The Workings of the Stock Market

The Workings of the stock market - Blog by Fintock

“All people are aware of the existence of the stock market. But few are actually educated about the subject. We will divide the study of the stock market into various subparts since the subject matter is so vast that covering it in a single blog won’t do justice and might get boring as well.”

In our previous coverage of the equities markets, this is what we said and in today’s blog, we are here to keep our word.

The stock market, unlike your friendly neighbourhood market, isn’t an actual, physical place, i.e, it’s intangible, digital. But very much like a regular market, it has several different market participants (first technical word), the buyers, sellers, brokers all form part of these market participants.

Let’s take a look at these participants, shall we?

First up is the Regulator:

SEBI (Securities and Exchange Board of India), think of them as the stock market police, they are the ones who save you from the bad guys in the market. They ensure that the market is a safe place for investors and make sure every trade is fair and square. There’s a whole act in India stating their powers.

Then comes the Exchange:

Bombay Stock Exchange (BSE), National Stock Exchange (NSE), are some famous terms we hear. But what are these exchanges? Think of these as facilitators. They provide the marketplace (digitally) for the buying and selling to happen, companies get listed on these exchanges and their shares are traded on THESE exchanges.

In highly technical terms, they facilitate the fulfillment of demand and supply of shares of different companies that are listed on these exchanges. 

Although most people believe that BSE & NSE are the only two stock exchanges in India, actually there are 23.

The Depositories:

There are two depositories in India, the National Securities Depository Limited and the Central Depository Services Limited. We told you at the very beginning of this blog, that the stock market is not an actual place you can visit, it exists digitally, similarly, the shares also exist digitally or shall we say, in dematerialised form. 

When you want to buy shares of a company, you do so through your Demat account, which is opened with a stockbroker. The depositories do the work of handling the shares for you and ensuring they are in safe hands, they also transfer the ownership of shares.

And then come the StockBrokers:

Like in any industry, the broker has the job of the middleman, similarly, in the stock market, the stockbroker acts as a middleman for us, the investors. But why do we need a middle man? 

The thing is, every day, there are millions of trades happening on these exchanges and it’s not very efficient for the exchanges to deal with each and every investor individually. 

And Finally, The Investors: 

This is where you come into the picture, (we are counting on the fact that by now, you must’ve understood that it’s of UTMOST importance for you to start investing your money) and why you’re here. The investors are the shareholders or the stockholders or you, as we said. These are the guys who trade the stocks on the market. They can include retail investors like you and us or institutional investors like a mutual fund, insurance companies, banks, etc.

How it all plays out.

First of all, you need to know that all transactions take place in an online form. But this hasn’t always been the case.

Earlier, securities used to be traded in physical form. There used to be a lot of commotion on exchange floors with people crying out prices and settling trades. Also, there were many disadvantages of this system such as delay in settlement of trades, spoiling or theft of physical stock certificates, etc.

To overcome all these shortcomings online system of trading came into play. Now all the transactions happen on your mobile or computer screens and securities are held in electronic form in your Demat account. The settlement of transactions is now quite fast with settlement happening in T+2 days (where ‘T’ means trade day). This means you will receive the securities in your Demat account on the second day after the trade day.

Now the next thing you need to know that there are two different stock markets in play – Primary and Secondary. 

The primary stock market allows companies to issue shares for the first time to raise capital through an initial public offering or IPO. The IPO opens for a small period and companies have to meet certain conditions beforehand to qualify for an IPO. Once all ready to go, the companies issue a price at which the shares are to be sold initially and investors can bid on that. A company is said to be public once the IPO is issued and the shares distributed.

The secondary market is where the daily trading happens once the company gets listed on the stock exchange. All the buying and selling is done through the brokers. Let’s say you want to buy shares of Reliance, your broker will pass your order to buy the shares to the stock exchange. The exchange then searches for a similar guy like you who wants to sell the shares of Reliance. Once found a price is agreed upon and details of both buyer and seller are confirmed to ensure transparency. The exchange then confirms the order and conveys the same to you through the broker. Ownership of the shares is transferred within two working days (or T+2 days as they say technically). All the details of the order are shared by the broker in a contract note such as the time and date of fixing the order. 

Now there are loads more stuff to discuss like all the different types of orders and how you can also sell the stock without actually owning it otherwise known as shorting which we will get onto as well in future discussions. This was just a peek into the vast world of stock markets and how they function. In short, we are just getting started ;).



2 Responses

  1. Shephalika Shukla says:

    Well written. Quite comprehensive.

  2. Shephalika Shukla says:

    Well explained, Quite comprehensive.

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