Everyone wants to become rich and earn a lot of money. Also, they have a knowledge that Stock Market is a place that deals with money. However, on the other hand, they are unaware of how does Stock Market works?
In this blog, we will discuss the meaning of the Stock Market, together with its working.
Meaning of Stock Market
In laymen’s sense, Stock Market refers to a place where several things like equity and commodities are regularly bought and sold. Mostly, it a place where stocks are traded publicly so that anyone can easily purchase or sell on an exchange.
Further, stocks are even termed as equities, which are given to the shareholders to make them owners of the company. That means a person is termed as the owner or shareholder of a company if he/ she has owned shares in the company.
Now, the next question is from where does stock comes from?
Public Limited Companies issue stock to the general public so that they can raise funds for their business. That means the people, commonly known as investors, think that the said business will prosper in the coming future and will prove to be beneficial, buy shares and stocks of that company.
The people who buy these shares become the shareholders and get dividends and appreciation in return. Also, the shareholders are termed as the owners of the company and have the right to attend meetings and cast votes.
It shall be noted that Stock Market is also termed as Aftermarket, wherein people can sell their shares to the investors or people who want to buy them for investment. In India, there are two prominent stock markets, which are NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
How Does Stock Market Work?
The working of Stock Market can be summarised in points as follows:
Understand the Platform of Stock Exchange
The term stock exchange precisely denotes a platform that carries out the trading of financial instruments, such as Stocks and Derivatives. Further, all the activities performed on this platform are governed and regulated by the SEBI (Securities and Exchange Board of India). Also, the participants need to register themselves with SEBI and the recognised stock exchange in order to make them eligible to conduct trades. Moreover, trading activities comprise brokering, issuance of shares by companies, etc.
Listing of Company on Secondary Market
For the first time, the equity shares of a public limited company are listed on the secondary market through the process of IPO (Initial Public Offer).
After that, the allotment of stocks takes place prior to listing and the investors who bid for the shares get their holding depending on the total number of investors.
Trading on Secondary Market
Once a public limited company has been listed on the stock exchange, stocks can easily be traded by the investors, i.e., buy or sell, in the secondary market. That means Stock Market is the marketplace for the sellers and buyers to enter into a transaction and make profits, or in some cases, even losses.
Concept of Stock Brokers
Due to the scale of investors who number in the lakhs, it is tedious to have them accumulate at one location. Consequently, to carry out trade, stockbrokers, brokerage firms, and underwriting firms come into the picture.
Further, these entities are also registered with the Stock Exchange and operate as intermediaries between the stock exchange and investors themselves.
Furthermore, when an investor places an order to buy a share at a pre-given rate, then the broker processes the same at the stock exchange where there are numerous parties involved.
Passing of the Order
In the next step, the buy order is further passed on to the stock exchange by the respective broker, where it is coordinated for the sell order for the same. After that, the exchange takes place when the buyer and seller agree upon a share price and finalise it; the said order is then confirmed.
Once the price is finalised, the exchange thereafter confirms the details to make sure that there is no error or default in the transaction.
The stock exchange then facilitates the said transfer of ownership of shares which is termed as Settlement.
After that, the investor will receive a message of confirmation once this takes place. The communication of this message comprises multiple parties, such as the brokerage order, department, and the exchange floor traders, etc.
Also, it shall be noted that earlier the settlement time took weeks to materialise, which now happens in a maximum of T+2 days. That means if a person trade today, then the shares are shown in the DEMAT account within two working days time.
In a nutshell, investments are subjected to market risk, but the said risk can easily be mitigated if you consult a professional before investing in any of the security. Further, by this blog, we have aimed to give a glimpse of the meaning and working of the Stock Market, and in how much time the stocks will be reflected in the Demat Account.