Public Limited Companies
We now understand the IPO process and reasons for offering shares to the public, thus allowing us to explore share markets further.
A publicly traded company is required to divulge all corporate-related matters to the public. The shares of such companies are exchanged regularly on the stock exchanges. In this chapter, we will look into some of the reasons why market participants trade stocks.
What is the share market?
The share market is an electronic marketplace where stocks, bonds, and other securities are bought and sold. Basically, it is a marketplace for investors to trade these financial instruments. It provides an avenue for companies to raise money through initial public offerings (IPOs) or existing shares in the market, while also enabling investors to generate returns by buying and selling securities.
Let’s take into consideration a scenario:
Reliance Industries was confronted with a corporate action from the regulator. Also, some of their management personnel resigned. This had significantly impacted their reputation, and their stock price took a dive to Rs.3,000 from the previous Rs.3,500.
Let’s suppose that A and B are traders.
A’s take on Reliance Industries – With the challenge of finding a new CEO, what seems probable is that the stock price will decrease further. For trading with A’s outlook in mind, selling Reliance Industries shares should be considered.
B has a different take on the issue; she believes Reliance Industries stock price is overreacting to the leadership change and the corporate action, and will rebound shortly when a suitable head is found.
From B’s perspective, it would be wise to purchase shares of Reliance Industries.
For A and B, the transaction amount in Reliance Industries will be Rs. 3000, with A selling and B purchasing.
Both A and B will order to buy and sell shares via their stock brokers, who deliver it to the stock exchange. The share market’s primary responsibility is ensuring these orders match and the trade can be completed. It serves as an intermediary between varied market participants.
A stock exchange is a platform where market participants can acquire shares from any publicly listed firm and take part in trading from their perspective, with the understanding that there will be opposing perspectives. Ultimately, differing opinions create a competitive market.