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What Is The Stock Market And How Does It Work?
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A detailed guide on Stock Market

Every business requires funds for running its business. Sometimes, the revenue earned through the sale of products or services is not enough to cover the expenses and working capital. Companies then invite the public to invest their money into the businesses to help operate more efficiently, for which the investors shall receive part of the profits made by the company. This is why companies get listed in the stock market and let’s explore more about this topic in greater detail to understand further how the share market works?

What is a Stock Market?

A share market is a place where the shares of companies are publicly traded. Shares are evidence of ownership of a company allowing an individual to buy or sell this document to others. The stock market was established to facilitate the exchange of shares openly. These exchanges help companies raise funds for their business while investors use them to purchase and sell shares.

What are Stock Exchanges?

Stock exchanges are nothing but a platform that facilitates buyers and sellers to meet and purchase or sell the shares of a particular company. Two main stock exchanges are in operation in India:

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

 

Every company that wants to list their company in the stock market should approach either of the following or both: NSE, BSE, or both. There are 1000+ companies listed on BSE and NSE, making it difficult for investors to choose the top from the entire lot. To address this issue, companies were grouped according to their market cap to form NIFTY & SENSEX, which benchmark the growth of top companies through equity indices.

Nifty 50 can be described as a compilation of the top 50 influential companies that are listed in NSE, while Sensex is a compilation of the top 30 influential companies listed on BSE. This is because the most reputed companies have a significant influence on the market and impact the nation’s economy. Therefore, an index that includes the largest and top firms is the best indicator to determine the overall performance of how the market is performing.

In addition to these, there are other indices, such as BSE 500, Nifty Midcap, BSE Smallcap, Bank Nifty, etc., but Nifty 50 and Sensex are the most tracked benchmark indices when it comes to Indian stock markets.

How does the share market work? 

Having understood the indices, you will want to know how the stock markets function. It follows the following steps:

  1. A company is listed on the primary market via an Initial Public Offering (IPO)
  2. Shares are then made available in the Secondary Market for investment and trading.
  3. Stockbrokers and brokerage companies are registered entities by the exchange, which allows you to purchase or sell specific shares at a certain price.
  4. Once a buy order is placed, the broker forwards your buy order to the exchange, where a sale order for the same share is searched and executed.
  5. You will receive the shares in your Demat account in two working days after the process of T+2 is completed.

 

Stock markets are the most popular investment avenues, and stock exchanges transacted shares worth crores daily. Therefore, before moving further about the methodology to invest in stock markets, you must know about the standard terms used in the stock market to understand the process clearly.

  • Primary Market: Businesses register themselves to issue shares to raise money. This is also known by the term “listing” on the stock exchange. The reason for entering the primary market is the need to generate capital and, if the business is selling shares for the first time, it’s known as an Initial Public Offering (IPO). At this point, the business becomes an official public company.
  • Secondary Market: The shares issued through the primary market enter the secondary market, where it starts trading in the exchanges. The majority of trading or investing happens here, where sellers and buyers come together to complete a transaction of investment or trading to make money or reduce losses.
  • Investing in Stock Markets: Once the stock is listed in the exchange, it is available for the general public to invest or trade on them. When you purchase shares at a cheaper price and then sell them at an increased price, you make profits. This is done in two ways, and if you are just beginning in the field, it’s crucial to be aware of these fundamentals. They are:
  • InvestorsThese are the people who invest their capital in stocks and stay invested for a longer time, often for years. The returns get compounded over time if the stock performs well. To do this, investors employ various techniques to study the company, do fundamental analysis, evaluate the trajectory of growth for the company and then decide whether they are susceptible to growth or not.
  • TradersThese are the people who usually buy and sell the shares of a particular company on the same day to make profits. Traders follow the process of technical analysis to determine what stocks are best and worth trading as they are primarily looking for short-term and fast gains. To become a good stock trader in stocks, one needs to be knowledgeable about stock market information and technical indicators such as Bollinger bands, momentum oscillators charts, and much more to successfully spot a trade.

Emerging markets such as India are rapidly becoming the drivers of future growth in the global scenario. At present, only a tiny portion of households’ savings in India are put into the market. As more awareness about the stock markets happens, more people are expected to start investing in shares, understanding the benefits of the stock market. However, like in any business, even stock markets also carry the risk of losing your capital, which is why a certain level of caution is required to navigate the world of stocks properly.

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