Companies initially get listed in the primary market via IPOs or initial public offerings.
Wondering how does stock market work? Well, while it is no rocket science, you should adopt a learner’s attitude in the beginning stages and attempt to imbibe as much as you possibly can. There are several ways in which stock market investments are deployed and the entire system functions in a way where trading or investing can earn you good returns, provided you do your homework and take the right decisions with a knack of good predictability.
How does share market works?
Companies initially get listed in the primary market via IPOs or initial public offerings. Shares are accordingly distributed in the secondary market and stocks that are issued can be traded by investors in the secondary market. If you were wondering how does stock market works in India, you should know that brokerage firms and stock brokers are those entities which have registration with stock exchanges.
They offer you the specific shares of companies at particular prices. The buy order that you give is passed onto the exchange by your brokerage which will then seek a sell order for the same share in question. The procedure will take approximately a couple of working days, within which, you will witness your shares being deposited in your demat account.
What is stock market?
The stock market is where sellers and buyers keep negotiating prices of shares of companies and other entities for making trades. Investors can then purchase and sell these shares/stocks amongst themselves while the exchange will be tracking the demand and supply of every stock that has been listed with it. The concept is quite similar to how things work at auction houses. Investors rely on the stock market as one of their largest channels for making investments with a whopping Rs. 6 lakh crore worth of shares/stocks having been traded across India’s two premier stock exchanges on a few occasions as well!
Investing in the stock market comes with its fair share of risks and requires a lot of patience, ability to withstand fluctuations and of course, sound understanding of the market. Nowadays, investing in the share market has become easier with the advent of mobile apps like Groww.
Key things worth noting
You can certainly invest in the stock market in a more convenient manner nowadays with the help of startups like Groww which help you make trades online while also giving you ample information and knowledge about the market. A stock exchange is a platform where derivatives and stocks, among other financial instruments, are traded. Participants in the market are required to have registration with the stock exchange and also the Securities and Exchange Board of India (SEBI) for undertaking trades.
This also covers companies which issue shares, the brokers who are conducting the trades in question and also the investors and traders. All of these aspects are carefully regulated by SEBI which lays down all rules pertaining to conduct and other guidelines.
Working process for the share market
If the entire procedure of operation were to be summed up for the share market, it will be through the following steps:
● A company will initially earn its listing in the primary market via the IPO or initial public offering. In the offer document of the company, all details will be listed about the company in question, the stocks that are being issued and other major aspects. During this listing, the stocks that have been issued in the primary market, will be allotted towards investors who have already placed their bids for the same.
● Post the listing, the stocks that have been issued, will be traded by secondary market investors. This is the where the action is, i.e. where much of the trading activity takes place. Here, sellers and buyers will be gathering simultaneously for carrying out transactions with a bid towards booking profits. Some will also be cutting losses.
● Brokerage firms and stock brokers are those entities which have registration with the particular stock exchange. They are the intermediary entities between the investors and the stock exchange.
● The buy order from you will go to the exchange via the brokerage and a sell order will be found for the same stock/share. Upon fixing the seller and buyer, there is a price that is agreed upon.
● Post finalization of this price, the exchange will inform your brokerage that the order has been confirmed.
● You will then receive this information from your brokerage. There are several entities involved in this entire chain of information dissemination including the exchange floor traders, brokerage order department and more.
● The trading procedure has become completely electronic in recent times and hence reaching buyers and sellers is more convenient for brokers via technology.
Processing of Orders
You should remember that there are thousands of investors in the market at any given time. Hence, it is impossible for all investors to come together at a single location for executing trades. This is where a vital role is played by online and offline brokerages and stock brokers. The broker processes your order to purchase a specific share at a particular price at the exchange.
Here are a few other steps that you should keep in mind:
● The exchange will be confirming buyer and seller details in order to make sure that there are no defaults later on.
● It will be enabling the ownership transfer for shares and this is a procedure that is known as settlement.
● The entire process is much faster today, i.e. suppose you execute a trade and your shares will be added to your demat account by two working days.
● The exchange will make sure that the buyer gets his/her shares irrespective of whether the seller has ample stock/shares for selling.
● Share prices keep changing when trades are executed. Prices are always dependent on the value that is perceived for shares. This is clearly indicated through fall in demand or rise in demand for a particular stock. With more demand, prices go up for a particular stock and vice versa.
There are various types of stocks available in the market to get the basic idea before venturing into the stock market. With the help of the right online brokerage/startup, you can certainly start conducting trades right away. The above-mentioned points will help you get the basic idea before venturing into the stock market.