What is Stock Market? The stock market is like a giant marketplace, but instead of buying and selling things like fruits, clothes, or toys, people buy and sell tiny pieces of companies. These tiny pieces are called stocks. When you own a stock, it means you own a small part of that company.
Imagine if a lemonade stand was divided into 100 pieces, and by buying one piece, you get to own 1% of the lemonade stand. If the lemonade stand does really well, the value of your piece goes up, and you could sell it for more than you paid. But if the stand doesn’t do well, your piece might be worth less than what you paid for it.
Companies go to the stock market to raise money. They sell parts of themselves (stocks) to people who want to invest their money with the hope that the company will grow and do well. If the company grows and makes profits, the value of the stocks goes up, and the investors can make money by selling their stocks for a higher price than they bought them.
The stock market has rules and is watched over by regulators to make sure everything is fair and transparent. Prices of stocks go up and down based on how people think the company will perform in the future, and this can be influenced by lots of factors like how much profit the company is making the economy’s health, and even news about the company.
In simple terms, the stock market is a place where you can invest your money in companies you believe will grow, with the hope of making more money over time.
The stock market is a place where publicly listed companies are traded. The stock market is a financial market where securities are traded on the basis of demand and supply. The shares that are bought and sold are not physical shares but units of ownership in the company. Like the physical market, share prices can rise and fall with demand and supply.
Participants of the Stock Market
To understand the workings of the stock market, it is essential to understand the key participants in the stock market. Let us see it one by one.
Stock Exchange
As the platform that facilitates the exchange between buyers and sellers, the most important pillar of the stock market is the market itself; the stock Exchange. In India, we have two major stock exchanges;
- The Bombay Stock Exchange; Its index is SENSEX
- The National Stock Exchange; Its index is NIFTY
Securities and Exchange Board of India (SEBI)
SEBI is the regulator of all the activities of the stock exchange in India. It ensures the efficient and transparent working of the share market in India. It protects the interests of all the participants. It also lays down the framework for the working of all the participants of the stock market in India.
Suggested Read: SEBI Registration Process – All You Need to Know
Stock Brokers
Stock brokers are financial representatives or intermediaries who manage the buying and selling of shares in exchange for a fee. A broker either works individually or as a part of a firm. He or the firm needs to register with a stock exchange to start functioning as the mediator.
Investors and Traders
Investors and traders are people who engage in the buying and selling of shares in the stock market. Traders are involved in the buying and selling of assets for short-term gains, whereas investors focus on long-term gains.
As you are familiar with all the participants in the stock market by now, let us walk you through the journey of a business till its entry into the stock market.
Can any company go there to sell their stocks? No! Then, who will not enter into this market to expand their business?
Journey of a Company Towards the Stock Market
Suppose Arun owns a supermarket in Bangalore. He has been managing this business for ten years. The supermarket has a value which is the sum of its products, its building, profit, etc. It is called the valuation of the business. This valuation of his supermarket can be divided into smaller units which are usually called stocks. Arun can decide the number of shares and their value based on the total valuation. He finds a partner who provides him the 30% of the total valuation of the company. Then onwards, he consulted his partner for major decision-making and gave him 30% of the total profit received.
Arun wants to expand his business further but lacks the capital required. So he added a few more partners. At one point, he got fed up with adding the number of partners, as arriving at a consensus with the huge number of partners had become a tedious task.
He realized listing his company in the stock market would be a better choice. He could raise capital without adding more and more partners who interfere with the day-to-day activity of his business. But the doors of the stock market are challenging to open, as you know.
He needs to convert his company to a publicly listed one and get listed via an initial public offering. His company needs to fulfill the criteria to be listed in the stock market. He went through Eligibility Criteria- NSE India.
Across the country, there are many companies, and among them, only around 2000 are listed on the National Stock Exchange, and roughly 5000 are registered on the Bombay Stock Exchange. So goes without saying that it’s not an easy journey for Arun.
He decided to sell 1000 shares of his company with a value of 500 for each with an initial public offering. After the initial public offering, his company stocks are available on the stock exchange, and the public can buy and sell its shares.
How Does the Stock Market Work?
In order to understand the workings of the stock market, you need to know the primary and secondary market and its functions.
Primary Market
The primary market provides the company that issues stocks to raise capital to meet their financial requirements, either to invest in the business or to discharge liabilities.
Through Initial Public Offering, the company lists and sells its shares to the public for the first time. The offering will be open for a specific period of time, and the public can bid and buy the shares of the company during that stipulated period. After the subscription period, the shares are given to the common public, and the company needs to pay a fee to the stock exchange. They need to intermittently update the financial status of the company to the stock market.
Secondary Market
It is in the secondary market that the shares offered during the IPO are freely sold and bought. It is the final stage of listing the company on the stock market.
As it enters the secondary market, the buying and selling are managed by stock brokers. When you buy a share of the company, it is your broker who passes the information to the stock exchange. The stock exchange searches for the seller for the order. Once the seller and buyer are matched, an agreement is reached regarding the price and finalized with the transaction. The stock exchange then informs the same to your broker.
FAQs About Stock Market
Are the stock and share markets the same?
Though we commonly use share market and stock market interchangeably, technically, there is a small difference. In the share market, only trading of shares takes place. Whereas the stock market allows the trading of various other securities apart from the shares like bonds and forex.
Is it easy to list a company on the stock exchange?
Listing a company on the stock exchange is a long process. The company needs to meet the criteria listed in the particular stock exchange for an initial public offering.
What is the minimum price of a share in India?
There is no minimum amount you need to trade in the share market in India.
Can you invest in the share market without a broker?
You can open a Demat account without a broker through depository participants. But to participate in stock market transactions, you need to open a trading account with one of the SEBI-registered brokers.
