How does stock market work in India?
Stock
investing is a tried and tested approach to grow your money and safeguard
your financial future. The number of investors in the Indian stock market has
significantly increased in recent years. People are becoming more aware of how
to invest directly in stocks, and modern-day brokers are assisting in this
process by sharing investing advice and stock market expertise, resulting in a
generation of well-informed investors.
The first
step in becoming an investor is to learn how the stock market works.
Investors
can trade in a variety of financial assets such as stocks, bonds, and
derivatives on the stock market. The stock exchange acts as the intermediary,
facilitating the buying and selling of shares.
The Bombay
Stock Exchange (BSE) and the National Stock Exchange (NSE) are India's two
primary stock exchanges (NSE). In addition, there is a primary market where
businesses first list their stock. Investors can buy and sell shares issued
during the initial public offering (IPO) on secondary markets.
A few basic
concepts to understand about how the stock market works:
How does stock market work in India?
Before you
can understand the fundamentals of trading, you must first understand how the
stock market works. Here is an explanation of how it works.
Participants
Stock
exchanges, brokers, and traders/investors are all participants of the Stock
Exchange Board of India (SEBI).
The stock
exchange serves as a trading platform for financial products. Before trading,
companies must register with SEBI and the exchange (BSE, NSE, or regional
exchanges), as well as brokers, traders, and investors.
Securities
Exchange Board of India (SEBI)
SEBI is the
market regulator whose major responsibility is to ensure that the Indian stock
market runs smoothly and without glitches. The board is in charge of ensuring
market openness and integrity, so that ordinary people can invest without fear.
SEBI''s guidelines must be followed by the exchange, companies, brokerages, and
other market participants.
Stockbrokers:
Stockbrokers are exchange members. They are the intermediaries who, in exchange
for a fee, carry out the purchase and sell orders of investors. Investors in
India must trade through broking houses/brokers, who operate as intermediaries.
Investors
and traders: In the market, there are two categories of
participants: investors and traders. Investors purchase company shares with the
intention of holding them for the long term and earning a profit. Traders, on
the other hand, are involved in the buying and selling of equities.
Investors
are influenced by a variety of factors, including company performance,
long-term growth prospects, dividend payouts, and so on. Traders, on the other
hand, are impacted by price changes as well as demand and supply variables.
Now let us
talk about 2 types of Stock markets.
Primary
Market
The primary
market, in simple terms, is where companies list themselves for the first time
on the exchange in order to become publicly traded companies.
To fund
their business plans, companies must borrow money from the market. One method
is to sell a portion of the company to general shareholders, which involves the
issuance of an IPO (initial public offering).
Secondary
market
In theory, the secondary market is where
traders go to buy and sell stocks. Company stocks become accessible for trading
in the stock exchange once they have been listed, and price movement is based
on changes in supply and demand variables. Traders and investors are the key
participants in the secondary market. It's a marketplace where buyers and
sellers may meet directly.
The process
of matching the buyer and seller in the stock market is known as trading. Your
broker sends your purchase request to the stock exchange, which matches it up
with a seller. Once the deal is set and the price is agreed upon, the exchange
notifies your broker, and the transaction is completed.
The process
used to take days, but thanks to digitization, it can now be completed in T+2,
or two days after the transaction.
Price
mechanism of the Indian stock market.
The market
price of stocks is determined by demand and supply factors. When there are more
buyers interested in the stock, the price rises. In the same way, as demand
falls, so does the price. Identifying the correct stock value is one technique
for making money in the stock market. It necessitates determining the share''s
fair value. Otherwise, you''ll end up buying overpriced stocks.
The market
capitalization value of a firm is equal to the total of the firm''s stock price multiplied
by the number of outstanding stocks. Because a change in stock price affects a
company's market cap, it affects your investment return.
Stock
Exchange Indices
Indices are
also offered on stock exchanges. Nifty and Sensex are different indices of the
NSE and BSE in India. These indices are made up of shares in the largest
large-cap companies based on market volume and popularity. Indices move up or
down in response to the performance of underlying equities, and general
investors use them to determine market direction.
Steps
involved to trade in the Indian stock market.
IPO’s
The SEBI
receives a draft offer document from the companies. This document contains
information about the company, such as the number of shares that will be
diluted, the price band, and other information. Following approval, the company
launches an initial public offering (IPO) on the primary market to sell its
stock to investors.
Share
allotment
The company
issues and allots shares to some or all of the investors who bid during the
initial public offering. The shares are subsequently listed on the secondary
market (stock exchange) to allow for trading. This platform offers a way for
first-time investors to exit their stock market investments. Furthermore,
investors who did not receive an allotment during the initial public offering
(IPO) are offered the opportunity to purchase shares on the secondary market.
Brokers
Investors
and the Indian stock market are connected through broking agencies (registered
with SEBI and the stock exchange). Brokers put orders on the market after
getting instructions from clients. The trade is completed after a buyer and
seller are matched. The stock exchange issues a confirmation, which is emailed
to both the buyer and the seller.
This
technique was previously manual, making it time-consuming and inconvenient.
Online trading platforms, on the other hand, manage the complete process of
matching buyers and sellers over the internet. The transaction time has been
decreased to a few minutes as a result of this.
Order
processing
When
brokers put orders on behalf of their clients on the exchange where they are
processed, order processing occurs. Several stakeholders are involved
throughout the entire procedure. To avoid defaults, the stock exchange delivers
a confirmation to both buyers and sellers when they are matched.
Understanding
the basics of the stock market and how it operates will help investors make
more money and avoid taking excessive risks.
Visit
to open a demat account and start your trading journey in the Indian
stock markets.