Stock Market

What is the Stock Market?

Most of the Indians think of investing in the stock market as gambling, but it’s not true. Rather than just putting your money in the stock market and expecting something magical to happen, people should understand the working of a stock market to make the most out of it. We talk about various types of stocks and the numerous terms relating to it, but first of all, let us understand, what is a stock market?

A stock market is a platform where companies raise funds for their businesses in return for a part of the ownership of the company. They divide the ownership in the form of small denominations known as shares and then charge people for the acquisition of the same. The term ‘Stock’ refers to various Corporate equities and securities which are traded on a stock exchange, whereas the word ‘shares’ has a more specific meaning i.e. a slice of ownership of one or more companies.

The decision regarding how many shares are to be issued for how much part in the company is taken by the company itself. However, a limit which is known as the authorized capital is put by regulatory bodies that control the upper limit of the amount that can be raised by a company in the form of capital.

Raising funds through the means of a stock market is considered to be a better option than that of bank loans, due to the presence of fixed charges like interest in the latter.

There are a lot of ways through which a company can offer its shares to the general public, but the process through which a company offers it shares to the public for the very first time is known as the Initial Public Offer (IPO)

Once the IPO is made, the company might offer shares through some other methods such as Right to Issue, Private Placements, Offer for Sale, Sale through intermediaries/brokers, and Privileged Subscriptions.

A stock market consists of 2 parts:

1. Primary Market: The place where the company issues its shares for the very first time is called a Primary Market. Here, the price of the shares is decided by an underwriter, which is an investment bank. An underwriter is someone who will decide the price of the share for the first time after evaluating certain aspects of the company.

2. Secondary Market: When the shares have been issued by the company, it is the secondary market where the shares are further bought and sold amongst investors. Here, the price of a share is decided by the market forces of demand and supply.

Under the stock market, there are various stock exchanges where the shares are bought and sold. Many times, terms like stock market and stock exchange are interchangeably used, but the latter is more of a subset of the former.

The 2 major stock exchanges in India are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). There are 23 stock exchanges in India.

These are regulated by SEBI (Securities Exchange Board of India), the Indian regulatory body which looks after the formulation and implementation of various policies regarding fair trade practices to protect the investors from fraudulent activities.

Although the stock market is also called the equity market as it is primarily known for trading stocks/equities, a lot of other financial securities are also traded in the stock market, such as Corporate bonds, Commodities, Derivatives based on stocks, Currency, etc.

Earlier, people used to own the shares in the form of papers/documents. It was the only way in which they could display the ownership of a share. Today, instead of being stored physically, the shares are stored in electronic form in various depositories like CDSL (Central Depository Services Ltd.) and NSDL (National Securities Depository Ltd.), just like our money is kept in electronic forms in the banks.

Unlike today, where people can buy shares while lying on their bed, people used to trade shares over the counter of a physical stock market where the prices of various stocks were shouted near the stock exchange to inform people about them.

The stock market makes profit by charging for the services it provides to the companies and investors i.e. a platform to raise funds to the company and the ability to invest in them to the public. The stock market also has a lot of functions to perform such as making the trading process a smooth experience, ensuring the safety of the investors, checking the authenticity of the people on the platform, and many more.

Stock Market consists of Retail participants as well as Domestic/Foreign institutions. The main motive of investors is to make profits by buying shares of a company at low prices and selling them at a higher price in the stock market. One should keep in mind that a De-Mat account with a broker is a pre-requisitory for indulging in stock trading. To increase one’s chance of making profits, the execution of a trade should be only done after proper research on the desired stocks.

Write-up by: Rishi Raniwala