How does the stock market work?

Stock Market investment is one of the profitable options that reward investors with high profits over the years. They provide easy, transparent access to investment assets and help professional investors determine fair prices for public companies. Stock market is one of the most common terms when discussing investment. When compared to other investments, the stock market gives competitive returns. In this article, you will learn how the stock market works?

What is the Stock Market?

Stock Market refers to exchanges where shares of public companies are bought and sold. Financial activities are conducted through formal exchanges, via OTC(Over The Counter) marketplaces which operate under a set of regulations.

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We can use ‘Stock exchange’ and ‘Stock market’ interchangeably. Traders in the stock market either buy or sell shares on one or more stock exchanges which are a part of the overall stock market. In the world, New York Stock Exchange (NYSE) is the biggest stock exchange.

How does the Stock Market work?

The stock market helps companies in raising money to fund operations by selling stock shares, it creates and sustains wealth for individual investors. When you purchase the stock of a public company that means you are purchasing some part of that company.

In the stock market companies raise money by selling their ownership stakes to investors. These equity stakes are called shares of stock. Companies list their stock shares on an exchange by using the process called initial public offering or IPO.

Investors purchase those shares that allow the company to raise money for growth in business, then investors can buy and sell the stocks among themselves. In exchange for selling stock to the public, companies require to disclose information. Investors get benefits from exchanging their money for shares in the stock market and companies put that money to work and expand their business. Additionally, companies pay dividends to their shareholders if the profit grows.

The performance of the stocks varies individually over time, but as a whole the stock market historically rewarded investors 10% on average annual returns, making it one of the reliable ways of growing money. This is how the stock market works.

Who Regulates the Stock Market?

In the U.S. the Securities and Exchange Commission (SEC) regulates the stock market.SEC was created after the Securities Act of 1933, following the stock market crash of 1929(October). The SEC regulations cover four areas:

Stock exchanges
Brokers and dealers
Financial advisors
Mutual funds

SEC’s mission is to maintain a fair, orderly, efficient market, protect investors, and facilitate capital formation.

Participants of the Indian Stock Market:

To understand how the stock market works in India, it is important to know its participants. Indian Stock Market involves four key participants:

1. Securities Exchange Board of India(SEBI)

2. Stock Exchange

3. Stockbrokers and Brokerages

4. Investors and Traders

1. Securities Exchange Board of India(SEBI):

It is the regulator of Indian stock markets and ensures that Indian securities markets work efficiently and transparently and protects the interests of all participants.

2. Stock Exchange:

Stock Markets allow investors to trade bonds, shares and derivatives. Two primary stock exchanges are there in India they are:

Bombay Stock Exchange(BSE)
National Stock Exchange(NSE)

3. Stockbrokers and Brokerages:

A Broker is an intermediary who executes buy/sell orders for investors and receives a fee or a commission in return.

4. Investors and Traders:

The individuals who purchase stocks and become a part owner of the company. Trading involves buying and selling the equity.

Markets:

To know how the stock market works in India, you should learn about primary and secondary markets.

Primary Market:

Securities are created in the primary market. In this market, for the first time, firms sell new stocks and bonds to the public. Through an Initial Public Offering (IPO) company lists its share in this market and also sells its share to the public for the first time.

An IPO opens for a specific period. Within this period, investors can bid for shares and buy them at the issued price which was announced by the company. After the completion of the subscription period shares are allotted to bidders. Now the companies are called public because their shares are given out to the common public.

For this, companies should pay fees to stock exchanges and also should provide important details of the companies financial information like quarterly/annual reports, income statements and balance sheets along with information on future objectives or new projects related to stock markets.

Secondary Market:

The last step is listing the company in the stock market, which means the stock issued during the IPO is freely bought and sold.The secondary market is where company shares are traded after initially being offered to the public in the primary market.

Trading in the Stock Market:

The stocks which are issued by the companies are traded in the secondary market. This selling and buying of stocks that are listed on the exchanges are done by brokerages/stockbrokers firms who act as middlemen between the stock exchange and investors.

Your broker passes the buy order to the stock exchange for shares. For the same share stock exchange searches for a sell order. After finding a seller and a buyer, to finalize the transaction price, the stock exchange communicates to the broker that your order is confirmed.

You receive this message from the broker and all this happens in seconds and in real-time. Meanwhile, the stock exchange confirms the details of the sellers and the buyers of shares to ensure the parties.

The actual transfer of ownership shares from sellers to buyers. This process is called as settlement cycle.

To understand how does share market work you should know about the share market.

What is the Share Market?

A platform for investors to trade financial assets like shares, bonds and derivatives. Stock exchange facilitates this transaction by allowing the purchase and sale of shares. A share is the physical representation of a small portion of the company’s value.

How does the share market work?

Indian share market works through clearing corporations, brokers and a network of exchanges. They work as mediators between listed companies and stock market investors. Their indices represent the share market. Sensex and Nifty are separate indices of NSE and BSE in India.

Based on popularity and market volume these indices comprise shares in large-cap companies. In terms of their market cap, there are other indices for specific segments of companies or different sector companies. In response to underlying stocks performance indices rise and fall and investors use them to predict the direction of the market.

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Conclusion:

I hope this article gives you information on how the stock market works. Before investing in the stock market you should understand the stock market correctly and try a few books to invest efficiently like “A Random Walk Down Wall Street” by Burton Malkiel and “The Intelligent Investor” by Benjamin Graham then you will get an idea about the stock market workings. After understanding the stock market, you can select a broker, can open your demat and trading accounts.

FAQs:

Q1.What is the Stock Market?

Ans: It is a marketplace where sellers and buyers meet to trade i.e. sell and buy shares of publicly listed companies.

Q2.What is the difference between the stocks and shares?

Ans. Stocks offer leading ownership of the organizations and an organization while Shares offer leading ownership for any definite organization.

Q3. Do stocks possess any numeric value?

Ans. Stocks do not possess any specific number.

Q4. In simple terms, explain how the stock market works.

Ans. Stock Market is the component of the free-market economy which allows the companies to increase money by offering stock shares and corporate bonds, it allows investors to participate in the company’s financial achievements, earn income through dividends, and make profits through capital gains.