What is the stock market? You have heard a lot about it, haven’t you? Often different opinions and verdicts about it. But do you even know its basics like what it is, how it works or why it even exists? If you are looking for some precise answers to stock market questions. Then you found the right place. In this article we will cover many beginner’s mindset questions which will help you get some idea and clarity about the stock market. So, let’s start:
What is the stock market?
Share market, Equity market or Stock market all these terms are often used interchangeably. However, there is a little difference among them. A share market or equity market refers to trading or investing only in shares of a company. The stock market on the other hand allows you to trade or invest not only in equity but also several other financial securities such as currency, commodities, bonds, derivatives etc. Hence stock market is a common term used for an overall market ecosystem where buyers and sellers buy and sell financial securities.
Why does the stock market exist?
The stock market helps companies raise money through an IPO (Initial Public Offering) by selling shares of the company. It can use this raised capital to fund its operations, expand in a different territory or any other investment the company deems fit. Also, the point here to note is that companies keep raising capital through various modes like taking loans from banks, NBFCs or floating bonds etc. But all these are debts and they have to be paid back to the lenders along with the interest. But if a company raises capital from an open market, it is not a debt. In exchange the company has to transfer ownership from their promoters and existing shareholders to the open public to the extent of capital raised. Companies are required to disclose information regarding their business on a regular basis to the exchange and follow their guidelines.
The stock market creates and grows wealth for all types of investors. Without a stock market, purchasing and selling shares or any other financial instrument would be more complex and expensive. Business growth would be more difficult if companies could not have an IPO or issue new shares to raise money. It plays a very important role in the economy of a country and is very crucial to its economic ecosystem
What is a stock exchange?
Now that we have understood what the stock market is and why it even exists. The next question could be where all transactions take place. Where does a company file for an IPO and where do common folks go and buy or sell stocks?
And, the answer is all the transactions take place on the stock exchange. You can also say that the stock market is a constellation of exchanges where securities like stocks, bonds, currencies etc. are bought and sold. Think of the stock exchange just like a supermarket where we would go and buy things we need. Similarly, we go to a stock exchange to transact in securities we want to.
Hence the stock exchange facilitates our transactions by helping us meet our counter parties. So, if you want to buy shares of a company, the stock exchange helps you meet the seller and vice versa. But unlike a supermarket you don’t physically have to go to a stock exchange, you access the market electronically from your computer or mobile through the internet and conduct transactions (buy or sell).
India has two major stock exchanges – the BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange). BSE is located on Dalal Street in Mumbai which is also the oldest stock exchange in Asia. It was established in 1875. NSE was established in 1992 at the behest of Government of India to bring about transparency in the Indian equity markets. It is also located in Mumbai.
How does the stock market work?
A company lists in the primary market through an IPO. Conducting an IPO is a very complex and exhaustive task. Each step in the IPO happens in sequence which is clearly defined by Sebi guidelines. There is a bidding process in which investors bid for shares at a specific price within the specified price band. This whole system is called Primary Market around the date of the issue where one can bid for shares. Shares then list and debut on the stock exchange. Now it starts to trade publicly and this is called the Secondary Market. It is in this secondary market that all activities take place, all the experts giving recommendations and professionals generating tips and almost every buzz you hear or see in the media.
How is the stock market regulated?
Usually in every country there is an apex body which lays the guidelines for stock markets to work properly and to function smoothly. In India SEBI (Securities and Exchange Board of India) is the stock market regulator. SEBI aims to promote the development of stock exchanges.
It strives to protect the interest of retail investors and regulate market participants and financial intermediary’s activities. It has prescribed a set of rules and regulations for each and every entity involved in the market. All the entities should operate within the legal framework as prescribed by SEBI. It also keeps a close eye on all the activities going on in the market and takes actions against those who violate the guidelines.
There are many corporate entities involved that work in tandem to ensure smooth transactions in the market. Some of them are clearing corporations, depositories etc. Most of these entities work silently behind the scenes, always obeying the rules laid out by SEBI and ensuring an effortless and friction free experience. Generally, these entities are Financial Intermediaries or market intermediaries.
Together, these market intermediaries are interdependent on one another to create an ecosystem in which the financial marketers operate.
This article aims to provide all the important information about the basics of the stock market from the perspective of a complete beginner. Hope you like the content. Do let us know what you would like us to cover in upcoming posts. Also drop any questions you might have in the comment section. We would try to answer all of them. We would also be delighted if you shared our contents with your friends.