How does the stock market work?
The stock market refers to a marketplace where individuals and organizations engage in the buying and selling of company shares. A share represents the smallest unit of ownership that a company offers to investors in exchange for capital. Further information regarding shares and their various types can be found here.It is important to note that while the terms ‘stock’ and ‘share’ have specific definitions, they will be used interchangeably throughout this guide.
Additionally, the stock market is often referred to as the secondary market. When a company first offers its shares to the public, an event known as an Initial Public Offering (IPO), and an investor purchases shares directly from the company at their nominal value, this transaction occurs in the primary market. Conversely, if an investor seeks to acquire shares of that company at a subsequent time, they must do so in the secondary market, which is the stock market. In this scenario, the investor purchases shares at the prevailing market price from other investors rather than directly from the company.
Grasping the Fundamentals of the Stock Market
In the stock market, participants engage in the buying and selling of shares from publicly traded companies, which are those listed on a national stock exchange. Individual investors looking to acquire shares from companies not listed on any exchange often face a complex process, which will not be covered here. In India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two primary stock exchanges, while in the United States, the New York Stock Exchange (NYSE) and Nasdaq are widely recognized.
The Securities and Exchange Board of India (SEBI) serves as the regulatory authority overseeing the stock market in India. It governs various aspects, including the process of companies launching initial public offerings (IPOs) and the operations of stock exchanges.
Trading in the stock market occurs during specific hours, which in India are from 9:15 am to 3:30 pm on weekdays. Share prices can vary throughout these hours due to multiple factors affecting their supply and demand, along with a significant degree of randomness influencing short-term price changes. This volatility is a natural characteristic of the stock market, and different types of traders seek to profit from these short-term price movements.
For beginners interested in investing in the stock market, the process is not as straightforward as simply visiting a fruit market to purchase your favorite fruits or going to a bookstore for a desired book. When buying stocks, the objective is not consumption but rather wealth accumulation and achieving financial objectives.
To invest in the stock market, you will work with a trusted bank or investment broker. First, you need to open a ‘demat’ account to store your shares electronically and a trading account for your investment money. Most banks and brokers also offer an online trading platform.
