The stock market, also known as the equity market or share market, is a system where publicly-traded companies sell ownership shares (stocks) to investors. The stock market provides a platform for buying and selling stocks, allowing investors to trade ownership in these companies.
When investors buy stocks, they become shareholders in the company and have a claim on a portion of the company’s profits and assets. The value of the stocks is determined by supply and demand, with the price changing based on market conditions and investor sentiment.
The stock market plays a crucial role in the economy by providing companies with a way to raise capital for investment and growth, while also giving individuals an opportunity to invest in and benefit from the success of these companies. The performance of the stock market is often used as a barometer of the overall health of the economy.
The stock market plays a crucial role in any economy, serving as a means for companies to raise funds and for individuals to invest in those companies. In India, the stock market has grown substantially and is a significant contributor to its economic development. As of January 2023, the total market capitalisation of the Indian stock market was valued at approximately ₹273 trillion. Given the increasing interest among the Indian populace regarding the stock market and its significance, this article will delve into the workings of the stock market and its functions.
What is the Stock Market?
The stock market enables investors to claim ownership in a company by purchasing its shares and lets companies raise capital without any debt, by selling the ownership as shares to the public. Additionally, the performance of the stock market is often viewed as an economic indicator, reflecting the overall health of the economy.
To participate in the stock market, individuals must fulfil these requirements. The stock market trading/investing has shifted online due to the advancement of technology, and individuals now require:
- an online demat account – Need an online demat account to digitally store securities,
- a trading account – to execute trades, and,
- a bank account – to transfer funds.
In India, the stock market consists of two primary exchanges: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). In the fiscal year 2021-22, retail investors contributed ₹1.6 lakh crore to direct equities. Consequently, the retail investors’ stake in the NSE-listed universe rose to a 15-year high of 9.7% as of March 31, 2022.
How Does it Work?
Companies list their shares for sale in the primary market for the first time, and subsequently, the shares are available for trade in the secondary market.
When you place an order to buy or sell stocks, your broker will submit the request to the stock exchange where it will be compared with a seller’s offer. Once the price is determined and fixed, the exchange will inform your broker that the trade is complete and the transaction will take place. Meanwhile, the stock exchange will verify the buyer’s and seller’s information to prevent defaults. After that, the transfer of equities will occur to finalise the trading process.
Before digitisation, the process of transferring equities used to take several days but digitisation helped cut down the time to T+2, that is, within two days of the transaction.
Participants of Stock Market
- Traders/Investors – Traders seek short-term profits from the stock market, whereas investors invest in the stock market for long-term gains. Because trading vs investing are two distinct entities, their approaches to buying, selling, and holding shares differ.
- Stock Exchange – It gives investors and traders the platform to trade company stocks and other securities. Furthermore, you cannot buy or sell stocks of any company unless and until it is listed on an exchange, which serves as a marketplace for stock buyers and sellers. The stock exchange is part of a larger system known as the stock market, which includes various stock exchanges such as India’s NSE and BSE.
- Brokers – Brokers act as go-betweens for the stock exchange and investors/traders. Bajaj Financial Services Limited is an example of a broker.
- The Securities and Exchange Board of India (SEBI) – It is an autonomous body with statutory powers which regulates the stock market in India, ensuring its fair and transparent operation. SEBI is in charge of regulating the issuance and trading of securities, as well as monitoring market participants’ behaviour to prevent fraudulent activities.
Conclusion
In conclusion, the stock market helps companies to raise capital without incurring debt and investors benefit from purchasing shares that appreciate over time and from receiving dividends as company profits rise. Stock exchanges and brokers facilitate investors and companies in realising their goals.
While a stock performance may fluctuate significantly over time, but on a broader picture, the stock market has rewarded investors. As per the World Bank’s collection of development indicators, the stock market return (year-on-year %) in India was 21.5% in 2021.
