How Does Share Market Work?

Choosing the correct platforms for wealth generation is crucial. Engaging in stock market investments stands out as a profitable option, offering substantial returns over time. However, understanding the workings of the stock market is important to achieving these returns. The share market serves as a dynamic platform where buyers and sellers trade ownership of company shares. This ecosystem influences global economies, shapes corporate landscapes and offers individuals the opportunity to participate in wealth creation.

Key Highlights

• Platforms where investors trade shares, with two primary stock exchanges in India - BSE and NSE.

• Stockbrokers act as intermediaries, executing buy and sell orders on behalf of investors.

• Shareholders profit through dividends and capital appreciation as the value of shares increases over time.

Participants In Stock Market

The stock market serves as a platform where investors engage in the buying and selling of shares, bonds, and derivatives, facilitated by stock exchanges. It functions as a marketplace, connecting buyers and sellers. To comprehend the workings of the stock market, it becomes crucial to understand the roles of its participants. In the Indian stock market, four significant participants play key roles which are explained as follows -

1. Securities Exchange Board of India (SEBI)

SEBI serves as the regulatory authority for India's stock markets, ensuring their efficient and transparent operation. Its primary objective is to safeguard the interests of all participants, preventing any unfair advantages. SEBI establishes regulatory frameworks that mandate compliance from exchanges, companies, brokerages, and other involved entities, with the overarching goal of protecting investors interests.

2. Stock Exchange

The stock market provides a platform for investors to engage in the buying and selling of shares, bonds, and derivatives, with stock exchanges facilitating these transactions. In India, there exist two main stock exchanges.

Bombay Stock Exchange (BSE) - Sensex is its index National Stock Exchange (NSE) - Nifty is its index

3. Stockbrokers and Brokerages

A stockbroker, whether an individual or a firm, acts as an intermediary responsible for executing purchase and sale orders on behalf of investors, receiving compensation in the form of a fee or commission. These intermediaries play a crucial role in the functioning ofmarkets, facilitating the seamless execution of trades and providing essential services to investors.

4. Investors and Traders

Shares represent fractions of a company's market capitalisation. Individuals known as investors acquire these shares with the intention of becoming partial owners of the company. Investors, by acquiring stocks, take on a long-term perspective, often motivated by factors such as the company's performance, dividends, and growth potential. Trading encompasses the actions of purchasing or selling this ownership stake. Unlike investors, traders may be more focused on market trends, price movements, and short-term opportunities to capitalize on fluctuations in stock prices.

Types of Market

To gain insight into the functioning of the Indian stock market, the next step involves gaining knowledge about primary and secondary markets.

1. Primary Markets

The primary stock market offers companies the chance to generate capital for their investment needs and fulfill financial obligations. To enter the primary market, a company undergoes an Initial Public Offering (IPO), during which it introduces its shares to the public for the first time. The IPO spans a specific duration, allowing investors to bid for shares at the company's predetermined issue price. Following the subscription period, shares are allocated to successful bidders, marking the company as public since it has distributed its shares to the general public.

2. Secondary Market

The secondary stock market is where a company's shares are traded after their initial offering to the public in the primary market. The secondary market provides a platform for buyers and sellers to execute transactions, contributing to the ongoing liquidity and efficiency of the stock market. The continuous trading activity in this market allows investors to adjust their portfolios, reacting to changes in their investment strategies or market conditions.

Working of Share Market

From primary listings to secondary market transactions, understanding the working of the share market is essential for investors looking to make informed decisions in their wealth-building endeavors. Indian stock market works in following manner:

1. Listing in the Primary Market: Initial Steps

• The company embarks on the listing procedure through an Initial Public Offering (IPO).
• A comprehensive document is presented, divulging crucial company and stock details.

2. Stock Allocation Process in the Primary Market

• Stocks issued during the IPO are allocated to investors who placed bids.

3. Transition to the Secondary Market

• Stocks become available for trading in the secondary market.

• The majority of buying and selling transactions unfold in this dynamic market.

4. Individual Participation and Trading Goals

• Individuals actively participate in buying and selling with the aim of making profits or mitigating losses.

5. Intermediaries in Action

• Entities registered with the stock exchange, such as stock brokers and brokerage firms, act as intermediaries.

• Your broker conveys your buy order to the exchange, initiating a search for a corresponding sell order for the same share.

6. Buyer-Seller Matching Process

• The exchange searches for corresponding buy/sell orders for the same stock.

• Identification of a seller and a buyer results in a mutually agreed-upon price.

7. Confirmation and Communication Chain

• The exchange informs your broker that your order has been confirmed.

• The broker relays confirmation to you, completing the transaction.

8. Electronic Evolution in Trading

• The trading process, though involving various parties in the communication chain, is predominantly electronic today.

• Computers play a crucial role in swiftly matching buyers and sellers, concluding transitions within minutes.

Example of How Does Share Market work?

When you purchase a stock today, the credit is processed by the end of the day. The stock exchange ensures the trade of stocks is honored during the settlement process. If the settlement cycle extends beyond T+2 days, it jeopardizes the integrity of the stock market as it implies that trades may not be upheld.

Stockbrokers uniquely identify their clients through an assigned investor code. Following an investor's transaction, the stockbroker issues a contract note containing details of the trade, including the time and date.

In addition to the stock's purchase price, investors are obligated to pay brokerage fees, stamp duty and securities transaction tax. For sale transactions, these costs are deducted from the sale proceeds, and the remaining amount is disbursed to the investor.

Both at the broker and stock exchange levels, multiple entities/parties, such as the brokerage order department and exchange floor traders, are involved in the communication chain.

Conclusion

The share market is a vibrant ecosystem, and understanding its working mechanisms empowers investors to make informed decisions. From primary listings to secondary market transactions, participants in the share market play integral roles in shaping the financial landscape and contributing to the overall efficiency of this vital economic engine.