How can the Stock Market Work in India

How Does the Stock Market Work? | Online Trading Academy

all of us understand how important it’s to invest money in the ideal paths to grow wealth. Stock market investment is one such rewarding option that has rewarded steadfast investors with high yields through the years. But to gain the maximum out of a financial instrument, it’s essential to know about its workings. Let’s return to the basics and learn how the stock exchange functions in India Read on!

Members of the Stock Market

The stock market is an avenue where investors trade in shares, bonds, and derivatives. This trading is facilitated by stock markets, that may be thought of as markets that connect buyers and sellers. Four participants take part in the trading of shares in the Indian stock market.

  1. Securities and Exchange Board of India (SEBI): SEBI is the regulator of stock markets in India and guarantees that securities markets in India operate in order. SEBI lays down regulatory frameworks were trades, businesses, brokerages, and other participants have to abide by to safeguard investors’ interests.
  2. Stock exchanges: The stock exchange is a path where investors trade in shares, bonds, and derivatives. This trading is facilitated by stock exchanges.In India, there are two primary stock exchanges where companies are listed.
  3. Stock agents /brokerages: A broker is an intermediary ( person or a company ) that executes buy and sell orders for investors at possession of a fee or a commission.
  4. Traders and investors: Stocks are components of a firm’s market value. Trading involves buying or selling this equity. To understand how to share market functions, the next thing would be to find out about primary and secondary markets
  5. Main Trader
    The primary stock exchange provides an chance to issuers of stocks, particularly corporates, to raise funds to satisfy their investment needs and discharge some duties and obligations.

A business lists its shares in the primary market via an Initial Public Offering or IPO. Through an IPO, a company sells its shares for the first time to the general public. An IPO opens for a particular period. Within this window, investors can bid for the shares and purchase them in the issue price announced by the company.

When the subscription period is over, the shares are allotted to the bidders. The businesses are then referred to as public since they have given out their shares to the frequent public.

For this, companies need to pay a commission to the stock exchanges. They’re also required to offer all critical details of the organization’s financial details like quarterly/annual reports, balance sheets, income statements, together with information on new jobs or future goals, etc., to the stock markets.

Secondary Market

The last step involves listing the business on the stock exchange, which means that the stock issued throughout the IPO can now freely be bought and sold. The secondary stock market is where shares of a firm are traded after being initially offered to the public in the principal industry. It’s a marketplace where buyers and sellers meet directly.

Once listed on the stock exchanges, the stocks issued by companies can be traded in the secondary market to make profits or reduce losses.

Your broker passes in your purchase order for stocks to the stock exchange. The stock market hunts for a sell order for the exact same share.

After a vendor and a buyer are found and fixed, a price is agreed to finalize the trade. Post the stock market communicates to your broker that your order was confirmed.

This message is then passed to you by the agent.

Meanwhile, the stock market also confirms the details of the buyers and the sellers of stocks to ensure the parties do not default.

It then facilitates the actual transfer of possession of shares from sellers to buyers. This practice is known as the settlement cycle.

For example,

Should you trade a stock now, you’ll get your stocks deposited on your Demat/trading account by the day after tomorrow (i.e. in two working days).

The stock exchange also makes certain that the trade of stocks is admired throughout the settlement.

In the event the settlement cycle doesn’t happen in T+2 days, the sanctity of the stock exchange is dropped, because it means trades may not be upheld.

After the transaction is done by means of an investor, the stockbroker difficulties him/her a contract note that provides details of the trade like time and date of the stock trade.

In the event of a sale transaction, these prices are reduced in the sale proceeds, and the residual amount is paid to the investor.

At the broker and stock exchange levels, there are multiple entities/parties involved with the communication chain like brokerage order division, exchange floor traders, etc..

But the stock trading procedure is now digital now. So, the procedure for matching sellers and buyers is performed online and consequently, trading occurs within seconds.

Pricing of Shares in the Stock Market

The key to making money in the stock market would be to understand how to properly value a business and its share price in the context of the Indian market as well as the company’s operating sector.

Allow me to describe to you how stocks are priced via a very simple example.

Let’s say you purchased a laptop for $100. The next day, a friend of yours supplied you to sell it for $150 to him.

Therefore, what’s the cost of the notebook then?

It is from $150. You may encash $150 by selling the notebook .

But you choose to reject his offer hoping that your other buddies may bid more than $150.

Now, what is the price of the laptop?

It’s $300 as this is the maximum bid for your laptop. You now know that your possession is valuable and opt to reject the current offers, hoping for a higher bidding tomorrow. However, the following day, a fellow student brings a better quality notebook to college with pages that are shinier.

Your friends are now attracted to the laptop greater than yours and that contributes to a dip in the value of your laptop. Now only a handful of people are eager to pay for your laptop and that too at the last quoted price i.e $300.

This is precisely how demand and supply affect the cost of a share in the stock market. You can also check out stock market recovery

When the pupils were optimistic and ready to pay higher money than its current price, the cost appreciated. When a lesser number of students wanted your laptop, the cost fell down.

Just keep this Little concept in your mind:

Once the demand for stocks is more than supply, cost rises.
When the demand for stocks is less than supply, price falls.
The Indian stock trades, BSE and NSE, have calculations that determine the purchase price of stocks on the basis of quantity traded and these prices vary pretty quickly. So this is how the stock exchange operates in India. There’s definitely more to it however this is a good starting point to develop additional understanding.

Happy Investing!

Leave a Reply