The share market in India is a platform where investors can trade in different financial instruments, such as shares, bonds, and derivatives. The stock exchange is the facilitator that allows the buying/selling of shares. Many people still struggle to understand how to share market works in India; it’s no rocket science and a basic understanding accompanied by trading practice will definitely help you understand the in and out of the market. This article covers important points related to the stock market and how it works that beginners can make use of.
Overview of the Stock Market
There are two primary stock exchanges in India, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Companies list their shares for the first time in the primary market whereas investors can buy and sell their shares during an Initial Public Offering by secondary markets. A huge amount of stocks are traded in these exchanges every day. Many novice investors still have a misconception that the stock exchange in India is a kind of legalized gambling. They think of it as a short term investment vehicle that may bring either huge returns or loss. Proper knowledge of the subject can help them change this perception.
Who Regulates the Indian Stock Markets?
The stock market in India is properly regulated and supervised by the Securities and Exchange Board of India (SEBI). SEBI was created as an independent identity under the SEBI Act of 1992 and has the power to conduct inspections and authorize the stock exchanges. The inspections track the operations of the market and the organizational structure along with the administrative control.
SEBI has the following responsibilities:
- Making sure that the transactions are completely a fair and equitable market
- SEBI ensures that the issuance of Initial Public Offerings (IPOs) and Follow-up Public Offers (FPOs) takes place in a transparent way
- It is responsible for safeguarding the traders’ interests and ensuring that the investors do not fall prey to any stock market fraud or manipulation
- SEBI also acts as a mediator in the stock market to ensure that the market transactions are taking place in a seamless manner
- It also takes care of the regulations by registering brokers, sub-brokers, transfer agents, etc.
Types of Share Markets
The share market can be divided into two types, viz. Primary markets and the secondary markets. These are the basics and hence very important terminologies to help learn Indian stock market basics for beginners.
Primary Share Market: As the name suggests, It is in the primary market in which the companies register themselves to issue their shares and raise funds. This process is also commonly known as listing on the stock exchange. The sole purpose of listing is to raise money and if the company is selling its shares for the very first time, it is referred to as the Initial Public Offering (IPO). A company becomes a public entity through this process.
Secondary Market: Once the new securities are sold in the primary market, the company’s shares are traded in the secondary market. Investors can exit after selling their shares. These transactions in the secondary market are known as trades. It involves the process of investors buying from each other and selling amongst themselves at a decided price. A broker is the facilitator and acts as the intermediary of these transactions.
How do Share Markets work?
Suppose that there is a company that wants to expand their business but doesn’t have enough capital. To fulfill this purpose, it needs to raise capital. One of the most efficient ways to raise capital is by IPO (Initial Public Offering). To do that, the company needs to follow certain rules and procedures laid down by SEBI. It is obviously not possible to go door to door and ask for money. So, the company decides to enlist itself on a stock exchange.
Now there are potential buyers that evaluate the prospects and decide whether to buy a share in your company or not. The percentage of shares a buyer owns represents the percentage of ownership in the company. And being an owner of the company he is also a part of profits and losses as well as important decision making. These rights are offered to a person when he buys shares in your company.
Now if the person wants to sell his percentage share or a part of it for any reason, he then again approaches the stock exchange and places an asking price (which is the seller’s price). And other person or entity who is interested in buying the share of the company places a bid (which is the buyer’s price). When these two prices match with each other, a trade is executed. And the number that is listed on the exchange in front of a company’s name is the Last Traded Price (LTP).
This process is applicable to all the companies listed on the exchange. Not to mention, Supply and demand is the main cause of the movement of the share price. One can select to buy the shares of an industry that is right up to their alley. For example, if you understand the automobile industry better, you can check Tata Motor’s share price or Ashok Leyland share price for example.
On a Closing Note
No matter how well you understand how to share market works in India, you might have to face losses at times. Summing it up, perseverance is the key to blossoming in the stock market and seeking experts’ guidance is also a must before investing as the share market is subject to market risks.