The stock market is where investors can trade in various financial instruments, including shares, debentures, and bonds. Stock exchanges work as a mediator to help investors and companies to buy/sell their shares in the open market. There are mainly two stock exchanges in India: BSE and NSE.
BSE full form is Bombay Stock Exchange, & NSE full form is National Stock Exchange. By trading in these exchanges, you can buy and sell your shares or stocks to build significant wealth in the long term. However, to achieve this goal, understanding how the stock market works in India is essential.
But before we discuss how the stock market works in India, let’s know the participants of the stock market first.
What are the Participants of the Stock Market?
The stock market has four major participants, as mentioned below.
SEBI, or Securities Exchange Board of India, is the authorized regulator of all the stock markets running in India. It ensures the stock market runs transparently and efficiently and none of the participants get undue advantages. For this, SEBI lays down many regulatory frameworks that every stock market participant needs to fulfill to stay eligible to trade in the stock market.
2. Stock Exchange
It’s the place where stock investors and companies trade in shares, bonds, and derivatives. The whole trading environment is set up by the respective stock exchange. There are 23 stock exchanges in India; however, BSE and NSE are the two major ones.
3. Stock Brokers
Stockbrokers are intermediaries by which the trader or investor buys or sells stocks in the stock market to generate profit. In return, stockbrokers charge a fee or commission on every transaction the trader executes. Remember, stockbrokers can be either individual or firm authorized as per SEBI’s guidelines.
4. Investors & Traders
Investors are the persons or firms who purchase stocks of a company to hold for some time to make a sustainable return in the long run. Traders buy the company’s stocks and sell them through intraday or delivery trading. They can also use other ways to generate a short-term return.
Let’s also understand the types of share markets.
Types of Share Markets
There are mainly two types of share market, where participants take place and buy/sell their stocks.
1. Primary Share Market
In the primary market, companies register to issue their shares for the first time in the stock market. So, they can raise funds for further R&D efforts. As a company listed on the stock exchange, it is also called listing on the stock exchange. The purpose is only to raise money by getting listed and issuing shares to the public. The shares that are issued in the open market for the first time are called Initial Public Offerings (IPO).
2. Secondary Share Market
Once the investors purchase company shares, they can exit by selling them in the secondary market. This process is known as trading, where buyers and sellers buy/sell the stock at the mutually agreed price. The broker worked as an intermediary and facilitated the entire trading activity to earn a commission or charge a fixed fee.
Now, you are ready to understand how the share market works in India.
How Stock Market Works in India?
Below are the steps on how the stock market functions in India. Go through each step carefully to know the same.
1. Knowing Stock Exchange
The stock exchange is the platform where companies, investors, and traders can execute the buying and selling of preferred stock listed in the open market. This platform and its activities are regulated by SEBI to ensure a healthy and transparent environment, so none of the parties gets an inadequate benefit over the other.
2. Listing Company in Secondary Market
Once the company issues its IPOs, they are listed and traded in the secondary market. The stock allotment takes place before its listing, and investors get their stocks based on the investment value and the number of shares decided by the company.
Also Read: How to List Company in Stock Market India?
3. Trading in the Secondary Market
After the company’s listing in the second market, the company’s stocks can start getting traded. Here buyers and sellers can transact and make a profit as per the market conditions. In some cases, traders face loss, whereas some trade also provides significant profit.
4. Stockbroker’s Involvement
Conducting trade in the stock market can be tough; therefore, a stockbroker comes in place. They provide a simple-to-use platform where traders can easily buy or sell the stocks at their convenience. These entities are registered with the stock exchange and its regulator and comply with the predefined guidelines to stay eligible to provide their stock trading facilities to normal traders and investors.
5. Passing Order Request
When you send a buy order to the exchange by the broker, where the seller is ready to sell the matched number of shares. The exchange takes place, and we finalize the deal and confirm the order.
6. Completing Settlement
It’s the final stage where settlement for the trading activity happens. First, the exchange ensures there is no effort in the transaction. It then facilitates the transfer of ownership of the share to its next buyer. After completing this step, the participant gets an update about their transaction over message.
As per the current status, the settlement takes T+2 days. If a trade happens today, the shares will be shown in your Demat account in two working days. Also, investing and trading in the stock market is risky; there are equal chances of making a profit and loss in trading activity. Thus, you must stay up to date with recent trends and the financial status of the concerned company.
In this article, we discussed how share market works in India; we also discussed some important terms to help you understand the whole process clearly. We hope you have a clear idea on the same and can make a better trading activity or get help.
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