How the Stock Market Works: A Step-by-Step Breakdown
The stock market works through a network of exchanges, brokers, and investors who buy and sell shares of publicly listed companies. At its core, it is a price discovery system: prices are set by what buyers are willing to pay and sellers are willing to accept at any given moment.
Step 1: Companies List on an Exchange
Before a stock can be traded, a company must go public through an Initial Public Offering (IPO). In an IPO, the company sells a portion of its shares to the public for the first time. After listing, those shares can be freely bought and sold on the exchange.
In India, the two primary exchanges are the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange).
Step 2: Brokers Connect Buyers and Sellers
You cannot trade directly on an exchange. You need a registered broker, such as Lemonn, to place orders on your behalf. You open a demat account (to hold your shares electronically) and a trading account (to execute buy or sell orders) through the broker.
Step 3: Orders Are Matched
When you place a buy order, the exchange's order matching engine looks for a seller who wants to sell at your price. When a match is found, the trade is executed instantly. This entire process happens electronically in milliseconds.
There are two common order types:
- Market order: You buy or sell at the best available price right now.
- Limit order: You specify the exact price you want and wait until a match is found.
Step 4: Settlement Happens
After a trade is executed, the exchange processes the settlement. In India, this follows the T+1 settlement cycle, meaning the shares and money are exchanged one business day after the trade date. Your demat account gets credited with the shares you bought, and debited when you sell.
How Are Stock Prices Determined?
Prices change throughout the trading day based on the balance of buy and sell orders. If more investors want to buy a stock, the price rises. If more want to sell, it falls. This is called price discovery.
Longer term, prices reflect business fundamentals: revenue, profits, growth prospects, and market conditions. That is why profitable companies with strong growth potential tend to have higher valuations.
Trading Hours in India
The Indian stock market is open from 9:15 AM to 3:30 PM on weekdays (Monday to Friday), excluding public holidays. There is also a pre-open session from 9:00 AM to 9:15 AM where orders are collected before regular trading begins.
Indices Tell the Overall Story
You may have heard of the Sensex or the Nifty 50. These are market indices that track a basket of top companies and give you a quick snapshot of how the overall market is performing. When the Nifty 50 rises, it generally means large-cap stocks are doing well that day.
Key Takeaway
The stock market is an organised, regulated, and transparent system for buying and selling company ownership. Understanding how it works removes fear and confusion, and gives you the confidence to start investing. Use the Lemonn app to explore real-time prices, place orders, and track your portfolio.
