How does Stock market works

It is important to invest money in the right avenues for wealth creation.

Stock market investment is one such lucrative option that rewards investors with high returns over the years. But to make this kind of return, it is important to understand how the equity market works.

Here is what you should know.

Participants of the Stock Market 

The stock market is an avenue where investors trade in shares, bonds, and derivatives. This trading is facilitated by stock exchanges. It acts as a platform, a marketplace, that connect buyers and sellers.
 
Four key participants are involved in the Indian stock market.
 

1) Securities Exchange Board of India (SEBI)

SEBI is the regulator of stock markets in India. It ensures that securities markets in India work efficiently and transparently. It also protects the interests of all the participants, and none gets any undue advantages.
 
SEBI lays down regulatory frameworks that exchanges, companies, brokerages, and other participants must abide by to protect investors’ interests.
 

2) Stock Exchange

The stock market allows investors to trade shares, bonds, and derivatives. This trading is facilitated by stock exchanges. In India, there are two primary stock exchanges.
 
Bombay Stock Exchange (BSE) – Sensex is its index
 
National Stock Exchange (NSE) – Nifty is its index
 

3) Stockbrokers and Brokerages

A broker is an intermediary (a person or a firm) that executes buy and sell orders for investors in return for a fee or a commission.
 

4) Investors and Traders

Stocks are units of a company’s market value. Investors are individuals who purchase stocks to become part owners of the company. Trading involves buying or selling this equity.
 

Trading in the Stock Market

Once listed on the stock exchanges, the stocks issued by companies can be traded in the secondary market. This buying and selling of stocks listed on the exchanges are done by stockbrokers /brokerage firms that act as the middleman between investors and the stock exchange.
 
Your broker passes on your buy order for shares to the stock exchange. The stock exchange searches for a sell order for the same share.
 
Once a seller and a buyer are found, a price is agreed to finalize the transaction. Post that, the stock exchange communicates to your broker that your order has been confirmed.
 
This message is then passed on to you by the broker. All this happens in real time and in seconds. 

 

For example,

If you buy a stock today, the credit is given by the end of the day. The stock exchange also ensures that the trade of stocks is honoured during the settlement.

If the settlement cycle doesn’t happen in T+2 days, the sanctity of the stock market is lost because it means trades may not be upheld.

Stockbrokers identify their clients by a unique code assigned to an investor.

After the transaction is done by an investor, the stockbroker issues him/her a contract note which provides details of the transaction such as the time and date of the stock trade. Apart from the purchase price of a stock, an investor is also supposed to pay brokerage fees, stamp duty, and securities transaction tax. 

In the case of a sale transaction, these costs are reduced from the sale proceeds, and then the remaining amount is paid to the investor.

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

Pricing of Shares in the Stock Market

Demand and supply for a stock play an important role in the changes in share prices as well as in determining the price of a share.

Read here for more: Why do stock prices change. Just keep this small concept in your mind:

— When the demand for shares is more than supply, The Price Rises.

— When the demand for shares is less than supply, The Price falls.

The Indian stock exchanges, BSE and NSE, have algorithms that determine the price of stocks based on the volume traded, and these prices change pretty fast.

Happy Investing!

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.