charts. 

How does Value At Risk affect Stock Market Investors?

Value at risk (VaR) is a measure of the chance of loss for an entity. Value at risk calculates how much an entity could lose in the current scenario, given its current profitability. Financiers use value at risk to gauge how much assets are needed to cover possible losses. 

Value at risk can be used by stock market investors in a similar. Traders can use value at risk to see how much risk of losing their portfolio has in a given time horizon. This helps investors rearrange or rebalance the portfolio to ensure maximum value. 

What is the Stock Market Psychology?

Stock market psychology is a branch of study that deals with emotions related to stock market trading. Stock market psychology aims to understand what goes behind certain emotions and to help investors keep their emotions under control when trading. 

Psychology in stock markets is a large topic because a lot of emotional factors contribute to the collective working of the market. Psychologists believe that group thinking has a pivotal role in investors’ stock market behaviors. Some studies have even found stock trading to be addictive for some investors, similar to gambling. This may cause mary to make irrational decisions. Stock market psychology prescribes ways to prevent such scenarios as well.

What is the effect of Group Thinking on Stock Market?

Group thinking is when a large number of investors have similar stock market predictors and make similar stock market movements. For instance, if a large group of traders see stock X seeing a group in the future, they may buy the stock, increasing its price. Group thinking has a huge effect on how a stock market works. One example of this is support and resistance levels.

Support and resistance levels are virtual lines in a stock graph that the stock price finds hard to cross. If a share price is going up, it tends to come to a standstill or go down, hitting a resistance line. This happens when the investors start to collectively think that the share price is near a threshold. Investors will start to sell at this point to get profits, making the share price go down. Similarly, many stock market behaviors work on the basis of group thinking. 

Why do Psychologists find Gambling and the Stock Market similar to each other?

Gambling is playing games or betting on things that are based just on luck. Stock market investment is not gambling. Successful investors get profit from strenuous research and understanding of the stock markets that able them to predict markets accurately. But some investors make stock market investing similar to gambling by basing their moves just on luck. Psychologists have found that certain investors approach day trading similarly to roulette. They make bets based on their gut instincts, and this may create a stock market addiction even. 

What is the Irrational Behavior in Stock Market?

Irrational behavior in stock markets refers to situations where the investors behave without logic. Irrational behavior may interrupt the smooth flow of markets. An example of irrational behavior is when investors sell their stocks at the first sign of risk. This will cause loss invariably. One of the major plus points of a successful investor is a lack of irrational behavior.

What is the Stock Market Crash?

A stock market crash is a sudden and often unpredictable drop in stock prices in general. During a stock market crash, most shares will feel the impact as their prices will also significantly go down. A stock market crash adversely affects an economy, investors, and companies and could wipe millions away in a matter of seconds. A stock market crash could have five main reasons. They are listed below.

  • Economic reasons
  • Political reasons
  • Market speculations
  • Natural disasters
  • Investor panic

Most stock market crashes have a reason listed above. But there can be crashes without a proper reason as well.

What are the major examples of Stock Market Crashes?

Let us discuss four major examples of stock market crashes.

The Great Depression (1929)

The great depression of 1929 happened after a major drop in stock prices in the United States. The economic depression was felt worldwide, with many people losing jobs and millions being wiped away from the stock market. 

But the stock market crash was not the only factor that contributed to the great depression. The other four main factors include the following.

  • Nearly 700 banks failed worldwide during the period contributing to the great depression.
  • Many people lost jobs causing lower spending.
  • American policy war with Europe during that time affected negatively as well.
  • Environmental problems worldwide, including a drought, caused further issues.

The great depression lasted till 1941 and is considered one of the worst in the history.

Black Monday (1987)

Black Monday of 1987 was a sudden stock market crash that shook the world on 19 October 1987. Black Monday started in the United States, and the effect later spread to most of the world. 

The stock markets were seeing a substantial rise in the five years leading up to the event. Experts believe that the prices have reached a threshold by then. The Dow Jones Industrial Average dropped more than 22% in the day, marking one of the worst days for the stock markets. 

The economic crisis of 2007-2008

The stock market crash of 2007 leads to the biggest economic crisis the world has seen since the great depression. Low-security home loans issued by financial institutions caused the crash as homebuyers found it hard to repay their high-interest, non-collateral loans. As the banks struggled to get repayments, the economy took the burden, leading to the crash that caused millions to lose their jobs. The effect was visible worldwide, with several economies struggling to stay afloat. Notably, India was one of the few countries that managed to survive the crash with few casualties. 

