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Introduction

The share market is a platform where buyers and sellers come together to trade on publicly listed shares during specific hours of the day(called as intra-day trading). People often use the terms ‘share market’ and ‘stock market’ interchangeably. However, the key difference between the two lies in the fact that while the former is used to trade only shares, the latter allows you to trade various financial securities such as bonds, derivatives, forex etc. Understanding stock market dynamics is important for investors, analysts , and policymakers .

The principal stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

NSE and BSE leverage NIFTY and Sensex, respectively, as benchmark indices to assess the stock market’s overall performance. The top 30 equities listed on the BSE make Sensex, and the top 50 firms listed on the NSE make NIFTY.

What Is Traded On The Share Market?

There are four categories of financial instruments that are traded on the stock exchange. These include:

Shares

A share represents a unit of equity ownership in a company, and shareholders are entitled to any profits in the form of dividends and bear any losses the company may face. Many investors manage their shares through a Share trading app.

Bonds

To undertake long term and profitable projects, a company requires substantial capital. One way to raise capital is to issue bonds to the public. These bonds represent a “loan” taken by the company. The bondholders become the creditors of the company and receive timely interest payments in the form of coupons. From the perspective of the bondholders, these bonds act as fixed income instruments, where they receive interest on their investment as well as their invested amount at the end of the prescribed period.

Mutual Funds

Mutual funds are professionally managed funds that pool the money of numerous investors and invest the collective capital into various financial securities. You can find mutual funds for a variety of financial instruments like equity, debt, or hybrid funds, to name a few.

Each mutual fund scheme issues units that are of a certain value similar to a share. When you invest in such funds, you become a unit-holder in that mutual fund scheme. When instruments that are part of that mutual fund scheme earn revenue over time, the unit-holder receives that revenue reflected as the net asset value of the fund or in the form of dividend payouts.

Derivatives

A derivative is a security that derives its value from an underlying security. This can have a wide variety such as shares, bonds, currency, commodities and more! The buyers and sellers of derivatives have opposing expectations of the price of an asset, and hence, enter into a “betting contract” with regards to its future price.

Determinants of Stock Market Behaviour

Trends:

Trend is the direction that prices are moving in, based on where they have been in the past. Trends are made up of peaks and troughs. It is the direction of those peaks and troughs that constitute a market’s trend. Whether those peaks and troughs are moving up, down, or sideways indicates the direction of the trend.

1. An uptrend(bullish) is made up of ascending peaks and troughs. Higher highs and higher lows.

2. A downtrend(bearish)is made up of descending peaks and troughs. Lower highs and lower lows.

3. A sideways trend (neutral)(consolidation) is when prices move sideways in a horizontal range.

Instabilities:

Volatility refers to how quickly markets move, and it is a metric that is closely watched by traders.

More volatile stocks imply a greater degree of risk and potential losses.

Standard deviation is the most common way to measure market volatility, and traders can use Bollinger Bands to analyze standard deviation.

Maximum drawdown is another way to measure stock price volatility, and it is used by speculators, asset allocators, and growth investors to limit their losses.

Beta measures volatility relative to the stock market, and it can be used to evaluate the relative risks of stocks or determine the diversification benefits of other asset classes.

The CBOE Volatility Index (VIX) is a common metric used to measure the expected volatility of the S&P 500.

Investors can hedge to minimize the impact volatility has on their portfolio, or they can embrace volatility and seek to profit from price swings.

Investor Behavior:

Mainstream financial theory relies on the assumption that market participants are rational actors, who are self-interested utility maximizers who never make mistakes.

Behavioral finance has emerged to challenge the assumptions of rational actor theory as it applies to markets, investments, and other financial matters.

Behavioral finance draws heavily from cognitive psychology to understand investor behavior in the real world.

Market mechanism:

The bank’s performance is influenced by several mechanisms making it fluid, transparent and fair. These include stock exchanges where the sale and purchase of stocks are done, clearing houses that simplify trade and regulatory bodies that ensure market integrity as well as market compliance.

Technological advancements such as computerized trading systems and algorithmic trading have changed the dynamics of the markets and improved efficiency; however, there are still problems in innovation performance, stable market conditions, and safety against cyber threats.

Conclusion

Stock exchange is an essential ingredient of the economy as it facilitates firms’ capital raising initiatives, mobilization of savings for investments, business expansion and profit sharing. It also enables small investors to have investment opportunities that are usually reserved for large corporations while government capital projects receive funds from it. It acts as a measure of how the economy is doing.

Navigating through these volatile circumstances entails a deep insight into market behavior, disciplined presentation and a strong risk control strategy. The stock market’s condition keeps changing all the time; nevertheless, investors can always find chances to reduce risks by keeping informed always, maintaining long-term horizon and having diversified portfolios.

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Authors: Khushi Shah | Associate Consultant | blogs@bilimoriamehta.com |  +91 98709 25375

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