How Does the Stock Market Work: The stock exchange is a place where investors can trade in various financial instruments such as shares, bonds, and derivatives. The stock exchange acts as an intermediary that allows the buying and selling of shares.
In India, there are two primary stock exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). In addition, there is a primary market where companies list their shares for the first time. Another market allows investors to buy and sell shares issued during an initial public offering (IPO).
How Does the Stock Market Work?
Functioning of the Stock Market
Understanding how the stock market works is essential. Here are the basic points explained in detail:
Participants
The Securities and Exchange Board of India (SEBI), stock exchanges, brokers, and traders/investors are involved in the stock market. The stock exchange provides a platform for trading in financial products. Before trading, companies (listing their shares), brokers, traders, and investors must register with SEBI and the exchange (BSE, NSE, or regional exchanges).
Steps to Invest in the Indian Stock Market:
IPO (Initial Public Offering)
Companies file a draft proposal document with SEBI. This document includes information about the company’s per share earnings, price band, and other details. The company, through an IPO, offers its shares to investors in the primary market.
Distribution
The company issues shares to some or all investors who bid in the IPO. The shares are then listed on the stock market (secondary market) to enable trading. This platform is a means for early investors to exit their investment in the stock market. Additionally, those investors who were unsuccessful in acquiring a stake during the IPO are provided with an opportunity to buy shares in the secondary market.
Stock Broker
Broking agencies (registered with SEBI and stock exchanges) act as intermediaries between investors and the Indian stock market. Upon receiving instructions from clients, brokers place orders in the market. Upon matching a buyer and a seller, the trade is successfully executed. Confirmation is received from the stock exchange, and both the buyer and the seller receive their shares and funds, respectively.
Order Processing
This occurs when brokers engage in the process of matching their clients’ orders. Several parties are involved in the entire process. Upon matching buyers and sellers, the stock exchange sends a confirmation to avoid defaults. Executed trades are settled, which is the process where buyers receive shares and sellers receive their funds. The Indian stock exchange follows a T+2 settlement, where settlement occurs within two working days from the trading day.
Conclusion
Understanding the basics of the stock market and how it operates prevents investors from taking unnecessary risks. The stock exchange and broking agencies play a crucial role in facilitating trading in the market.