The pandemic-induced stock market crash (2020)

The world was shaken by a pandemic in the early half of 2020. The stock markets reflected the same with a crash. The bear run that started on 20th February lasted till the first half of April the same year. Although not as catastrophic as its predecessors, the same was the most recent example of a stock market crash.

The stock market has always bounced back till now in history after a crash. But every investor should ensure they are always on the lookout for a similar crash when they invest. 

What is the Stock Market Index?

A stock market index is a composition of the best stocks that represents the condition of a stock market or stock market sector. The stock market index usually contains the biggest stocks in the market. The performance of these stocks, in general, is used to measure the overall performance of the stock market. 

The Nifty is an example of a stock market index. The performance of the Nifty usually indicates how the stock market in India is performing in general. 

Below are the four main functions of a stock market index.

  • It is used to measure market sentiments
  • Used as a scale for market growth
  • Acts as a benchmark for funds
  • Acts as a model portfolio for index funds and ETFs

Because of the above functions, a stock market index acts as a tool for technical and fundamental analysis. Investors could look at a stock market index’s chart to find patterns that indicate growth or decline in technical analysis. Similarly, investors could study the growth potential of an index when it comes to fundamental analysis. 

What is the definition of a Derivative Instrument?

A derivative instrument is a type of contract that derives its value from an underlying asset. Investors use derivative instruments to speculate about the market and make money. There are five main underlying asset classes that derivate instruments use.

  • Stocks
  • Bonds
  • Currencies
  • Commodities
  • Stock indexes
Derivative Instruments in the Stock Market
Derivative Instruments in the Stock Market

There are four main types of derivates.

  • Options
  • Futures 
  • Forwards 
  • Swaps 

What are the examples of Derivative Instruments in the Stock Market?

There are four main types of derivatives

  • Options – Options are derivative instruments that give an investor the right to buy or sell a security at a future point. For example, a stock option gives you the right to buy a particular stock at a preset price at a future point. 
  • Futures – Futures allow investors to buy or sell the underlying asset for a set price at a specific point in time. For example, you can buy a stock at a specific date at a prefixed price if you own a future stock. 
  • Forwards – Forwards are future contracts where the holder has an obligation to sell/buy the stocks. On the other hand, options and futures contracts come with no obligation.
  • Swaps – Swaps are derivative instruments where future cash flows are agreed to be exchanged by two investors on a specific date in the future. Equity swaps are often based on a predefined notion amount. It gives investors great flexibility to tune the contract according to the need of the two investors involved. 

What is the definition of a Derivative Market?

A derivative market is where derivative instruments are bought and sold. A derivative market is similar to a stock market. Investors can trade derivatives using the same mechanism they use in a stock market. 

There are two types of derivatives markets. First is the regular market, where there are proper regulations. Second is the over-the-counter market, where regulations are limited.

What is the definition of a Stock Market Investment Strategy?

A stock market investment strategy is a plan that you follow in your investment for the best results. A stock market investment strategy is formed according to an investor’s taste and could differ for different investors.

An investor can create a stock market investment strategy according to their goals initially. For instance, an investor can create a strategy based on intraday trading if they want to try intraday trading. Implementing a stock market investment strategy is as important as forming one. To ensure you stick to your plan, you should monitor your strategy every once in a while and be mindful of the same whenever you trade or invest. 

What are the main strategies in the Stock Market Trading?

Below are some of the strategies that traders use.

Main Strategies in the Stock Market Trading
Main Strategies in the Stock Market Trading

1. Short Selling

Short selling is when an investor sells a share that they don’t own. The investors borrow shares from brokers to do short selling. Usually, this is done when an investor sees that a particular stock’s price is going to go down. Hence, short selling is a way to earn from a stock price going down.

Compared to the normal way of trading, short selling may come with more risk, and it is frowned upon in certain situations. In India, short selling is allowed only for intraday trading. 

2. Margin Buying

Margin buying is loaning from the brokerage for trading. Margin buying thus helps you amplify your returns from an investment. Your stocks are kept as collateral when you margin buy. 

But margin buying is highly risky as well due to the debt factor. You may end up in a loss if your investment with debt loses money. 

Margin buying is an extremely risky move compared to buying with your own money. 

3. Naked Shorting

Naked shorting is short selling without first borrowing the stock. Instead of affirming whether a particular share can be borrowed or not, the investor engages in selling the share. Naked shorting is now illegal worldwide. 

