How do markets work?

Financial markets are profitable but complex to understand. They are made of a large number of different parts that complete and move towards each other. Every trader must have a full overview of the basic concepts, which will make it easier for you to understand the nature, logic, and terminology of financial markets. Fundamentals will lead your path to success.

Let’s start from the beginning. There is no one market when we say financial markets. It is a vast network of millions of traders aiming to generate profits by buying and selling anything we can think about.

THE SECRET OF UNDERSTANDING THE MARKET: IT HAS NOTHING TO DO WITH BEING RIGHT OR WRONG

Everyone who faces the market for the first time is usually scared because of plenty of information coming around. The idea is that all the information influences price movements. A trader should notice how the information will influence and decide on the right moment what action to take.
It is not okay to say that prices are ‘right’ or ‘wrong’. Prices are too cheap or too expensive. Suppose you were the trader in the stock exchange. When he has that feeling that a stock is underpriced, he will jump and buy it. When he buys it, his purchase will raise the value of the stock and push its price to go up.
On the other hand, if the trader feels that a stock is too expensive, he will sell it. His action will command the asset price to go down. This is how supply and demand rules markets.
The point is that there is no one trader thinking and acting. There are millions of traders who use computers and trade through trading platforms. There are millions of dollars flowing in a second, and the market is adjusting to their actions. The little secret is that the stock market allocates the capital. So, the stock market exists to determine the price of a stock based on how many people are willing to pay for a piece of a company.

Selling shares to the public helps companies raise their capital. IPOs are the first step towards this path. The initial public offer makes the company obvious to the public, and it is disposable to them. Anyone can buy its shares. As people buy their shares, the price goes up. Companies can raise the number of shares in the market, even after the IPO. It is called FPO.

How Company's Capital is raised in the market?

When the company enters the market, the markets try to understand and put a fair ‘price’ to its stocks. It is like people looking for a loan into a bank. One has a credit score of 813 and the other 623. Who will get a lower interest rate? The lower interest rate loan will go for the person who has the highest credit score. Why? Because it is less risky for not paying back. So is the market. Traders are willing to buy safer companies at higher prices—the riskier the company, the lower the price.