How Does the Share Market Works?

Stocks are a proven way of building wealth and securing your financial future. The Indian stock market has seen a steady increase in investors over the past few years. Modern-day brokers have made it easier for people to learn how to invest directly in stocks. They also share investing tips and stock market information that will help create an informed investor generation.

To become an investor, you must first understand how the stock market works.

Investors can trade on the stock market in a variety of financial instruments such as bonds, shares and derivatives. The stock exchange allows the buying and selling of shares.

The Bombay Stock Exchange and National Stock Exchange are India's two main stock exchanges. There is also a primary market for companies to list their shares. Secondary markets enable investors to purchase and sell shares that were issued in the initial public offering (IPO).

Here are some simple facts about the Stock Market:

  • The Stock Market.
  • How to Invest in India's Stock Market.

The Stock Market:

It is important to understand how the stock market works before you can learn about trade basics. This is how it works in detail.

  • Participants:

    The Stock Exchange Board of India, stock exchanges, brokers and traders/investors

Stock exchanges allow you to trade financial products. Before trading, brokers, traders and investors, as well as the companies, must register with SEBI.

  • Securities and Exchange Board of India, (SEBI),:

SEBI, the Indian market regulator, is responsible for ensuring that the Indian stock exchange functions smoothly and without any hiccups. This board ensures that the market is transparent and honest so that investors can make confident investments. SEBI guidelines must be followed by all participants, including exchanges, companies, brokerages and others.

Stockbrokers Stockbrokers make up the majority of members of stock exchanges. They act as intermediaries and execute buy-sell instructions from investors for a fee. In India, investors must trade through brokers/broking houses, who act as facilitators.

Investors vs traders: There is a difference between traders and investors in the market. Investors purchase company shares in order to keep them for the long-term and generate income. Traders are involved in the purchase and sale of equities.

Investors are motivated primarily by company performance, long term growth opportunities, dividend payouts and other factors. Trades, on the other hand, are influenced primarily by price movements and demand and supply factors.

Let's now discuss the two types above.

Primary Market: Simply put, the primary marketplace is where companies first list themselves on the exchange in order to be publicly traded.

To finance their business plans, companies need to borrow money from the market. You can do this by selling a portion of your company to shareholders. This requires issuing an IPO, or initial public offering.

Companies that issue shares for the first-time are listed on the primary market. In the following section, we have covered how you can apply for an IPO.

Secondary Market: In theory, the secondary market is where traders can buy and sell equities. Once company stocks are listed, they can be traded on the stock exchange. The price movements of the stock market are influenced by changes in supply and demand. Investors and traders are both primary participants in secondary markets. It's the place where sellers and buyers meet directly.

The stock market trades are a way to match the buyer and the seller. Your broker will forward your request for buying to the stock exchange. The stock exchange then compares it with a seller. The exchange notifies your broker once the price has been agreed upon and the trade is completed. The bourse also confirms the information of the buyer and seller to ensure that there is no default. To complete trading, the actual transfer of stock takes place.

The process used to take days. Digitisation has helped speed up the process to T+2, which is within two days of the transaction.

Understanding pricing in the stock market

Demand and supply factors drive the stock market's price. The share's price will rise if there are more buyers. The opposite is true for the stock market. As demand decreases, so does the price. To make money on the stock market, you need to know the exact value of your stocks. This requires you to calculate the fair value of each share. Otherwise, you might end up buying overpriced stock.

Partly, a company's share price is dependent on its market capitalisation. This is the sum of the company's stock prices multiplied with the number of outstanding shares. A change in stock price can affect a company's total market cap and therefore alter your return on investment.

The changes in demand and supply are the factors that determine the share price. The market's current asking price is determined by the closing price. Let's say you wish to purchase 100 shares of company XYZ. The previous closing price was Rs 40. The fair value is Rs 40*100 or Rs 4,000.

Another method to calculate fair price is the discounted cash flow method. According to this theory, the fair price equals the sum of all future dividends, which are discounted at the present value.

What is the stock market?

Let's now look at how the stock market operates. The stock market works in the same way as any other market. It is a place where buyers and sellers can come together to trade and negotiate prices.

The stock market is a network made up of brokers, broking houses and exchanges. They act as intermediaries between investors and companies. Companies are listed on the exchange via initial public offerings (IPO) before investors can buy their shares. IPO is a way to establish a company's market capital. Investors can purchase shares from companies on the stock exchange that are large-capitalized, medium-capitalized, or small-cap.

Stock exchanges have indices, too. Nifty and Sensex are separate indices for Indian exchanges NSE/BSE. These indices are shares of large-cap companies that have the highest market volumes and shares with the most popularity. These indices are affected by the performance of the underlying stocks and investors can follow them to see the market direction.

The bid-ask spread is another important concept that you should know when discussing the stock market. The price buyers will pay for an underlying is called the bid. It is usually less than the seller's asking price. The bid-ask spread is the difference between these prices. To make a trade, the buyer must increase his bid price while the seller must lower her ask price.

Steps to Invest on the Indian Stock Market

  • IPO:

    The SEBI receives a draft offer document from the companies. This document contains information about the company, including price band and shares being diluted. The company will offer its shares to investors via an IPO on primary market after approval.

  • Distribution

    The Company issues shares and allots shares for all or some of the investors that bid during the IPO. To enable trading, the shares are listed on the stock exchange (secondary market). This platform allows the initial investors to sell their sharemarket investments. Investors who did not receive an allotment at the IPO have the option to purchase shares on the secondary markets.

  • Stock brokers:

    The Indian stock market is interconnected through brokers (registered with SEBI or the stock exchange). The brokers place orders on the market after receiving instructions from clients. The trade is executed when the buyer and seller match. The stock exchange will confirm the transaction and send it to the seller and buyer.

This process was traditionally manual, time-consuming, and cumbersome. The entire process of matching buyers with sellers can now be done online through online trading platforms. The transaction time is now only a few seconds.

However, there are many potential investors. It is difficult to bring them all together in one place. This is where stock exchanges and brokerage agencies are crucial.

  • Place your order

    This happens when brokers place an order on behalf of clients on the exchange that processes it. The entire process involves several parties. To avoid defaults, both buyers and sellers receive confirmations from the stock exchange when they are matched. Settlement refers to the process in which the buyers receive the shares and the sellers receive the funds. T+2 settlements are used by the Indian stock market. Settlements take place within two working days of the date of the transaction.

Understanding the stock exchange basics will make investing profitable.

To invest in stocks, however, you will need a demat account as well as a trading account. To receive stocks or other forms of investment, a Demat (or dematerialized) account is necessary. Online account opening is quick and easy. Choose a trusted broker on the market, and then complete the online account opening procedure for your first Demat.

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