Now, if you have set up your account and ready to invest, then let us discuss what stocks are? And what exactly is a stock market? If you haven’t set up a DEMAT account and confused as to how to do it, here is a link to my first blog post where I talk about exactly how to do that https://rtistic.info/investing-in-nepal-getting-started/.
The things you will learn from this article are as follows
- What is the Stock Market?
- The Complexity of the Stock Market
- An Ideal Stock Market
- How is the stability of prices maintained
- How do buyers and sellers define the price of stocks
- How are the Values of a Particular Stock Decided?
- Where can I find the Price of Shares of Different Companies in Nepal
What is the Stock Market?
To understand the stock market, you can draw an analogy from the regular markets where we all make “trade.” A market is a meeting of people for the purpose of trade. There are many markets in the economy, such as the apple markets, cake markets, vehicle markets, house markets, and so on. Similarly, a stock market is a place where people can buy or sell shares of a company(like apples).
The Complexity of the Stock Market
Unlike the apple market, the stock market can seem very unstable, and it is. Prices move up and down on the screen, showing a variety of colors. But I think it also invokes a false sense of belief that the stock market is very complex and ordinary people other than “financial experts” cannot possibly understand it. But that’s not true. If that were the case, I wouldn’t be writing these posts.
Although the stock market is complex, it’s not as complicated to a level that regular people like you and I cannot understand it at all. And I would like to go as far as to say that there are no real “financial experts,” at least not in a way that we think about them. And that is a topic for another day.
An Ideal Stock Market
We all know the ideal theoretical conditions that we studied in schools. And we also understand that the perfect conditions are seldom accurate in the realm of practicality. So a well-functioning (Stock) Market has a few fundamental traits:
- Competition between Buyers and Sellers
- High Volume Trading (To maintain stability in individual trades)
- Contracts and Rules enforced by Law.
Let’s take the analogy of the apple market and lets us try to understand these traits in detail. Competition between buyers and sellers simply means that the buyer is looking for the lowest price possible, and the seller is looking for the maximum profit. In the apple market, both the buyer and the seller have agreed on a price. It’s the price at which both the buyer and the seller will be happy with the trade(under reasonable condition).
But other than that, the sellers are also competing with other sellers. That is simply market competition(capitalism at its core). Hence the price of the apples always remains fair as the market itself defines the cost of the apples (under reasonable condition). Stocks are similar in a way that the price of a particular stock is always “fair.” The market price of shares is never low or expensive but ‘fair,’ which is a crucial distinction. But prices can also be manipulated a topic I will discuss ina future post.
How is the stability of prices maintained
If there are many buyers and sellers selling apples, then the price stabilizes because the market will punish the sellers who are trying to sell at a high cost as no one would buy from them.
Law must enforce the rules of the trade in a way that is fair to both buyers and the sellers. If in a market, a large number of sellers decide to come together and sell at a high cost, then buyers will have no choice but to buy at that price point. If sellers form a syndicate and start selling at a price, then the Law should ideally step in and save the day(in an ideal condition), which is not often the case. For e.g., in a monopoly, a single company gets to decide the price of a product in high demand regardless of what the buyers want. How do buyers and sellers define the price of stocks
How do buyers and sellers define the price of stocks
Remember the first image that comes to your mind when you think about the stock market. Yeah, that one. Let us demystify the colors and patterns. So when you see numbers going from red to blue to green and so on. That’s the price of stocks moving up and down. Now you might ask who defines the price of the stocks? Well, it’s you or rather the traders who trade the shares.
You see, unlike the apple market, in the stock market, buyers compete with other buyers, and sellers compete with other sellers. A seller is always trying to sell at a higher price to take home the maximum amount of profit available. And conversely, a buyer is always trying to buy at the lowest price possible. This constant tug of war is what keeps the market ‘fair.’ The movement of stock prices is not very complicated, but many variables affect it. But for now, let us understand how prices of stocks are decided by the people who trade them.
How are the Values of a Particular Stock Decided?
To make this idea simple, let us consider a hypothetical scenario wherein a day, only one stock can be sold or bought (Stock (A)). Let’s say the price of the stock A at first is 1 Rs. Now let’s say you as a buyer want to buy Stock A because you believe it will go up in value in the upcoming days, and you will make a good profit on it. Now the person who holds stock (A) also knows it’s potential but thinks he can use the money from his sale and invest somewhere else. And knowing the potential for the stock, he is ready to sell the stock at 3 Rs. Now, if you, as a buyer, think the price is fair, then you will buy the stock, and then the price of the stock after you buy it will be 3 Rs. for the entire day.
Yes, it’s that simple. Every person that buys or sells a stock defines the price of that stock for the next person. And the process continues.
In the Nepalese stock market the different colors and there meaning are as follows (it’s very straight forward):
- Red: Price went down
- Blue or no color: Price didn’t change
- Green: Price went up
Where can I find the Price of Shares of Different Companies in Nepal
All the stock prices of the companies listed in the Nepalese Stock exchange can be seen here. http://www.nepalstock.com. A stock exchange is where people can buy and sell stocks (and other securities). I know I haven’t yet talked about brokers and the secondary market. The Next post will be about how to set up a brokerage account and start trading stocks on the Nepal Stock Exchange. And there, I will also talk about the primary and secondary markets.
In General, You can understand the index value of NEPSE as the average value of all the stocks listed in the Nepalese stock exchange. Some indexes show the average value of different sectors in the exchange. How the values of indexes are defined is a whole different topic for another day.
Do feel free to comment if you have any questions you can email me and I will get back to you as soon as possible. Or just drop a comment down below.
- A stock market is a place where people can buy and sell stocks
- The stock prices are almost always fair
- Price of a stock is defined by the buyers and the sellers who sell them
- Stability in the markets is due to the constant tug of war between the buyers and the sellers