In any local vegetable market, the price of a vegetable is dependent on its demand and supply. As the demand increases, the prices too increase. On the contrary, if the supply is more, perishable commodities’ prices decrease. In a simplistic sense, this is the case with share markets too.
Share markets are entities which provide a platform for trade of securities, shares, bonds and futures. They preside over the transactions, secure the trade and guarantee future agreements. Bombay Stock Exchange and National Stock Exchange are the two prominent stock exchanges in India. To trade a company’s stock over a stock exchange, it has to be listed there. There are about 1552 listings in NSE (as of December 2010) and over 5000 listings in BSE. Every stock exchange has a means of keeping track of the progress of its top companies’ stocks (by means of trade volume/value). This, it does for the assessment of trend in trading during a particular day. NIFTY is the key index of NSE which is based on the value of top 50 highest traded stocks while SENSEX is the key index for BSE which keeps track of the top 30 stocks.
Who or what determines a share’s price is quite complex and before going down the monkey’s tail one should know how a stock’s price is decided when it first goes public, an event called initial public offering. It is the sale of a company’s stock for the first time to the public. In privately held companies, almost all the stocks of the company are held by a privileged set of owners and it usually isn’t possible to obtain the stocks of a private company. On the other hand, a huge portion of a public company’s stocks are held by the public and their stocks are readily available in free market trade. Since a public company can have thousands of share holders, it must have a board of directors who analyze the company’s going in the share market and report it to a centralized governing board. In India, Securities and Exchange Board of India has the ultimate authority over trades in NSE and BSE.
The prime reason for going public is to raise cash. The value of a company’s stock at IPO is called as the face value which is generally Rs.10 in India. As long as there is demand for a company’s stock, it can issue more and more stock to raise more money. In addition to this, stocks being liquid are excellent perks to be given as a part of employee stock ownership plans to allure good talent.
Whenever a stock is traded, say over BSE, the central authority automatically notes down the price at which the stock was traded. And this is assigned as the price of that stock. Successively, if the stock is traded at a different price, then the value assigned for the stock too is changed to that. The problem with this system is that during heavy trade heavy trade traffic, the stock prices tend to be extremely volatile which is clearly insalubrious. To avoid this, most stock exchanges will freeze trading in a stock if its price wavers too much. A stock exchange can also suspend a stock’s trade if it suspects that insiders are deliberately manipulating a stock’s price.
From this it is clear that there is no central authority to decide a stock’s price. At any time, the price of a stock is the price at which a seller sells the stock to a willing buyer. If one observes the price of a stock throughout a day, one will be appalled by the various fluctuations in it. Most of the trade in a stock exchange is done by professional traders who try to profit out of minute changes in stock prices. They buy a stock at a lower price and sell it a few minutes, or may be a few hours later at a higher price, thereby profiting out of it. For this the trader needn’t know all the information or growth prospects of a company. He simply has to be a good mind reader, grasping the mood in the market and buying the stocks which he feels others too are likely to buy and hence its price is likely to rise. These traders, who hardly hold a stock for more than half a day, are the prime reason for the fluctuation in stock prices.