Stock markets are crucial for the development of countries around the globe. They provide liquidity for investors and help allocate capital across various sectors.
The stock market is a financial system where companies can raise money by selling a small portion of their ownership. At the same time, investors can purchase stock in companies to gain partial ownership.
Only some companies could sell stocks, but this has expanded to include many companies in different industries over time. Continue reading if you are interested in learning more about the working of the stock market!
Who are the stock market’s participants?
Before understanding how the stock market works, let us discuss who the participants are in the stock market.
The Securities and Exchange Board of India (SEBI) regulates the Indian stock markets, ensures fair trading and prevents fraud and manipulation in securities markets.
All players must adhere to the rules established by SEBI, including exchanges, businesses, brokerages, and other parties.
2. Stock Exchanges
The buying and selling of securities can be done on a stock exchange’s platform. Registration with SEBI and the stock exchange in India (BSE, NSE, or regional exchanges) is a need before any trading can take place.
A person can buy or sell any share they see on the stock market today since it is issued by a company that is currently publicly traded.
A corporation makes its first shares offer and begins trading on the stock market during an initial public offering (IPO).
4. Market Intermediaries
Intermediaries are organizations that facilitate the investing activity while guaranteeing that all regulations established by the regulator are followed.
These include trading members, depositories and depository participants, clearing houses, members, and banks.
Investors and traders are the two main categories of participants in the market. Investors purchase a company’s stock to hold it long-term and earn money from it. In contrast, traders engage for the short term.
What are the types of markets?
Now, let us see what the types of markets in India are:
a. Primary Market
Companies offer their stocks for sale for the first time on the primary market.
b. Secondary Market
Shares issued by an organization go on the secondary market after being issued. Then they are quoted on the stock exchange in India. This means that anyone can buy or sell shares according to the price listed on the stock exchange.
How does the stock market function?
Let us now start to comprehend the working of the stock market.
- Through an IPO, enterprises first make their stock available to the general public for purchase.
- Now, through brokers, investors subscribe to IPOs. The stock is sold to winning bidders at a price set by the firm after the IPO.
- Stock is listed on the secondary market after the initial public offering.
- Then, investors wishing to gain profits or decrease losses can buy and sell these stocks.
However, investors will require to open a Demat account and a Trading account to trade. After they have the account, they may decide which stock to purchase.
The broker must know that you want to purchase a specific stock. Your broker posts a request to buy on the stock exchange, and the exchange looks for a seller.
To ensure that no fraudulent transactions occur and that the parties do not default on their agreements to buy and sell, the exchange additionally verifies the identity of the buyer and the seller.
Within T+2 days, shares that are purchased and sold are settled.
The stock market is volatile and prone to ups and downs. Thus, before investing, gain an understanding of how the market functions. As one becomes more competent at stock market investing, start small and progressively raise capital.