Ridhi Finserv

For many, the stock market seems like a magical place where shares of companies are bought and sold in an unending cycle. This perception of an “endless supply” of stocks can be puzzling, especially to new investors. To understand this phenomenon, it’s essential to delve into how the stock market operates, the role of primary and secondary markets, and the mechanisms that maintain liquidity and trading volume in the Indian context.

Primary Market: The Birthplace of Stocks

The journey of a stock begins in the primary market. When a company decides to go public, it issues a finite number of shares through an Initial Public Offering (IPO). These shares are sold to institutional and retail investors, providing the company with the necessary capital for growth and expansion. This initial issuance of shares is limited and predefined by the company, marking the first instance of the stock’s availability in the market.

Secondary Market: The Hub of Continuous Trading

Once the IPO is complete, the shares move to the secondary market, where they are traded on stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Here, investors buy and sell shares amongst themselves. The secondary market creates an illusion of an endless supply of stocks due to the constant trading activity. However, it’s important to note that the total number of shares remains fixed unless the company decides to issue additional shares through secondary offerings.

Mechanisms Ensuring Liquidity

A crucial aspect of the stock market is its liquidity – the ease with which shares can be bought and sold. Several mechanisms contribute to this liquidity:

1. Market Makers: These are entities or individuals who buy and sell stocks continuously, ensuring there are always buyers and sellers for any given stock. They play a pivotal role in maintaining the flow of trading and stabilizing the market.
2. Brokers: Brokers facilitate transactions between buyers and sellers, helping to match orders and execute trades efficiently. Their presence ensures that trades can happen quickly and smoothly.
3. Order Books: Stock exchanges maintain electronic order books that list buy and sell orders for each stock. This system helps match orders automatically, enabling continuous trading and contributing to the perception of endless supply.

Stock Splits and Buybacks

Companies can also influence the number of shares available in the market through actions like stock splits and buybacks:

• Stock Splits: In a stock split, a company increases the number of shares by dividing existing shares into multiple ones. For instance, in a 2-for-1 split, each existing share is split into two. While this increases the number of shares, it doesn’t change the overall value held by shareholders; it merely redistributes it.
• Buybacks: Conversely, in a stock buyback, a company purchases its own shares from the market, reducing the total number of shares available. This can increase the value of remaining shares if done strategically.

The Reality Behind the Perception

The perceived endless supply of stocks is a product of the efficient functioning of the secondary market, coupled with the liquidity provided by market makers and brokers. While trading appears continuous and unbounded, the actual number of shares is finite and determined by the issuing company. The dynamic nature of stock trading, influenced by investor demand and company actions like splits and buybacks, contributes to the robust and active environment of the stock market.

Conclusion

Understanding the stock market’s operation clarifies why it appears to have an endless supply of shares. This perception is crucial for maintaining investor confidence and ensuring smooth market operations. Recognizing the underlying mechanics can help investors make informed decisions and appreciate the complexities of stock trading. The stock market’s ability to match buyers and sellers efficiently creates an environment where trading can flourish, sustaining the illusion of an endless supply.