Participants in the stock market
Investing in the stock market can reward investors with high returns, which isn’t possible through other conservative avenues. Thus, it is crucial to understand how the equity market works. Typically, investors trade in shares, derivatives, and bonds, and the stock exchanges facilitate this trading mechanism by acting as a platform or marketplace connecting sellers and buyers.
To fully comprehend how the share market works, you must know about the various players involved in the Indian stock market.
1. Securities Exchange Board of India (SEBI)
SEBI regulates the Indian stock markets and ensures the efficiency and transparency of the securities markets. The regulatory body also safeguards the interests of all players, eliminating the possibility of unfair advantages and ensuring a level playing field. All companies, exchanges, brokerages, and other participants must conform to and abide by the regulatory framework laid down by SEBI to protect the interests of investors.
2. Stock exchange
As previously mentioned, stock exchanges act as a marketplace, facilitating the trading of shares, bonds, and derivatives in the stock market. There are two main stock exchanges in India:
3. Stockbrokers and brokerages
Stockbrokers are financial professionals who execute orders in the stock market on behalf of their clients. They are also called registered representatives (RR) or investment advisors. These intermediaries execute buy and sell orders for investors and receive a fee or commission in return. Most stockbrokers are employed by brokerage firms and typically handle transactions for various individual and institutional customers.
4. Investors and traders
The key players in the stock market are the investors and traders, who buy companies’ stocks to become part owners. Through trading, investors can purchase or sell this equity.
Additional read: Different types of stock trading
Types of share market
To understand what is a share market and how it works in India, you have to know about primary and secondary markets.
1. Primary markets
A primary market, also called a new issues market, is where securities, such as primary bonds, stocks, and debentures, are created and issued by companies or governments for the first time. Companies can raise capital by issuing new securities to the public in the primary stock market to meet their investment needs and discharge liabilities.
Companies list their shares in the market through a process known as Initial Public Offering (IPO), which allows them to sell their shares to the public for the first time. The initial public offering remains open for a certain period, and investors have the chance to bid for shares and purchase them at the issue price, which the companies announce. After the end of the subscription period, the shares are allotted to the bidders, and the companies are referred to as ‘public’, as they have offered their shares to the public.
Companies pay a certain fee to stock exchanges for this process. Moreover, companies must offer all the relevant details pertaining to their financial information to the stock markets, including quarterly or annual reports, balance sheets, and income statements. They must also provide information about new projects or future objectives. Lastly, the company is listed on the stock market. That is, investors can freely buy or sell the stock issued during the IPO.
2. Secondary market
To know how the share market works, you must also know about secondary markets. Once the company’s shares are offered to the public in the primary market, they are traded in the secondary market. Thus, investors purchase and sell securities to other investors in the secondary market.
Trading in the stock market
Stockbrokers and brokerage firms act as middlemen between the stock exchange and the investors, purchasing and selling stocks once they are listed on the exchanges. Your buy order for shares is passed on by your broker to the stock exchange, which will then search for a sell order for the same share.
With the emergence of a buyer and a seller, the transaction is finalised at a certain price. Afterwards, the stock exchange confirms the order with your broker. The entire process takes place within seconds.
Simultaneously, to ensure that neither party defaults, the stock exchange confirms the buyer and seller details, facilitating the actual transfer of ownership of shares. This is known as the settlement cycle. Previously, settling stock trades used to take weeks, but today, this duration has been reduced to T+1 days.
Let us understand how the share market works with a simple example. Let us assume that you purchase a stock today and the credit is given by the day’s end. During the settlement, the stock exchange will ensure that the trade of stocks is honoured. In the event that the settlement cycle doesn’t occur within T+1 days, the stock market’s sanctity comes into question, as it would mean that the trade may not occur.
Stockbrokers utilise the unique code assigned to an investor to identify their clients. Once the transaction is completed by the investor, they are issued a contract note by the stockbroker, providing details of the transaction, including the date and time of the stock trade.
Besides paying the stock’s purchase price, the investor must also pay the brokerage fees, stamp duty, and securities transaction tax. These costs are deducted from the sale proceeds in the event of a sale transaction, and the investor is paid the remaining amount. Furthermore, multiple parties are involved in the communication chain at the broker and stock exchange levels, such as the brokerage order department and exchange floor traders.
Which are the fundamental entities available in Indian stock markets?
In May 2024, the cumulative market capitalisation of companies listed on the BSE crossed US $5 trillion. This was a major milestone as India became the fifth country globally to have crossed this mark. Even though India’s stock exchanges have fewer listed companies compared to giants like the US or China, these companies have higher liquidity.
The share market in India consists of three major entities. These are the primary and secondary markets and stock exchanges. A major distinction is that stock exchanges like BSE and NSE are open for business throughout the year, whereas the primary markets are only operational during IPOs.
The share market in India has always been vital to the country’s economy. It has improved the distribution of capital in the corporate sector and promoted the launch of new businesses in the country. With several new companies launching IPOs and going public, the stock market has been undergoing rapid growth, which is only expected to increase further in the coming time.
How to evaluate a stock before investing?
There are two key ways to evaluate stocks before investing. These are:
Technical analysis
This involves studying stocks and price movements through graphs, chart patterns, and diagrams. The basic idea of technical analysis is to understand and identify the trends in volume and price movements in order to choose stocks. Some of the indicators in technical analysis are the Relative Strength Index (RSI) and moving averages.
Fundamental analysis
This includes the assessment of different factors that give insights into a company’s actual valuation. Some primary metrics that are analysed in the fundamental analysis include earnings yield, equity, debt-to-equity ratio, GP margin, market capitalisation, and interest cover ratio. An in-depth study of these indicators provides insights into stock prices.
Pricing of shares in the stock market
The supply and demand of a stock influence the share prices and play a pivotal role in determining share prices. You can remember this important concept while learning how the stock market works in India:
- If the demand for shares is greater than the supply, the price increases.
- If the demand for shares is less than the supply, the price decreases.
The two stock exchanges — BSE and NSE — use certain algorithms to find the stock price depending on the volume traded, and these prices change constantly.
Example of share value in the Indian stock market
A share’s value in the stock market is dependent on the value of the company and the number of issued shares. For example, imagine company ‘F’ making more money than company ‘H’. In this case, the shares of company F will be more valuable. Moreover, your purchase of the shares of company F will be considered more valuable than buying shares of company H.
The market price of shares can fluctuate based on market sentiments and other factors. If traders believe that a company has strong fundamentals and is doing well, its value will increase. These share prices are recorded and monitored every working day. The closing price at the end of the trading day is used to measure the amount of money you could have potentially made if you bought a share earlier to sell it at closing.
Conclusion
In conclusion, understanding the intricacies of the stock market, is essential for investors seeking lucrative opportunities. With regulatory bodies like SEBI ensuring fairness, and key players like stockbrokers facilitating transactions, participants navigate primary and secondary markets to capitalise on supply-demand dynamics, shaping share prices and fostering a dynamic trading environment.
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