What is stock market?
Stock market is a place where individuals and institutions trade shares, meaning buying or selling shares. Effectively owning a portion of a company. Companies utilize the stock market to raise capital by issuing shares to the public. Investors, in turn, use this platform to buy and sell these shares, becoming stakeholders in the companies they invest in. Stock market basically helps you to buy the share of a company and connect the seller with you and vice versa.
What is stock :
Stock is an instrument that represents ownership of anyone in a company. When individuals or institutions own stock in a company, they are considered shareholders or stockholders. Owning stock means having a part ownership in the company.
Types of stock market
1. Primary Markets
The primary market, is where companies issue new shares of stock for the first time, to raise capital for various purposes such as expansion, research, development, or debt repayment. This process is typically made through an Initial Public Offering (IPO). Also known as the new issue market.
During an IPO(Initial Public Offering), a company offers its shares to the public for the first time. Investors in the primary market purchase these shares directly from the issuing company. The primary market is critical for companies looking to secure funds for their growth and operations. It’s the gateway for a private company to become publicly traded.
The main investors in this are Individual Investors, financial institutions, banks, HNIs, etc. The company who offers its share to public has to follow all the rules and regulations established by the SEBI(Securities Exchange Board of India), who is the regulatory authority for stock market.
2. Secondary Market
The secondary market, is the market in which issued shares are traded among investors. This market is the one most people refer to when discussing about the stock market.
Here, individuals and institutions buy and sell shares of publicly traded companies. The secondary market provides liquidity to investors, enabling them to easily convert their holdings into cash whenever they desire.
For example if you are buying 100 shares of TCS, some other will be selling 100 shares of TCS.
Participants
To understand stock markets in India , it is essential to know its participants. Key participants involved in the stock market are-
Securities Exchange Board of India (SEBI) : SEBI makes sure that the Indian securities markets operate effectively and transparently. Additionally, it safeguards everyone’s interests so that no one gains an unfair advantage. To safeguard the interests of investors, SEBI establishes regulatory frameworks that exchanges, businesses, brokerages, and other participants must adhere to.
Stock exchange : Stock exchanges in India are intermediaries which facilitates the trading of stocks by the investors i.e., buying and selling of the stocks listed on the stock exchange. Primarily there are two stock exchanges in India
- Bombay Stock Exchange (BSE) : Bombay Stock exchange is Founded in 1875, and it is one of the oldest stock exchanges in Asia. Commonly referred to as the BSE Sensex it is located in financial capital of India, Mumbai.
- National Stock Exchange (NSE) : National Stock exchange is founded in 1992, the National Stock Exchange (NSE) is a relatively newer entrant as compare to Bombay Stock Exchange but it has quickly risen to prominence.
Stockbrokers : A broker is an intermediary (a person or a firm) between an investor and the stock exchange, that executes buy and sell orders for investors in return for a fee or a commission. In simple words, stock brokers act as a portal to the stock markets , giving electronic access to expedite transactions.
Investors and Traders : Investors are the one who purchase stocks to become part owners of the company. Whereas, in trading buying or selling of equities occurs.
Trading in the Stock Market
Once listed , stocks issued by companies trades in the secondary market. This transactions means buying and selling of the stocks listed on stock exchange are done by stockbrokers which acts as an intermediary (a person or a firm) between an investor and the stock exchange. Broker passes on the buy order for shares to the stock exchange and exchange searches for a sell order for the same share.
Once buyer and seller both are found, a final price is agreed by both of them to finalize the transaction. Post that exchange communicate to the broker that order has been confirmed. This information is then passed on by the broker to investor. This whole process happens in real time and in seconds. Meanwhile, the exchange also confirms the details of the buyers and the sellers of shares to ensure the parties don’t default.
Exchange then facilitates the actual transfer of ownership of shares from sellers to buyers. This process is called the settlement cycle.
Trading Process
- Buyers and Sellers: Buyers seek to purchase shares of a stock, while sellers look to sell their existing shares. Trades occur when a buyer’s bid matches a seller’s ask price.
- Market Participants: Market participants facilitate trading by providing liquidity to the market
- Execution of Trades: When a buyer and seller agree on a price, a trade is executed. In the case of market orders, the trade occurs instantly at the current market price. whereas, Limit orders are executed when the market reaches the specified price.
Factors Influencing Stock Prices
- Supply and Demand: Stock prices are primarily determined by the forces of supply and demand. If more people want to buy a stock than sell it, the price rises, and vice versa.
- Market News and Events: News, earnings reports, economic indicators, and geopolitical events can impact market sentiment and influence trading decisions.
- Market Makers: Market makers play a crucial role in facilitating trading by providing liquidity. They help match buyers with sellers and ensure there are always buyers and sellers in the market.
Functions of the Stock Market
The stock market serves several crucial functions.
- Provides a platform for companies to raise capital for growth and expansion.
- Offers liquidity to investors, allowing them to buy and sell shares with relative ease.
- stock market is instrumental in price discovery, as stock prices fluctuate based on supply and demand.
- It provides diverse investment opportunities, from established blue-chip companies to emerging startups.
In conclusion, understanding what the stock market is essential for anyone looking to navigate the world of investments. It serves as the backbone of the financial industry, connecting companies with capital and investors with opportunities. So, whether you’re a novice or an experienced investor, grasping the fundamentals of the stock market is a valuable step in your financial journey.