Compared to short selling, naked selling is an unethical move and should be avoided.

4. Position Trading

Position trading is when an investor buys a stock and holds it for a longer time period in the hope that the stock price grows. Position trading is the most prevalent form of investing. 

Compared to intraday trading, position trading is often considered the safer approach.

5. Swing Trading

Swing trading is when an investor buys a share and holds it for a few days. Swing trading is outside the scope of intraday trading, but at the same time, it is not a long-term approach like position trading as well.

6. Scalping

Scalping is when a trader enters and exits a trade within a matter of minutes or seconds. Scalping is used by traders when they want to make use of the short-term volatility of the stock markets. Scalping can be compared to intraday trading but in intraday, investors hold the stocks for a little longer. 

7. Socially Responsible Investing

Socially responsible investing is an approach where returns are considered more than monetary. Investors try to invest in ethical avenues and companies that follow ethics closely in socially responsible investing. 

How does Fundamental Analysis help for Finacial Investments in Stock Market?

Fundamentals analysis is the analysis of the financial statements of a company to determine whether you want to invest in them. Fundamental analysis helps you understand more about a company by looking at the financial statements and numbers related to the company. By analyzing and comparing these numbers with the company’s past numbers and with its peers, an investor can gauge if the investment opportunity is the right fit for you. 

To do a fundamental analysis, an investor may look at the financial statements of a company first. This includes quarterly reports, earrings reports etc. You can use this number and compare it with sector standards to gauge how well a company is performing. Fundamental analysis also gives you a better understanding of the basics of the company. 

There are two types of fundamental analysis – qualitative and quantitative.

Quantitative analysis looks at the numbers related to the company like earnings per share, revenue etc. while quantitative analysis looks at subjective matters such as the performance of the management, ethics of the company’s corporate actions etc. 

For example, if a company had a management change, you could take a call on how the new management will perform and how it will affect the stock market. 

Fundamental analysis can sometimes be misleading as many factors are subjective. Hence, it is a good idea to combine fundamental analysis with technical analysis. 

How does Technical Analysis help for Finacial Investments in Stock Market?

Technical analysis is the study of charts and patterns of a stock price to try and predict the stock market movements. In technical analysis, investors believe that patterns in charts are repetitive and they indicate a movement in a particular direction or a trend.

For instance, if a particular trend appears when charts move from A to B in a particular way, technical analysts believe that similar trends will appear after similar patterns.

An investor can start doing technical analysis by studying the charts. There are hundreds of indicators that an investor can use here. An investor is simply a charting tool that helps analyse a particular attribute of the stock price. The investor can then look for patterns in the chart and try to predict stock market movements based on the patterns.

Investing in stock markets is not entirely a technical job, and hence, technical analysis can often fall short. Instead, the best course of action is to combine technical and fundamental analysis together for the best results. 

How to Classify Stock (Financial) Markets?

Classification of stock markets means categorising different markets based on what is traded on them. This classification allows easy understanding of markets and makes investing easy as well. 

The classification here can be done in different ways. For instance, you can classify based on the type of asset that is traded, the level of trade that happens in a market etc.

1. Stock Markets according to Traded Asset Type

An asset class is a group of financial instruments that has similar characteristics. There are four main asset classes traded in stock markets primarily. 

  • Equities – They are shares of different companies that are traded in the stock market. Equities are the most common asset class too. Investing in equities comes with a higher risk but the highest return potential as well. Equities are the most volatile too. 
  • Bonds – Bonds are debt instruments used by corporates and governments to raise money. Bonds come with a fixed interest rate, and compared to options like equities, they have lower risks associated with them as well. There are two types of bonds mainly – government bonds and corporate bonds. Government bonds are issued by the government, while corporate bonds are issued by different companies.
  • Cash equivalents – Cash equivalents are currency-like securities that come with high liquidity. They are meant for short-term investments. Examples of cash equivalents include currencies, treasury bills etc.
  • Commodities – Commodities are securities that trade according to the price of different physical commodities. A commodity is usually a raw material. For example, gold, silver etc.

2. Organized and Unorganized Markets

The stock markets are the organized marketplace where there is a central authority controlling and overseeing the trading activities. In an organized market, factors like the price of the security are fixed using standardized methods. India’s stock exchange is an example of the organized market.

An unorganized market is where securities are traded without an overseeing authority. Prices are fixed between the seller and the buyer in such a market.

