Stock market serves as a meeting place for buyers and sellers of shares. The Indian stock market plays a vital role in the country’s economic system as it creates opportunities for large sections of the population to participate in wealth building. However, participants should have a basic knowledge of the stock market in India. The National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) are the two prominent stock exchanges in India.
It is equally important for market participants to understand how the share market works. Some investors buy stocks to get higher returns, while others sell stocks to reduce losses or retain profits. In economic terms, stock performance is also an indicator of corporate profits and how the economy is faring.
Participants in the stock market
The broad term “stock market participants” includes companies, traders, investors, regulators, institutional investors, and private buyers. Each of them has a specific role to play in the ecosystem. That said, the key players in the stock market are buyers and sellers.
A trader buys/sells securities to make short-term profits from price fluctuations. Alternatively, an investor purchases shares of companies and holds them for the long term to build wealth. To understand how the stock market works, it is important to identify the key players.
Securities and Exchange Board of India (SEBI)
SEBI oversees and regulates the functioning of the Indian stock market. SEBI was established in 1988 primarily to protect investors from fraud and maintain the integrity of the stock market.
Among SEBI’s responsibilities are stock exchange regulation, intermediary registration and regulation (including stockbroker registration), corporate disclosure monitoring, and enforcement of rules to prevent fraudulent activity. SEBI instils trust in investors by ensuring that market players follow the highest standards of behavior. One must understand SEBI’s function to understand how the stock market works.
Stock exchanges
Stock exchanges facilitate the buying and selling of securities. Essentially, one should understand how the stock market works before entering the stock market. The optimal floor price is always being discussed and exchanged between buyers and sellers. Investors can’t interact directly with the exchanges. They must go via dealers or stockbrokers who help with trading.
The BSE and the NSE exchanges allow the selling of shares to the public, providing businesses the opportunity to raise capital and buyers a place to purchase those shares. With a market capitalization of more than Rs. 2.27 trillion crore, the NSE is the biggest stock exchange in India.
Stockbrokers and Brokerages
Stockbrokers serve as an intermediary between the stock exchange and investors. They carry out buy-and-sell orders as authorized agents of their customers. Brokerages are crucial to the share market’s operation as they handhold traders and investors to navigate the market. For rendering trading-related services, they charge a fee based on the level of service provided—full-service or discount.
Discount brokerages offer basic buying and selling services at a low cost, whereas full-provider brokerages provide customized services along with financial planning and deployment of funds. Anyone who wants to learn how the share market works should understand the role of stockbrokers and brokerages as they serve as the main point of contact for traders.
Investors and Traders
Investors buy securities and other financial instruments and hold them for the long term to make profits. They regularly receive returns as dividends and stock splits apart from stock gains. The stocks they hold gain or lose value based on stock market fluctuations and the general state of the economy. A trader purchases and sells currencies, commodities, and stocks to take advantage of short-term fluctuations.
Traders bring vim and vigor to the markets with aggressive stock bets, while investors prove how the waiting game can pay off in the long term. Due to their respective roles in generating supply and demand, investors and traders are essential to the functioning of the stock market ecosystem.
Markets
A capital market is a marketplace that provides a meeting place for buyers and sellers. In a capital market, buyers and sellers trade financial instruments. Two popular examples of capital markets are the stock market and the bond market.
Primary Market
The primary market is often referred to as the new issues market. It is where stocks, primary bonds, and debentures are offered to the public by companies or governments to raise money. The primary market refers to that market in which original securities are sold and circulated. Learning how the share market works ensures that securities offerings are done in a fair, transparent, and efficient manner.
Companies, financial institutions, and even governments use the primary market to raise money to expand their business or carry out development activities such as building infrastructure. Eg: Bonds issued by NHAI (National Highways). Initial public offerings (IPO), rights issues, and the sale of equity or debt are various modes of raising capital from the primary market.
Secondary Market
A financial market where investors purchase and sell previously issued assets including stocks, bonds, options, and futures contracts is called the secondary market, often referred to as the aftermarket. Instead of being sold directly by the issuing business, securities that were previously offered on the main market are exchanged among investors on this market.
The secondary market refers to the stock market where traders and investors buy and sell shares of companies. In other words, the secondary market provides investors in the primary market a platform to profit from their investments. Examples of secondary markets are the National Stock Exchange and the Bombay Stock Exchange. To sum up, in a primary market, investors purchase shares from the company, while in a secondary market, shareholders sell their shares to buyers.
Trading in the stock market
Stock market trading entails the buying and selling of shares of companies that are available to the general public. Such investors should know how the share market works before making a selection. The share market refers to trading exchanges, where shares are bought, sold, and traded on exchanges like the BSE and NSE. One needs to understand how the stock market works.
Intraday trading is among the most popular approaches to stock exchange trading, also termed day trading. While many traders use this technique to gain huge profits, there are inherent risks involved. These include traders who buy and sell stocks over the same day, employing short-term trading strategies.
Arguably, the safest investing method is long-term investing. It works well for a majority of cautious investors who prefer to purchase and keep stocks for months or years. While this might sound easy, choosing stocks to hold for the long term is not easy. The process involves extensive research of the company’s fundamentals, business model, and prospects.
Pricing of shares in the stock market
When a company decides to go public, the price of its shares is initially determined by the IPO price band. However, the listing price of a stock does not stay constant but fluctuates with varying market conditions. Macroeconomic factors can influence the performance of the stock market, while the performance of a business has a bearing on its stock price. If the market perceives that a firm is efficient, it will likely reflect in a higher stock price, while a bad perception can push the share price down. However, this is not set in stone as several other factors can also move stock prices. Understanding what is stock market in India is essential before pricing a share in the stock market.
Government policy and regulation can also impact stock prices. Stock prices are influenced by a company’s management style and level of leadership experience. The announcement or remarks made by management might result in an instant change in the stock price. Interest rates have a big influence on how much it costs for businesses to borrow money.
Conclusion
A stock market is a platform through which people buy and sell shares of companies, with the price determined by demand and supply in the market. The stock market enables business entities to issue shares to source capital for expansion and allows investors to invest for possible gains.
A basic understanding of market indexes, stock exchanges, and price fluctuation dynamics is necessary to comprehend how the stock market works. A knowledgeable approach to investing can reduce risks induced by market volatility while fetching financial rewards.
