The Stock Markets
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Having understood the IPO process and what really goes behind the company’s transition from
primary to secondary market we are now set to explore the stock markets a step further.
By virtue of being a public company, the company is now liable to disclose all information related
to the company to the public. The shares of a public limited company are traded on the stock exchanges
on a daily basis.
There are few reasons why market participants trade stocks. We will explore these reasons in this article.
What really is the stock market?
stock market is an electronic market place. Buyers and sellers
meet and trade their point of view.
For example, consider the current situation of Infosys. At the time of writing this, Infosys is facing
a succession issue, and most of its senior level management personnel are quitting the company
for internal reasons. It seems like the leadership vacuum is weighing down the company’s reputation
heavily. As a result, the stock price dropped to Rs.3,000 all the way from Rs.3,500. Whenever
there are new reports regarding Infosys management change, the stock prices react to it.
Assume there are two traders – T1 and T2.
T1’s point of view on Infosys - The stock price is likely to go down further because the company
will find it challenging to find a new CEO.
If T1 trades as per his point of view, he should be a seller of the Infosys stock.
T2, however views the same situation in a different light and therefore has a different point of
view – According to him, the stock price of Infosys has over reacted to the succession issue and
soon the company will find a great leader, afer whose appointment the stock price will move upwards.
If T2 trades as per his point of view, he should be a buyer of the Infosys stock.
So at, Rs.3, 000 T1 will be a seller, and T2 will be a buyer in Infosys.
Now both T1 and T2 will place orders to sell and buy the stocks respectively through their respective
stock brokers. The stock broker, obviously routes it to the stock exchange.
The stock exchange has to ensure that these two orders are matched, and the trade gets executed.
This is the primary job of the stock market – to create a market place for the buyer and
seller.
The stock market is a place where market participants can access any publicly listed company
and trade from their point of view, as long as there are other participants who have an opposing
point of view. Afer all, different opinions are what make a market.
What moves the stock?
Let us continue with the Infosys example to understand how stocks really move. Imagine you are
a market participant tracking Infosys.
It is 10:00 AM on 11th June 2014 ,and the price of Infosys is 3000. The management makes a statement
to the press that they have managed to find a new CEO who is expected to steer the company
to greater heights. They are confident on his capabilities and they are sure that the new CEO
will deliver much more than what is expected out of him.
Two questions –
a.How will the stock price of Infosys react to this news?
b.If you were to place a trade on Infosys, what would it be? Would be a buy or a sell?
The answer to the first question is quite simple, the stock price will move up.
Infosys had a leadership issue, and the company has fixed it. When positive announcements are
made market participants tend to buy the stock at any given price and this cascades into a stock
price rally. how
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