3. Primary and Secondary Market

A primary market is where security is sold for the first time. A security reaches the primary markets only once. In the case of equities, stocks reach the primary market during the initial public offering. Initial public offering is when a company sells its shares to the public for the first time. 

The secondary market is where securities are sold after their initial sale. The share market is a secondary market. 

4. National and International Markets

The national stock market consists of stocks that are listed within the national. For instance, the Indian stock markets consists of all the stocks that are listed in India.

An international stock market is where an investor go to buy international shares. Each country may have an international stock market. For instance, if you want to buy a share of Apple in Japan, you need to go Japan’s international market.

5. Commodity Markets

A commodity market is where primary economic sectors are traded. This includes raw materials such as gold, silver, oil etc. The trader bets on the price of these commodities rising in a commodity market. 

6. Derivative Market

A derivative market is used to buy and sell derivatives. Derivatives are securities that derive their price from the underlying asset. Types of derivatives include futures, options etc., where the price is based on an underlying asset.

7. Forward Market

A forward market is a marketplace that prices securities for future delivery. A forward market enables the trading of future contracts. Forward contracts are similar to futures, but they differ in customizability.

8. Foreign Exchange Market

The foreign exchange market trades foreign currencies. It is an over-the-counter market. An investor buys a currency in the foreign exchange market in the hopes that it will raise in price. Thus, the foregin exchange market becomes a wise option to take advantage of foreign currency growth.

9. Traditional Market

Traditional marketplaces are the physical places where you can purchase the products you need on a daily basis. These marketplaces cater to the locals’ requirements, and the vendor is more knowledgeable than a new customer about things like seasonal buying patterns, places to find inexpensive goods at a discount, etc.

10. Alternative Market

The Alternative Securities Market is a category of the securities market developed especially for young, promising enterprises that have a lot of room to grow but can’t yet meet the standards set for larger companies. Small and medium-sized businesses can access the capital market with fewer restrictions in order to raise long-term, low-cost finance because of the way the market is set up.

What are the resources to learn Stock Market Trading?

Stock markets have been in existence for centuries now, and yet, we are still in the process of figuring it out completely. Hence, the best resource to learn about stock market trading is usually the experience of the experts. There are four main ways you can get access to this experience. The first way is through mentorship.

A mentorship program helps you get access to an expert from which you can learn firsthand about the trick of the trade. You could consider getting an online course for mentorship. Indiacharts is a platform that can offer stock market trading training and mentorship. You can also look at the history of successful traders in the past here. 

Secondly, you can watch documentaries and movies related to the stock market as well. They make it a common man to understand the complexities of the stock market. 

resources to learn Stock Market Trading
Resources to learn Stock Market Trading

Books are another valuable source of information about stock markets. Books give you a detailed view of stock market trading strategies.

William Delbert Gunn: A trader who has propounded his own methods and theories to

formulate a strategy to beat the market.

Jesse Livermore: He was able to amass great wealth through shorting. But then he lost all of

it and eventually took his life due to bankruptcy.

George Soros: A Hungarian-born trader who owns one of the most successful hedge funds in

the history of hedge funds.

Warren Buffet:  An investor who was an ardent supporter of value investing and he is

considered as the best in the industry and his teachings are still taught as lessons to new


Paul Tudor Jones: He is one of those traders who made money through shorting.  Paul made use of the 1987 market crash.

What are the important Stock Market Traders in the History?

Below are details about some of the important stock market traders in history.

Stock Market Traders
Important Stock Market Traders

John W. Henry: American investor and businessman John William Henry II is the creator of John W. Henry & Company. John Henry began developing a sports empire after making a fortune from his trading company J.W. Henry & Co. in the early 1980s.

The Boston Red Sox were purchased by Henry and his business partner Tom Werner in 2002 for $380 million, and in 2004, the Sox won their first World Series in 86 years.

Ed Seykota:  Ed Seykota is a famous trader wjp composed and featured in a musical adaptation of his trading method called “The Whipsaw Song.”

Despite being almost unknown in the financial world, Seykota’s accomplishments place him among the top trend watchers and traders of all time.

William Delbert Gann: Technical analysis tools like Gann angles and Master Charts were created by financial trader William Delbert Gann, sometimes known as WD Gann. W.D. Gann is renowned for his use of geometry, astrology, and prehistoric mathematics to forecast financial market occurrences. He created the indicators, master charts, and Gann angles for technical analysis.

