Last updated on May 10, 2020
What is stock market? Explaining various exchanges, how does trading happen, and how does stock market work?
What is stock market and how it works? Most of us are interested in starting stock market trading but find ourselves lost without having basic knowledge about what stock market is, what are the various exchanges involved, how does trading takes place, and over all how does the stock market work.
Having proper knowledge about the stock market makes it easier for us to take our first step towards stock trading. Before starting the stock market investments, it is important to understand completely about the same.
What is stock market?
Stock market is the place or the market where buying and selling of stocks take place. A stock is a representation of a unit of ownership of the company from where the buyer bought it. For instance, if a person holds the stock of Sun Pharma, then the stock is a representation of a unit of Sun Pharma with the stockholder. When a stockholder buys stocks of a company, he/she is investing a certain amount of money in the company. When the company starts growing, the price of the stock starts rising, and vice versa. When you sell the stock in the market, you earn a profit.
The primary motive behind companies issuing their stocks is that they need capital for expansion, development, and other activities required for carrying out their business activities.
The stock market is divided into two broad categories- the primary market and the secondary market.
The main motive behind companies entering the primary market is to raise funds from the market. The company gets registered in the primary market to issue stocks to the public and to raise the required money. The companies need to route themselves through the primary market to get listed on the stock exchanges in the country. The act of selling stocks for the first time by the company is called an IPO or Initial Public Offering.
While coming up with an IPO, the company needs to provide details related to its financials, its businesses, its promoters, the number of stocks being issued, the price band, the amount of capital company aims to raise, and so on.
Secondary Stock Market
It is in the secondary stock market that the investors are capable of trading securities that are already listed on the stock exchange. This means the market where the buying and selling of stocks take place is called the secondary stock market. The transactions of buying and selling of stocks are conducted by the investors with the help of a broker.
It is through the secondary market where the buyers can sell all their stock-holdings and exit the stock market.
Various Stock Exchanges in India
Before finding out about the various stock exchanges in India, it is essential for us to understand what a stock exchange means.
A stock exchange is an organization through which stocks, bonds, commodities, F&O, and other market instruments are traded. It is through the stock exchange that the buyers and sellers of securities come together during the specific time of the business days and make a trade. In other words, a stock exchange is an organized market for the sale and purchase of securities. This trade is made by abiding with certain rules and regulations imposed on the firms and brokers for ensuring the safety and security of the investors and for safeguarding the interest of different stakeholders.
Here are the top stock exchanges in India:
- Bombay Stock Exchange: Bombay Stock Exchange, popularly called as the BSE is India’s as well Asia’s oldest and leading stock exchanges. The BSE was established in the year 1875 as the Native Stock and Stock Brokers’ Association. It is also the world’s fastest stock exchange with a speed of 6 microseconds. Based in Mumbai, the BSE lists around 6,000 companies, which again makes it the world’s leading stock exchange.
Bombay Stock Exchange has played an important role in the development of the Indian capital market. It has provided an efficient platform for the Indian corporate sector and helped them raise their capital investments.
It provides other important capital market trading services that include risk management, clearing and settlement, and investors’ education.
Round about 70% to 80% of the transaction done in India are done by BSE alone. Located in Mumbai’s Dalal Street, BSE operates BOLT, its computerized trading system, in 275 cities with around 0.5 million traders per day.
- National Stock Exchange: National Stock Exchange or NSE was established in the year 1992 and is marked as one of the most important developments in the Indian capital market. Located in Mumbai, it is one of the leading stock exchanges in India and is the fourth largest stock exchange in the world, according to the WFE (World Federation of Exchanges). NSE commenced trading in the year 1994 and has developed itself into a sophisticated electronic market. NSE conducts transactions in the wholesale equity, debt, and derivatives market. NIFTY 50 is the index offered by NSE, which tracks the largest assets in the Indian equity market.
It provides complete transparency of the trading operations to both the trading members and the participants.
How does stock market work?
There are four major steps, to sum up, the entire process of how the stock market works.
- To understand the stock exchange platform
- To list the companies in the primary market
- To trade the securities in the secondary market
- Involvement of the stockbrokers
Understanding the stock exchange platform
The first step to understand the working of the stock market is to understand the stock exchange platforms operating in the country. A stock exchange, as mentioned above, is a platform that assists and allows the trading of the financial instruments, including stocks, derivatives, commodities, and other instruments. All the activities of a stock market are regulated by the SEBI (Securities and Exchange Board of India).
Listing of the companies in the Primary Market
For a new company to start trading its stock in the market, it is essential for the company to get itself registered on any of the leading stock exchanges in India. A company is listed on a stock exchange through the process of initial public offering or IPO. An IPO is a tool for companies to go public and to raise capital from the market. The allotment of the stocks after the IPO has been released takes place during the listing of the company, and the investors bid the stocks to get their stock.
Trading of the securities in the Secondary Market
Once the company is listed in the primary market, the stocks of the company are traded in the secondary market. The secondary market, as told above, is the market where buying and selling of stocks and other securities take place. It is a place where the buyers and sellers of the security come together.
Involvement of the Stock Broker
Since the number of investors in the country is in thousands, it becomes difficult to bring them in one location. This is where the stockbrokers and brokerage firms come into play. Stockbrokers are individuals or entities that are registered the stock exchanges and act as a bridge between the investors and the stock exchanges. Whenever an investor places an order for buying the stocks of a company at a given price, the request is processed through a broker at an exchange that has multiple parties involved in it.
The purchase order is forwarded by your broker to the stock exchange. At the stock exchange, the buy or the purchase order is matched with the sell order for the same amount. Once the seller and the buyer agree at the price the order is executed and is confirmed.
Settlement of the trade order
Once the order is finalized, the details of the order are confirmed by the exchange, and it is the exchange that ensures that no default in the transaction takes place. Once the order is confirmed, the ownership of the stocks is then transferred. This transfer of ownership is known as a settlement.
How does stock trading take place?
In order for stock trading to take place, an investor needs to have a Demat and trading account. In India, Demat and Trading Account are provided by CDSL and NSDL through stockbrokers or brokerage firms.
A trading account is an account where the investors can place bids for buying or selling orders, whereas a Demat account is an account that holds the securities in a dematerialized form.
In order to open a Demat and Trading Account, the investor needs to follow the below-mentioned steps:
- The first towards opening a Demat and Trading account is to find a stock broker. There are two types of stockbrokers in India- full-service stockbrokers and discount brokers. A full-service broker provides a variety of other services like buying and selling of stocks, research and advice; tax planning, and much more. Discount broker on the other hand provides a limiter array of services but at much lower charges compared to full-service brokers.
- Every broker charges a certain amount of commission or brokerage fees for providing its services to the investors. These charges vary from broker to broker. While opening a Demat and trading account, compare the brokerage rate charged by different brokers for the services they are providing.
- In order to get your Demat and Trading account open you need to complete the KYC process. For completing the KYC process, you can either visit the office of the stockbroker or can do the same online by visiting their official website. To get your KYC done, you need to fill forms and submit the same along with an identity and address proof. Once your details are verified, you are given your account details, and the account is activated.
Stock market trading has gained popularity in India for the last few years. Before one starts investing in the stock market, it is essential for them to understand completely about what the stock market is, how it works, what are the various stock exchanges. Also, since a broker plays an important role in stock trading, it is essential for the investors to compare different brokers for their brokerage charges and the services they are providing, and then choose the most preferred stockbroker for their trading needs.