What really is the stock market?

Like we discussed in chapter 2, the stock market is an electronic market place. Buyers and sellers meet and trade their point of view. For example, consider the current situation of Infosys. At the time of writing this, Infosys is facing a succession issue, and most of its senior level management personnel are quitting the company for internal reasons. It seems like the leadership vacuum is weighing down the company’s reputation heavily. As a result, the stock price dropped to Rs.3,000 all the way from Rs.3,500. Whenever there are new reports regarding Infosys management change, the stock prices react to it. Assume there are two traders – T1 and T2. T1’s point of view on Infosys - The stock price is likely to go down further because the company will find it challenging to find a new CEO. If T1 trades as per his point of view, he should be a seller of the Infosys stock. T2, however views the same situation in a different light and therefore has a different point of view – According to him, the stock price of Infosys has over reacted to the succession issue and soon the company will find a great leader, after whose appointment the stock price will move upwards. If T2 trades as per his point of view, he should be a buyer of the Infosys stock. So at, Rs.3, 000 T1 will be a seller, and T2 will be a buyer in Infosys. Now both T1 and T2 will place orders to sell and buy the stocks respectively through their respective stock brokers. The stock broker, obviously routes it to the stock exchange. The stock exchange has to ensure that these two orders are matched, and the trade gets executed. This is the primary job of the stock market – to create a market place for the buyer and seller. The stock market is a place where market participants can access any publicly listed company and trade from their point of view, as long as there are other participants who have an opposing point of view. After all, different opinions are what make a market.