In the modern world, a stock exchange is an electronic marketplace where buyers and sellers come together to buy and sell shares. The stock market is mainly a function of demand and supply. These are the forces for driving the markets. If more people investing in that particular stock will give good results and desire to buy the same stock than selling it, the price would rise and vice versa.
At a specific point, there should always be a buyer or seller; otherwise, there will be no trade. Every share that trades in exchange has a range known as the upper circuit and lower circuit. If you find only sellers and no buyer as the result, this particular stock hit the lower circuit and vice versa. Therefore, Trade takes place only buyers and sellers available for the trade to take place.
If you place a market order, the order is executed at the available exchanges best bid/offer. The bid-ask distribution is called the bid-ask spread. If the quantity of current bids/offers is not adequate to fit the quantity of your order, in that case, the remaining unfinished quantity will be balanced against the next best bid/offer. The equilibrium price is the price at which the maximum number of stocks may be traded based on the quantity and price of demand and supply.
Stock exchanges like BSE and NSE have computer algorithms that determine the price of stocks on the basis of volume traded and these prices change at a very high speed and make most of the price-setting calculations.
The stock market price also depends on timings and how news is being marketed. The major factors that influence the demand for stocks are economic data, interest rates, and corporate results, speculations in the market. The stock exchange is free of human influence. It can be more explained as an auction house, which enables market participants to negotiate prices and make trades happening.
An initial process of listing shares on a stock exchange is IPO (Initial public offering). The company sells the company shares to raise money to grow its business. Investors purchase those shares at the first level (primary market), then buy, and sell those stocks among themselves in the secondary market. An exchange monitors the demand and supply of each listed stock or the levels at which stock market participants (investors and traders) are willing to buy or sell. An execute trade is settled in T+2 days meaning you will get your shares transacted into your account in two working days.
From Monday to Friday, the Indian stock market runs for five days. At both the major Indian stock exchanges, BSE and NSE, the usual trading period is between 9:15 AM and 3:30 PM. However, there is a brief pre-opening session from 9:00 AM to 9:15 AM every day prior to the regular trading session.This is the time when a decision is made on the opening price of the securities.
The pre-opening session is split into three segments - The order collection period, order matching period, and buffer period.
9:00 AM to 9:08 AM (Order Collection period) -During this time span, you can place, change, and cancel your order. In this time, however, no execution occurs.
9:08 AM to 9:12 AM-This is referred to as the order matching period or trade confirmation order. During this interval, you will not put, change, or cancel your order. Based on the price identification process, placed orders are executed during this time. This is often referred to as deciding the equilibrium price or auctioning the call.
9:12 AM to 9:15 AM-This time is called the buffer period and is used from the pre-opening session to the regular market session for a quick transition.
The stock valuation is an important aspect that helps in making informed decisions using some standard formulae and concepts. Stock valuation tries to figure out the fair market value of a financial instrument at a particular time and can be divided into two groups: Absolute Valuation & Relative Valuation.
Absolute valuation intends to find the “intrinsic” value of the financial instrument using fundamental strengths of the company as the dividends, cash flow, and the growth rate for a single company.
Relative valuation or peer comparison, is mostly used a few common ratios are price-earnings, price-sales and price-book, P/E, EV/EBITDA, and others, there could be an endless number of methods of comparisons. This idea is simply based on valuing “comparable” assets with other businesses.
There could be different approaches to value a company. Different industries have different persona hence require different valuation methods. For example, Banks cannot be valued in the same way as the cement industry. The underlying principle is to find the intrinsic value of the stock and find whether it is overvalued or undervalued and whether they have the necessary organizational and financial capacity to recover from such undervaluation.
Another important method is the Discounted Free Cash Flow method (DCF). This approach offers insight into the company's potential success and its capacity to produce cash flow from the resources of the company. It can be further elaborated by doing fundamental analysis (Quantitative and qualitative terms) How stock prices are calculated in the short term is what is mentioned above. Stock rates or prices, however, obey the dynamics of their underlying market in the long term.
Kundan Kishore
Curator of A Complete Course On Indian Stock Market
