How Does The Stock Market Work In India
How Does The Stock Market Work In India
In the complex world of money matters, the stock market is like a network of places where things like stocks and bonds are bought and sold. In India, when people talk about "the stock market" or "Dalal Street," they're basically referring to the whole world of buying and selling different financial things, including stock exchanges and markets where various financial items are traded.
Types of Markets
To unravel the workings of the stock market in India, let's first explore the primary and secondary markets.
1. Primary Markets
In the primary stock market, companies have the opportunity to raise capital by issuing stocks. This capital serves to meet their investment needs and discharge liabilities. Companies enter the primary market through an Initial Public Offering (IPO), where they sell shares to the public for the first time.
The IPO window allows investors to bid for shares at the company's announced issue price. Once the subscription period concludes, shares are allotted to the bidders, and companies become publicly listed. To facilitate this, companies must pay fees to stock exchanges and provide crucial financial information, including quarterly/annual reports, balance sheets, and income statements.
2. Secondary Market
The secondary market in the stock exchange refers to the marketplace where already-issued financial instruments, such as stocks and bonds, are bought and sold among investors. Unlike the primary market, where these securities are initially offered to the public through processes like Initial Public Offerings (IPOs), the secondary market facilitates the trading of existing securities between investors.
Once a company has gone through the process of issuing its stocks or bonds in the primary market and they are held by investors, those securities can be traded on the secondary market. This trading occurs on organized exchanges, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in the context of India.
In the secondary market, buyers and sellers interact, determining the price of securities based on the forces of supply and demand. The market provides liquidity, allowing investors to convert their investments into cash. It's a dynamic arena where the value of securities fluctuates based on various factors, including market conditions, economic indicators, and company performance.
How Does the Stock Market Work?
The stock market serves a dual purpose—it enables companies to raise funds by selling shares and cultivates wealth for individual investors.
Companies generate capital by selling ownership stakes, or shares, on the stock market. These equity stakes fund operations and expansion without incurring debt. In return, companies disclose information and grant shareholders a say in business operations.
Process of buying and selling of shares in stock market
Once companies have their stocks listed on the stock exchanges, these stocks become eligible for trading in the secondary market. The buying and selling of these stocks, which are listed on the exchanges, are conducted by stockbrokers or brokerage firms, acting as intermediaries between investors and the stock exchange.
When you place a buy order for shares, your broker forwards this order to the stock exchange. Simultaneously, the stock exchange looks for a corresponding sell order for the same shares. Upon locating a seller and a buyer, they agree on a price to finalize the transaction. Subsequently, the stock exchange notifies your broker that your order has been confirmed.
Your broker promptly conveys this confirmation to you. This entire process unfolds in real-time, occurring within seconds. Concurrently, the stock exchange verifies the details of both buyers and sellers to ensure there are no defaults. It then facilitates the actual transfer of ownership of shares from sellers to buyers. This operational phase is known as the settlement cycle.
In the past, settling stock trades used to take several weeks. However, advancements have reduced this period significantly, bringing it down to T+2 days, signifying the completion of the settlement cycle within two days of the trade.
Investors, in turn, benefit by exchanging money for shares. As companies utilize these funds to grow, investors experience capital gains as their shares appreciate. Additionally, companies share profits with investors through dividends.
The individual performances of stocks vary, but collectively, the stock market historically rewards investors with average annual returns of around 10%, establishing itself as a reliable avenue for wealth growth.
Stock Market vs. Stock Exchange
While the terms are often used interchangeably, it's crucial to differentiate between the stock market and a stock exchange. A stock exchange, like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in India, is a component of the broader stock market. The latter encompasses myriad public companies listed on various exchanges, extending beyond stocks to include bonds, mutual funds, exchange-traded funds (ETFs), and other securities.
Understanding the dynamics of the stock market involves grasping its vast scope, with each stock exchange contributing to the overall performance of this financial galaxy.
Embarking on the journey of investing in the stock market is more straightforward than you might think. Here's a step-by-step guide to get you started:
Determine Your Investment Account Type:
When venturing into the stock market, the first step is deciding the type of account that aligns with your financial goals. Whether it's for retirement savings, funding education, or achieving short-term objectives, there exists an investment account tailored to your needs.
Open a Brokerage Account
Once you've identified the type of account you require, the next step is to open a brokerage account. Choose a reputable provider by considering factors such as fees and the range of investment options they offer.
Initiate Your Initial Deposit
To kickstart your investment journey, you'll need to make an initial deposit. Additionally, consider setting up recurring deposits to automate future investments, streamlining your financial planning.
Select Your Investments
With your account open, the next crucial step is choosing your investments. The stock market offers a plethora of options, ranging from individual stocks and bonds to mutual funds, index funds, and exchange-traded funds (ETFs) comprising diverse securities. Experts often advocate for a diversified, fund-based approach to mitigate the risk associated with individual investments.
Execute Your Investment Transactions
Once you've made your investment decisions, executing transactions is a straightforward process. Enter the ticker symbol of your chosen investment in the buy field, specifying the number of shares you wish to purchase.
In conclusion, the stock market is not just a platform for buying and selling stocks; it's a dynamic space where companies and investors engage in a financial symbiosis. As companies access capital for growth, investors participate in the journey, witnessing their investments evolve and mature over time.