Understanding How The Stock Market Works

After understanding the basic stock market terms in the last article, let's take the next step in the stock market journey. Many people are often eager to dip their feet into the stock market but before doing that, doesn't it make sense to know more about the stock market and how it works?

By doing so, you'll be in a better position to make the right decisions when it comes to trading and investing in the stock market. So, let¡¯s dive in and understand how the stock market works.

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But firstly, understand what the stock market is. It is a platform where investors come to trade and invest in financial instruments like shares, bonds, and derivatives. The stock exchange, which is like an organized marketplace, works as a facilitator of these transactions and enables the buying and selling of shares and other securities.

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Stock Exchanges

Now comes the stock exchanges in India. There are primarily two major stock exchanges in India, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Overall, at present, there are a total of seven recognized stock exchanges in India, as per SEBI. Besides BSE and NSE, there are five other recognized stock market exchanges, namely Calcutta Stock Exchange Ltd., Indian Commodity Exchange Limited, Metropolitan Stock Exchange of India Ltd., Multi Commodity Exchange of India Ltd., and National Commodity & Derivatives Exchange Ltd.

Companies list their shares for the first time on a stock exchange through an IPO. Investors can then trade in these shares through the secondary market. Let's understand that further.

But before that, get to know who regulates the stock market in India.

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The Regulator

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The regulation, as well as supervision, of the stock markets in India rests in the hands of SEBI (Securities and Exchange Board of India). Under the SEBI Act of 1992, SEBI was formed as an independent identity and has the power to conduct inspections of the stock exchanges. The conducted inspections thoroughly review the operations of the market as well as look after the organizational structure along with other aspects of exercising administrative control.

The primary roles of SEBI include ensuring a fair as well as an equitable market for investors, due implementation of the guidelines and directions issued by SEBI, and checking if the stock exchange and other stock market participants have complied with all the set conditions.

Now, to understand how the stock market works, you need to know the types of markets first.

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Types of Market:

1. Primary Share Market

It is in the primary market that companies register themselves to issue their shares and raise money. This process is also termed as listing on the stock exchange. The aim behind entering into the primary market is to raise money, and in case the company is selling its shares for the very first time, it is termed as the Initial Public Offering (IPO). Through this process, the company becomes a public entity.

2. Secondary Market

Once the new securities are sold in the primary market and the shares of the company get listed on the stock exchange through IPO, trading of those shares and other securities in the secondary market begins. The secondary market acts as the marketplace for the buyers and sellers to transact and make profits/losses.

This way investors can exit by selling their shares or buying new ones too. These transactions that take place in the secondary market are termed as trades. It involves the activity of investors buying from each other and selling amongst themselves at an agreed-upon price. And a stockbroker or brokerage firm acts as an intermediary that facilitates these transactions in return for usually a fee or commission.

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Understanding the Stock Exchange Platforms and Participants

To be precise, a stock exchange is a platform that conducts the trading of financial instruments like stocks and derivatives. The activities on this platform are regulated by SEBI. So, the participants have to register with SEBI and the stock exchange in order to conduct trades. Trading activities include brokering, issuing of shares by companies, etc.

And the stock market includes four key participants: SEBI, stock exchanges (primarily NSE and BSE), traders and investors, and stockbrokers.

Stock Brokers¡¯ Role & Market Working

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Given the massive magnitude of investors, it is difficult to have all of them assemble at one location or be handled through a single entity for transactions. Hence, to conduct smoother trade, stockbrokers and brokerage firms step into the picture.

Brokers are individuals/entities that are registered with the Stock Exchange and serve as intermediaries between the investors and the exchange itself. So, when you as a trader/investor place an order to buy any share at a given rate, the broker processes it at the exchange where there are multiple parties involved. Next comes the passing of your order.

Your buy order is passed on to the exchange by the broker, where the stock exchange matches that buy order for a sell order for the same share. Once a seller and buyer are found, the transaction takes place when the price is finalized. Hence the order then gets confirmed, which is communicated by the stock exchange to the broker.

And once the price is finalized, the exchange confirms the details to ensure that there is no default in the transaction. The exchange then facilitates the transfer of ownership of the shares which is termed as Settlement.

The settlement time earlier took not days but weeks to materialize, which now happens in T+2 days, i.e. transaction plus two days. This means that if you trade today, the shares are reflected in your Demat account in two working days¡¯ time. Also, remember that stock market transactions can only be carried out during the regular trading session time, which usually is 9:15 am to 3:30 pm.

So this is how the stock market works and your transactions are carried out.

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