How does the stock market work?

How does the stock market work?

The stock market functions as a platform for the exchange of shares and various financial instruments. It constitutes a network wherein investors and traders engage in the buying and selling of stocks, thereby influencing stock prices. These prices are subject to fluctuations based on prevailing market conditions.

Investing in the stock market presents a lucrative opportunity for investors to potentially achieve substantial returns over time. However, realizing these returns necessitates a comprehensive understanding of the mechanics and dynamics of the equity market. 

What is share market?

The share market, also known as the stock market, is a platform where individuals and institutions buy and sell shares of publicly traded companies. It serves as a vital mechanism for companies to raise capital and for investors to participate in the growth and performance of businesses.

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Table of Content

  1. What is share market?
  2. Participants of the Share Market
  3. Markets
  4. Stock Market Trading
  5. Pricing of Shares
  6. Who controls the stock market?
  7. How does the share market work in India?

Participants of the Share Market

To comprehend how the share market works, let us understand its participants. The four key participants involved in the share market are: 

1) Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) plays a crucial role in regulating the stock market. It oversees the functioning of stock exchanges, brokers, and other participants to ensure fairness, transparency, and investor protection. 

SEBI sets rules and regulations for the market, monitors trading activities, and penalizes those who break the rules. Essentially, it ensures the stock market is a safe and fair place for everyone involved.

2) Stock Exchange

The stock market serves as a platform for investors to engage in the trading of shares, bonds, and derivatives. Facilitating this exchange are stock exchanges, of which India is represented by two primary ones.

Bombay Stock Exchange: The Bombay Stock Exchange (BSE) serves as a platform for trading stocks, derivatives, and other financial instruments, playing a pivotal role in the Indian financial market.

National Stock Exchange: The National Stock Exchange (NSE) facilitates the electronic trading of equities, derivatives, and other financial instruments, playing a crucial role in the country's financial ecosystem.

3) Stockbrokers

A stock broker is a licensed professional who buys and sells stocks and other securities on behalf of clients, typically charging a commission for their services.

4) Investors and Traders

 Investors are individuals who acquire stocks to obtain ownership stakes in companies, while trading encompasses the act of purchasing or selling such equity.

Markets

To comprehend how the stock market works, let us first understand the concept of primary and secondary markets:

1) Primary Market 

The primary stock market is where new securities are issued and initially sold to investors. It is the market where companies raise capital by issuing new stocks or bonds for the first time. In this market, securities are purchased directly from the issuing company.

2) Secondary Market

 A secondary is where already-issued securities are bought and sold among investors. This market provides liquidity to investors, allowing them to easily buy and sell shares of publicly traded companies without affecting the company's financials directly.

Stock Market Trading

Stocks listed on exchanges are traded in the secondary market through brokerage firms, serving as intermediaries between investors and the exchange. When you place a buy order, your broker forwards it to the exchange, which matches it with a sell order. Once a price is agreed upon, the exchange confirms the transaction to your broker, who then notifies you. 

Pricing of Shares

  • The pricing of shares in the stock market is determined by the interaction of supply and demand forces. 
  • When there is high demand for a particular stock and limited supply, its price tends to increase, reflecting investor confidence and perceived value. 
  • Conversely, if there is more supply than demand, the price may decrease. 
  • Overall, the pricing of shares in the stock market is a complex chemistry of market forces and investor perceptions, shaping the value of securities traded on exchanges.

Who controls the stock market?

The stock market is controlled by individual investors, institutional investors’ corporations, government bodies, and regulatory agencies. Market movements are influenced by many factors, including economic indicators, geopolitical events, company performance, investor sentiment, and even psychological biases. 

The share price is decided based on supply and demand in the stock market, where buyers and sellers negotiate on factors such as company performance, investor sentiment, and overall market conditions.

Moreover, algorithms and high-frequency trading play a significant role in market dynamics, as computerized trading strategies execute trades at lightning speed based on predefined criteria. While no single entity completely controls the stock market, its direction is shaped by these participants' collective actions and decisions, reflecting the constantly evolving financial ecosystem.

How does the share market work in India?

The share market in India operates through the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) where investors buy and sell shares of publicly listed companies. Prices fluctuate based on supply and demand dynamics, influenced by company performance, economic conditions, and investor sentiment.

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FAQs on How does share market work

Your broker facilitates the transmission of your buy order for shares to the stock exchange, where it is matched with a corresponding sell order for the same shares. Following this matching process, an agreed-upon price is determined to execute the transaction efficiently.

A stock exchange is a regulated marketplace where securities such as stocks, bonds, and derivatives are bought and sold by investors.

Stock prices are determined by the forces of supply and demand in the market, influenced by factors such as company performance, economic conditions, investor sentiment, geopolitical events, and market trends.

A brokerage account is a financial account that enables individuals to buy and sell various financial instruments, such as stocks, bonds, and mutual funds, through a brokerage firm.

Share market mein, company ke shares ke kharidne aur bechne ka vyavasay prabhavit hota hai supply aur demand ke niyamon se, jo ki company ki performance, arthik suchak, aur niveshakon ka manobal par adharit hota hai.