The stock market is a mediator platform that allows you to buy and sell shares. However, it is not as simple as going to a grocery store and purchasing groceries. This is where the question of how does stock market work in India and the nuances of online share trading comes in.
How Does Stock Market Work in India?
A stock is a equity share of a company that you can buy and sell. Immediately, you must’ve wondered how not all companies are listed on the stock market. That’s because a company must be publicly listed for you to be able to buy and sell its stock.
Companies go public via a process called Initial Public Offering (IPO) on the primary market. Not every investor is able to buy shares during an IPO because of the allotment process, a method in which a fraction of all those who’ve applied for the IPO get freshly issued shares.
Once the IPO is over, however, the shares move to the secondary market where every investor can buy or sell their stock. This is the market you must be more familiar with, as there are indices like Nifty 50, Nifty Bank, and others that track the performance of stocks in the secondary market.
By now you must’ve guessed that the stock market has several moving parts to it. As a first step, uncovering all market participants would make it easier for you to:
- Understand how the stock market works
- Learn where all participants fit in
- The types of markets you can engage with
Without further ado, let’s begin with the various participants of the stock market.
Stock Exchange Participants
There are 5 participants in the stock market, so let’s check them all out.
1. Securities and Exchange Board of India (SEBI)
SEBI is the principal authority responsible for regulating the market in India. It safeguards the interest of investors by ensuring the safety of their transactions and investment with rules and regulations.
Being a market regulator, SEBI ensures that the stock exchange functions smoothly.
SEBI’s rules apply to you as an investor as well. If you want to make any stock market investment, remember that you have to abide by the guidelines laid out by SEBI. Fraudulent practices like insider trading are prohibited per SEBI’s regulations.
2. Traders and Investors
Traders and investors are often used synonymously. However, you should remember that they are not the same and have a few key differences that distinguish them from each other.
While traders are essentially involved in buying and selling equities for short-term or intraday, investors buy shares for the long term and generate a source of passive income from them. These are two key market players because their decisions heavily influence the market.
While investing in a company’s shares, the investor usually studies the company’s performance, dividend payouts, and long-term growth. Hence, these become an investor’s metrics. On the other hand, a trader’s decisions are influenced by market prices, demand, and supply.
In fact, traders steer clear of fundamental analysis and use technical indicators and analysis to make their decisions.
3. Stockbrokers and Other Market Intermediaries
Did you know that you as an individual can not buy and sell shares on an exchange? You have to go through a stock broker to do so. Stockbrokers or trading members are intermediaries who carry out the purchase and sale of shares on your behalf.
They carry out these activities in exchange for a fee known as brokerage. Much like other market participants, stock brokers are regulated by SEBI and have to abide by the laws laid down by stock exchanges.
There are various market intermediaries, and for your convenience, we have listed them below, along with their roles.
A. Depositories and Depository Participants (DP): Depositories are institutions responsible for holding your securities. A DP is an agent who opens your Demat account, allowing you to trade in the market.
B. Clearing Members: These members help clear and settle deals that a trading member executed through the clearing house.
C. Clearing House: A clearing house is an intermediary between any two entities. This body is also responsible for ensuring that all transactions carried out in the stock exchange have a financial guarantee.
D. Clearing Bank: This market intermediary is the link between the clearing corporations and clearing members for the settlement of funds.
Without publicly traded companies existing in the market, there would be no stocks to purchase or sell. Through an Initial Public Offer (IPO), a company takes its first step toward becoming publicly traded.
This means that every stock you track, invest in, buy or sell is issued by one of the publicly traded companies on the stock exchange.
Read 👉 Top 10 Biggest IPOs in India
5. Stock Exchange
A stock exchange, also known as a securities exchange, is a platform where everything related to buying and selling a stock happens. In India, there are two major stock exchanges that are listed below:
- National Stock Exchange (NSE)
- BSE Limited (Bombay Stock Exchange)
Apart from NSE and BSE, there’s also another list of stock exchanges in India that operate at varying volumes.
Types of Markets
To better understand how does share market work, you also need to know about the two types of markets.
1. Primary Market
The primary market allows companies to issue their shares and raise capital for their funding requirements. Companies offer IPOs initially, and investors bid for the shares and purchase them at the prices set by the companies.
Once the subscription period is over, bidders are allotted shares. To become a part of the stock exchange, the companies need to provide financial information such as quarterly reports, balance sheets, income statements, etc.
2. Secondary Market
In a secondary market, the stocks that were once issued as IPOs can now be traded freely. This market allows initial investors to exit the market by selling their shares. When you buy shares of Reliance or Tata, it is done in the secondary market.
Wondering where derivatives fit into all of this? Read this blog 👉 What is a Derivative Contract
Trading in the Share Market
The stock market functions are based on all these participants and types of markets. However, to better understand how does Indian stock market works, you need to know what influences it and its participants. Here are a few simple things that apply to the stock market:
- When the demand for shares is high, the stock price shoots up.
- When the demand for shares is low, the prices fall.
The stock exchanges have an algorithm that determines the prices based on the volume of trading that occurs. The stocks are initially traded in the primary market for a window period, after which they become a part of a secondary market.
You now know the ins and outs of how does share market work in India! While the share market is complex, it is designed to give you transparent access to investing in shares online via brokers like Dhan. Speaking of Dhan, here is one of the most important features we’ve launched for the stock market: