There are many investment avenues available for individual investors. Right from fixed income options to equity-related products, there can be many options to choose from, depending on investors’ risk appetite and time horizon. Though the share market is a popular investment choice, many individuals don’t understand how share market works. Given the technicalities involved, it is not surprising. So, let’s breakdown the concept of share market and understand how share market works.
What is the share market?
In the simplest of terms, the share market is the platform that allows investors and traders to buy and sell shares, derivatives or bonds. The share market, therefore, acts as a middleman between the investors and the companies offering their securities for sale.
Participants of the share market
Before understanding what is share market and how it works, it is important to understand the participants which constitute the share market. A share market has four main participants which are as follows –
1. SEBI – The regulatory body
The Securities and Exchange Board of India (SEBI), is the head of the share market which acts as its regulator. It lays down the rules of the share market and the market participants, as well as the traders and investors, have to follow the rules and guidelines prescribed by SEBI. SEBI also governs and monitors the working of the share market and ensures that the market works as per the prescribed guidelines.
2. Stock Exchange – The platform
Stock Exchange is the place where the shares and derivatives are listed and traded. There are two stock exchanges in India – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
3. Brokers – The middlemen
Brokers are individuals or companies who are authorized to conduct buying and selling of stocks and derivatives listed on the stock exchange on behalf of their clients. For rendering their services, brokers get a brokerage on the amount that they transact.
4. Investors and traders – The players
Investors and traders are the final participants who buy and sell securities on the stock exchange. They can be an individual or a company.
How share market works?
Now that you know the important participants of the share market, it is time to understand how share market works. The following process is a step-by-step guide to the workings of a share market:
- There are two stock markets – primary and secondary. To be able to trade its securities on the stock market, a company has to get listed on the primary stock market. This listing is done through an IPO (Initial Public Offering) wherein the company offers its stock to the public to trade for the first time. The company is required to issue an offer document containing the details of the IPO, the company details, the stock being issued, etc. The company would also have to register itself with SEBI and the stock market.
- Once the company is successfully listed, it's stock trades on the secondary market. The secondary market is the platform wherein the traders and investors buy and sell stocks of the listed companies.
- Since there are thousands of investors who want to trade on the listed securities, it becomes impossible for them to assemble at one platform for trading. That is where brokers come into the picture. Brokers represent a set of investors and trade on their behalf. Brokers are also registered with the stock exchange and serve as an intermediary between the participating company and the investors.
- If you, as an investor, want to buy a particular stock at a particular price, you have to communicate your purchase desire to your broker. The broker would then process your order on the stock exchange.
- Your broker lists your purchase order on the exchange which, in turn, searches for a seller willing to sell the stock that you want. When the seller is found, a price is fixed and the exchange informs the broker of the confirmation of the purchase order. The broker then informs you and you need to pay the money to purchase the requested stock.
- The details of the buyer and seller are also confirmed by the exchange to ensure that an authentic transaction is taking place and that there would not be any default by either of the parties in buying or selling the stock. Once the records of the buyer and seller are recorded, the exchange starts the process of transferring the ownership of the stock. This process is called settlement and it takes T+2 days for the actual transfer to complete. This means that, if you request to buy a share today, the share would be bought and deposited in your Demat account the day after tomorrow.
- It is also the responsibility of the exchange to ensure that the purchase goes through without any default. It ensures that the buyer gets the desired number of shares after paying for them.
- The trading of the stock also impacts its price. The share market is volatile wherein the stock prices rise and fall on a continued basis. This rise and fall are due to the theory of demand and supply and the perception of the participating company which investors have. If investors perceive a company to be very profitable, they would be motivated to buy the shares of such a company. This would increase the demand for the company's shares. As the demand rises, the price of the shares also increases. The same holds true for a stock whose prices plummet. If there are too many sellers looking to sell off their stocks, the company would be perceived in a bad light. As the supply of shares increase and the demand is lower than the supply, the price of the stock would fall.
You can also track established indexes like the Nifty 50 to select which companies to invest in. Nifty 50 is a benchmark index that monitors the movement of the share prices of selected bluechip companies. 50 selected companies are tracked by the index covering 13 sectors of the industry. The index, therefore, covers about 65% of the float-adjusted market capitalization of leading companies.
Also, when investing, you should understand the types of stocks trading on the stock exchange. There are, broadly, three types of stocks which include the following –
- Large-cap stocks are stocks belonging to companies that have a large market capitalization. These are those companies which are established from a long time and enjoy a very good reputation.
- Mid-cap stocks are stocks that belong to companies which have a medium market capitalization. These companies lie between the spectrum of large-cap and small-cap companies having a market capitalization ranging between INR 5000 crores to INR 20,000 crores.
- Small-cap stocks are stocks belonging to companies that are relatively new in the market and have a low market capitalization.
The art of investing in the share market
Understanding what is share market and how it works is not enough. You should also understand how to invest. Always understand your risk appetite before investing in a stock market. Though the market promises good returns, there is an equally high chance of a loss when the market falls. You should, therefore, invest only up to the limit which suits your risk profile.
Always study the market and the participating stocks before selecting a particular stock for yourself. Do a trend analysis of the price movement of the selected stock and go through market predictions. Don't get too emotional in case of falling markets because, given time, the market can correct itself.
Be patient with your investments and invest only what you can afford. Don’t get greedy about the returns. Start small and then build up your investment as you learn the ropes of share market investing. Take the help of a good broker who has the required expertise in the field to guide you to invest wisely. IndiaNivesh is an online platform wherein you can get expert guidance on how share market works in India. You can trust IndiaNivesh’s experts to give you investment advice suitable to your risk profile. Your money is hard-earned and at IndiaNivesh you can make your money work harder to give you a good corpus.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.