Markets have been a crucial part of human society ever since trade came into existence. In the beginning, transactions took place in the form of a barter system ie. exchange of goods. However, with the creation of currency, trade expanded beyond the geographical boundaries and there was no limit as to how an economy could grow. As markets evolved, prices became a key factor in turning the market to be competitive in nature.
Furthermore, with the invention of stocks as means of capital for businesses, it soon had a thriving marketplace of its own . Ever since, the stock market has been one of the most significant pillars of the economy. So significant that some would go as far as saying that it is one of the largest legal gambling markets.
Origin and History of Stock Market
Although the early barter systems laid the foundation for financial markets, stock markets didn’t come to existence until 1602. The first modern stock exchange was established when Dutch East India Company issued public shares in Amsterdam. Later in 1792, NYSE came and became the central hub of U.S. financial markets. Soon stock markets saw rapid growth, especially in India where informal stock trading began in the 1830s. In 1875, BSE was formed and during the colonial era as industries expanded BSE became India’s first organised stock market. Post independence, regulatory bodies like SEBI were established to oversee the market. During the economic liberalisation in the 1990s, NSE was founded introducing greater transparency. Soon enough, physical certificates transitioned to electronic formats allowing stock markets to integrate with the global markets.
How does the stock market work?
Stock market aka share bazaar, is a place where stocks are bought and sold on exchanges like NYSE, NASDAQ, or BSE. Buying a share is like buying a partial ownership of a company allowing investors to earn income from returns and dividends. Stock prices, like any other market, are influenced by supply and demand, political scenario, company performance, industry trends, economic factors, and investor sentiments.
These factors can be tracked by following up on the news and reading up on stock indices like S&P 500 or Nifty 50 that track the performance of a group of stocks and reflect market trends. However, stock prices can be sensitive and volatile in nature, driven by economic changes, interest rates, or global events, making the market unpredictable.
Understanding Science behind the Stock Market
Understanding science behind stock market involves understanding the nuances of some important concepts like:-
- Market Efficiency: EMH (Efficient Market Hypothesis) suggests that all the information available in the market is already reflected in the stock’s price.
- Risk and Return: Investors want higher reward for higher risk which is why stock is more riskier than a bond.
- Market Sentiment & Behavioral Finance: It signifies the importance of how investors can drive the prices higher or lower based on collective emotions, often leading to bubbles or crashes.
- Valuation Models: Understanding models like DCF (used to value present value of a company’s future cash flows) or P/E ratio (indicates how expensive or cheap a stock is) can help in fundamental analysis of a company.
- Diversification & Portfolio Theory: MPT (Modern Portfolio Theory) states that diversifying investments across different sectors and assets can reduce risk.
- Technical Analysis: It is widely used by traders to study historical patterns, price charts and trading volume of a stock as well as to time their entry and exit points.
Where to learn about the stock market?
Learning about the stock market involves indulging in a combination of foundational knowledge, practical experience and keeping up-to-date on market trends. Some of the recommended sources to learn about stock market is:
- Books: like The Intelligent Investor by Benjamin Graham, A Random Walk Down Wall Street by Burton G. Malkiel and One Up On Wall Street by Peter Lynch are interesting reads.
- Online Courses: Opting in for courses will give you a way to track your performance and learn at the same time. For example, the online Stock Market Wizard Course by The WallStreet School provides practical training to formulate the students their own strategies. The most highlighted advantage of this course is that training is provided by ex-Investment Bankers and Valuers from Goldman Sachs and Mckinsey.
- YouTube Channels: YouTube has a variety of channels that helps to understand the stock market from a professional’s perspective.
- Competitions: Participating in stock market simulated competitions fosters interest and allows to trade stocks in a simulated environment with access to real time data.
- Podcasts: Provides insights from famous investors, investing strategies and explains financial and economic trends in an accessible way.
- News Platforms: like Bloomberg, CNBC, Financial Times helps in understanding real time market sentiments, coverage of global financial markets and trends
Using these resources will help you build a solid foundation in stock market investing, develop practical skills, and stay updated on market news.
Summary
To conclude, stock markets have evolved from early barter systems, starting with the barter system, to a global marketplace where stocks are traded as an important part of the economy. The first modern stock exchange was established in Amsterdam in 1602, followed by the New York Stock Exchange in 1792. In India, the Bombay Stock Exchange (BSE) was founded in 1875, becoming the first organized stock market in the country. Stock prices are impacted by supply and demand, company performance, economic factors, and investor sentiment, which makes them volatile.
Learning about the stock market can be achieved through books, online courses, news platforms, and simulated trading competitions, providing a comprehensive foundation for investors to make informed decisions.
