How Does the Stock Market Work?
A stock market is a platform where you can invest in various financial instruments, including shares, bonds, futures and derivatives. Irrespective of your choice of investment, the stock market is more than equipped to offer you the ideal instrument and immense opportunities to make profits. However, before you enter the stock market, it is wise to understand the functioning of the market to be better equipped to make informed decisions.
The 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 where companies or businesses register themselves and list for the first time. Companies enter the primary share market to raise funds by offering their stocks to the general public. When a company lists 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 in the proportion of the shares you hold.
- Secondary share market: After the company lists in the primary market, the actual trading of a company’s shares occurs in the secondary share market. After a company’s shares are listed on a stock exchange, investors can trade, i.e., sell or purchase the shares through a broker. In the present digital age, you can easily open a Demat Account and a Trading Account, following which you can effectively trade in stock markets via broking platforms.
Who Regulates Stock Markets in India?
The Securities and Exchange Board of India (SEBI) regulates the stock market, the stock exchanges and the Depositories Participants in India. It was constituted in 1992 under the SEBI Act. Along with the overall administrative control of stock markets, SEBI is also entrusted with the role of conducting inspections and formulating rules for the transparent functioning of the stock markets.
Who are Stockbrokers?
Stockbrokers are financial intermediaries who enable you to buy and sell shares by providing the service of opening a Demat account and trading account. For the service, they charge a small brokerage fee. 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 visit brokers and instruct them for transactions physically. However, with numerous new digital technologies, stockbrokers provide digital trading platforms through which you can trade in just a few clicks. These are:
- Web trading applications
- Terminal software
- Mobile-based apps
How does the Actual Trading Occur?
- After opening a Demat Account and Trading Account, you can use the trading platform to choose an individual stock, specify the number of shares you want to buy or sell and execute the order.
- Once you execute the order, the broker checks whether your account has the requisite funds.
- If there are enough funds, your order is finally executed on the stock exchange. For instance, if you have issued a purchase order, it will be matched with a similar sell order.
- The exchange then confirms the transfer of ownership of shares. You then receive an intimation about the settlement, and the shares start to reflect in your demat account after two working days.
How to Evaluate a Stock Before Investing?
You can evaluate stocks through the following two processes:
- Technical analysis: Technical analysis is the study of chart patterns, graphs and diagrams on a screen. The idea is to understand price and volume trends and pick stocks accordingly. Here, you analyse a slew of factors like moving averages, Relative Strength Index (RSI), etc.
- Fundamental analysis: It is the analysis of factors that explain a company’s real valuation. Here, you analyse some key factors, like Returns on Equity, Earnings Yield, GP Margin, Debt to Equity Ratio, Interest Cover Ratio, Market Capitalisation etc. to have greater clarity regarding stock prices.
How are Stock Market Returns Calculated?
Typically, you can use two methodologies 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 based on the overall period. Market experts prefer this methodology over the absolute return methodology.
Thus, the stock market is a place where stocks and securities are electronically traded. The first step before investing in stock markets should be to open a Demat and Trading Account with a reliable financial partner like IIFL. 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.