The share market can sometimes feel confusing, especially when it is going up or down. If you’ve ever wondered, “Why is the stock market down today?” or “How does the stock market work?”, you’re not alone! This guide will help you understand the basics of the stock market, why it goes down, and how to handle it.
What is the Stock Market?
The stock market is where people buy and sell stocks (also called shares) of companies. A share represents a small piece of ownership in a company. When you buy shares, you become a partial owner of that company. If the company’s value increases, you can make a profit.
In India, the two main stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These exchanges are like big marketplaces where shares are bought and sold. They are regulated by the Securities and Exchange Board of India (SEBI) to ensure fairness and transparency.
To buy or sell shares, you need to open a Demat account (for holding shares electronically) and a trading account (for buying and selling shares). A stockbroker helps you with this process by acting as an intermediary between you and the stock exchange.
How Does the Stock Market Work?
In simple terms, the stock market allows companies to raise money by selling shares to the public. In return, investors can buy and sell shares in hopes of making a profit.
There are two parts to the stock market:
- Primary Market: This is where companies first offer their shares to the public through an Initial Public Offering (IPO).
- Secondary Market: After IPOs, investors can buy and sell shares that have already been issued. Most trading happens here.
The stock market operates during specific hours in India, from 9:15 AM to 3:30 PM, with a short pre-opening session from 9:00 AM to 9:15 AM.
Why Do Stock Prices Change?
Stock prices don’t stay the same—they go up and down every day. This happens because of supply and demand. Here’s how it works:
- More demand for a stock (more people wanting to buy) makes the price go up.
- More supply (more people wanting to sell) makes the price go down.
In addition to supply and demand, stock prices are also affected by factors like company earnings, economic news, inflation, interest rates, and global events. For example, if a company releases a strong earnings report, its stock price might go up. On the other hand, negative news about a company can make its stock price drop.
What Causes the Stock Market to Go Down?
There are several reasons why the stock market may go down. Let’s explore some key factors:
- Excessive Leverage (Borrowed Money): Sometimes, investors borrow money to buy more shares than they can afford. If the market moves against them, they can lose a lot. When many investors use leverage and the market falls, they may all rush to sell, causing the market to drop even more.
- Inflation and Interest Rates: Inflation means the prices of goods and services rise. To control inflation, central banks may increase interest rates. Higher interest rates make borrowing money more expensive, which can slow down consumer spending and hurt company profits. This often leads to a fall in stock prices.
- Political Instability: Political problems, such as changes in government or conflicts, create uncertainty. When this happens, investors might sell their shares, leading to a drop in stock prices.
- Tax Changes: Sometimes, governments change tax policies. If investors think these changes will negatively affect companies, they may sell their shares, which can lead to lower stock prices.
What is a Stock Market Crash?
A stock market crash occurs when stock prices fall sharply in a very short time, often due to economic issues, market panic, or external events like natural disasters. Although crashes can be scary, they usually don’t last long. The market often recovers over time.
What to Do When the Stock Market is Down?
When the stock market is down, it’s normal to feel anxious. However, panic selling can make things worse. Instead, here are some steps you can take to protect your investments:
- Stay Calm and Avoid Emotional Decisions: It’s important to stay calm during a market drop. Emotional decisions like selling off your shares in fear can lead to greater losses. Remember, the stock market has always gone through ups and downs, and it usually recovers over time.
- Review Your Portfolio: Look at your investments and see how they’ve been affected. Are they still good investments for the long term? If needed, consider making adjustments to your portfolio.
- Diversify Your Investments: Diversification means spreading your investments across different assets like stocks, bonds, and mutual funds. This helps reduce risk because when one part of the market falls, others might not be affected. It’s always a good idea to have a balanced portfolio.
- Focus on the Long-Term: Stock market downturns are temporary. If you focus on your long-term goals, you’ll be better prepared to ride out market fluctuations.
- Rebalance Your Portfolio: Sometimes, your investments can get out of balance as market prices change. Rebalancing means adjusting your investments to make sure your portfolio matches your long-term goals.
- Consider Buying More Shares: If you believe the market will recover, a downturn can be a chance to buy shares at lower prices. Focus on companies with strong fundamentals (companies that are financially healthy and have a solid track record) as they are likely to recover faster.
Examples of Stock Market Crashes in India
India has experienced several significant stock market crashes, including:
- 1992 Crash: The Harshad Mehta stock market scam manipulated stock prices, causing a sharp drop in the market.
- 2008 Global Financial Crisis: The global recession affected stock markets around the world, including in India.
- 2015-2016 Crash: A slowdown in the Chinese economy, combined with demonetization in India, caused a market downturn.
- 2020 COVID-19 Crash: The pandemic caused a massive market drop, but the market rebounded in a few months.
Bull Markets, Bear Markets, and Market Bubbles
- Bull Market: A period when stock prices are rising and investors are optimistic. This can last for years.
- Bear Market: A period when stock prices are falling, and investors feel pessimistic. A market is considered a bear market if it drops 20% or more over a year.
- Market Bubble: When stock prices rise too much based on speculation (rather than the real value of companies). Eventually, the bubble bursts, and prices fall sharply.
How Stock Market Crashes Affect the Economy
A stock market crash can hurt more than just investors—it can affect the entire economy. A big drop in stock prices can lead to lower profits for companies, job layoffs, and reduced consumer spending. This can trigger a recession, where the economy shrinks, and recovery may take time.
Conclusion: Why Is the Share Market Down?
When the stock market goes down, it’s usually due to a mix of factors, like economic conditions, investor behavior, political instability, and global events. While it can feel unsettling, understanding these causes helps you make smarter decisions.
To ride out market fluctuations, it’s essential to stay informed, calm, and focused on your long-term goals. By following strategies like diversification, patience, and monitoring market trends, you can increase your chances of success in the stock market.By educating yourself about stock market basics and making informed decisions, you can become a more confident and successful investor!
