How Does the Stock Market Work?

A stock market is a platform where you can invest in a wide range of financial instruments, including shares, bonds, futures and derivatives. Whatever your preferred choice of instrument, stock markets enable the transaction.

Stock Markets in India

There are two major stock exchanges in India:

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

Types of Share markets: There are two types of share markets in the country:

  • Primary share market: This is the market where companies or businesses register themselves. Companies enter the primary share market to raise funds by offering their stocks. When a company registers itself in the primary share market and offers to sell its shares for the first time, it is known as Initial Public Offering (IPO). Here, you must understand that shares are a physical representation of a small value of the company, and owning the shares means that you are a part-owner of the company.
  • Secondary share market: The actual trading of a company’s shares occurs in the secondary share market. After a company’s share is listed on a stock exchange, investors can engage in trading, i.e. the sale or purchase, on prices that are governed by market movements. You can trade in shares in the secondary share market only through a broker. In the present digital age, you can easily open a Demat Account and a Trading Account, following which you are allowed to trade in stock markets via broking platforms.

Who Regulates Stock Markets in India?

Securities and Exchange Board of India (SEBI), constituted in 1992 under the SEBI Act, regulates and monitors stock markets in India. Along with the overall administrative control of stock markets, SEBI is also entrusted with the role of conducting inspections and formulating rules for stock markets.

Who are Stockbrokers?

It is imperative for you to understand that you can trade in stock markets only through a broker. Stockbrokers are financial intermediaries, who enable you to trade while charging brokerage fees for their services. Stockbrokers/ Brokerage firms are registered with SEBI and act as a link between the investor and stock markets.

How can you Trade in the Stock Market?

Before the advent of the internet, you were required to physically visit brokers, and instruct them for transactions. But now stockbrokers provide digital trading platforms, where you can trade through:

  • Web trading applications.
  • Terminal software.
  • Mobile-based apps.

How does the Actual Trading Occur?

  • After providing the details of your Demat Account and Trading Account to the broker, you need to specify the amount of stocks to be sold or purchased.
  • The broker checks whether your account has the requisite funds.
  • Your order is now passed for execution in the stock exchange. For instance, if you have issued a purchase order, it will be matched with a similar sell order. You have to finalize a price, following which the seller will confirm it.
  • The exchange then confirms the transfer of ownership of shares. You then receive an intimation about the settlement, and the shares will be reflected in your account in two working days.
  • Depending upon the market movement, you either make a profit or loss from the transaction.

How to Evaluate a Stock Before Investing?

You can evaluate stocks through:

  • Technical analysis: This involves a minute examination of the market for intraday trading. Here you have to analyze a slew of factors like movement average, Regarding Strength Index (RSI), etc. You can use the trends, patterns, analysis, and reports provided by stockbroking companies to analyze the stock movements.
  • Fundamental analysis: Here, you can yourself study some key factors, like Returns on Equity, Earnings Yield, GP Margin, Debt to Equity Ratio, Interest Cover Ratio, Market Capitalisation, etc. This will provide you with greater clarity regarding stock prices.

How are Stock Market Returns Calculated?

Typically, two methodologies are designed to calculate market returns:

  • Absolute Return Methodology: Here, variables, including buying price, selling price, returns and return percentage are used to calculate returns.
  • Compounded Annual Growth Methodology: Here the returns are calculated after taking into account the overall time period. Market experts prefer this methodology over the former.

Conclusion

Thus, stock markets are places where stocks and securities are electronically traded. The first step for your investment in stock markets should be to open a Demat Account and a Trading Account with a reliable financial partner. A trusted brokerage platform can provide you with cutting-edge market reports, alongside facilities, like brokerage cashback and zero AMC charges for up to one year on your Demat Account.

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