James Beeland Rogers Jr: American investor and financial analyst James Beeland Rogers Jr. is located in Singapore. He was an investor in the Quantum Fund, which was jointly formed. The portfolio increased by more than 4,000 percent over the following ten years, whereas the S&P only increased by less than half that amount.

John Alfred Paulson: John Alfred Paulson is a millionaire American hedge fund manager. When the credit bubble peaked in 2007, John Paulson made his fortune betting against subprime mortgages.

Paulson & Co., his hedge fund company, was founded in 1994 and prospered as a specialist fund until Paulson executed his “big short” in 2007.

Steven A. Cohen: Steven A. Cohen is an American hedge fund manager and owner of the Major League Baseball’s New York Mets.Steve Cohen is in charge of $26 billion hedge fund Point72 Asset Management, which began handling foreign capital in 2018.

Cohen oversaw SAC Capital, one of the best-performing hedge funds ever, for many years.

What are the important Stock Market Books?

Books are the go-to method for all those individuals who are beginning to start trading in the

stock market. Books can teach you many things that you might not be able to learn through

experience or simulators.

Stock Market Books
Important Stock Market Books

The following is a list curated as the important stock marketing

books to be read.

·   The intelligent Investor: No list with the topic stock market will miss out on this book. The

intelligent investor is written by Benjamin Graham. He was the mentor of Warren Buffet.

·   One up on the wall street: Another important stock marketing book written by Peter Lynch.

He points out how the stock market works and the methods of choosing the correct stocks.

·   Rich Dad Poor Dad: This book is not exactly a stock marketing book. Rather this book

teaches you about money management and about the right mindset. This book was written by

Robert Kiyosaki.

·   Market Wizards: A book that shows the insides of the minds of some of the greatest traders

in the history of the stock market. The book was written by Jack D.Schwager

·   Reminiscence of a stock operator: This book is considered as a biography of late Jesse

Livermore. It is important for traders to know what could go wrong as well. This book might

throw an insight just into that. It was written by Edwin Lefevre.

What are the Stock Market Movies?

The Stock Market has become a huge entity in the world and there are various kinds of

stories revolving around it. Stock Market movies have garnered attention for its thrilling

elements as well as for vicariously learning about the stock market.

Stock Market Movies
Stock Market Movies

Few of the stock marketing movies would include:

·   The wolf of wall street: A story about a man who started low and went on to become a

stockbroker. The plot also shows his downfall. The movie was released in the year 2013 and

starred Leonardo Dicaprio.

·   The big short: This movie was released in the year 2015 and it portrays a true-life event that

happened during the 2008 financial market crash.

·   Money Monster: This movie is an excellent lesson to traders which gives the message that

you should never blindly trust any financial advisers.

·   Trading places: This movie was released in 1983. It is a comedic movie and can be watched

for humorous elements. The story revolves around a con artist and a commodity broker

who are planning to take revenge on two millionaires.

·   Too Big to Fail: Another stock market movie based on the 2008 financial market crisis. It

talks about the stability of financial institutions and how the fall of one can result in the fall of

the economy.

What are the Stock Market Documentaries?

Stock Market documentaries can be considered as a more accurate depiction of the stock

market when compared to Stock market movies. Stock Market movies can be exaggerated

and produced for the sake of entertainment and the box office.

Stock Market Documentaries
Stock Market Documentaries:

Therefore, here are a few documentaries to watch which can give you a real insight into the stock market.

  • Quants (The Alchemist of Wall Street) 

Quants are math gurus and computer programmers in our global financial system’s engine room who created the financial product that nearly brought down Wall Street. This documentary vividly depicts the impacts of greed and terror, as well as the limitations of mathematical modeling in the context of stockbroking. This film is intended for people who believe in a practical approach to the ups and downs of the stock market.

  • Inside Job- Documentary (2010)

This documentary earned an Academy Award and is considered one of the best films about the financial crisis ever made. This film is a fascinating factual narrative thanks to high-profile interviews and excellent cinematography. This documentary clearly shows what transpired prior to the financial crisis and the levels of fear and greed.

  • The Ascent of Money (2008)

Niall Ferguson’s 2008 work The Ascent of Money: A Financial History of the World was made into a television documentary for Channel 4 and PBS, which won an International Emmy Award in 2009. It delves into the history of money, credit, and banking.

  • Enron: The Smartest Guys in the Room (2005)

Enron: The Smartest Guys in the Room is a 2005 American documentary film based on the best-selling 2003 book of the same name by Fortune reporters Bethany McLean and Peter Elkind, who also serve as co-writers with filmmaker Alex Gibney.