How does Share Market Works in India?
Reema started working in an MNC. She was keen on starting her investment journey and began parking her savings in post office deposit schemes, bought some gold and kept some money in her bank account. Two years down the line, the savings increased but not anywhere around the returns her friend Mansi got over the same period. Pondering upon the gap of growth, she asked Mansi about her investment methods. Mansi kept a part of her gold and post office savings investments, while one was invested in the share market. Even though Reema heard about the Indian share market through news articles, she wasn't sure about investing in them. The only introduction she had to the stock market was the volatility and risk of losing the invested capital. To go beyond the risky image of the share market in India, let's understand what the share market is and how it works.
What is a share market?
A share market is a platform for investors to trade financial assets such as bonds, shares and derivatives. The stock exchange facilitates this transaction by allowing for the purchase and sale of shares. A share is a physical representation of a small portion of a company's value. In India, there are two types of stock exchanges:
a) Primary Market:
Companies sell their equities on the primary share market to raise fresh money from the investors through IPO. An initial public offering (IPO) is where a company lists itself on the stock exchange and offers shares for the first time to the public at large.
b) Secondary market:
The secondary share market is where a company's shares are traded. Following listing a company's stock on a stock exchange, investors can trade shares at market prices. The market price is determined according to the demand and supply of that share in the stock market. That could be due to several factors such as the growth prospects of the company and companies past performance.
Additional Read: ICICI Direct- Types of Stocks and Investing
Participants of Indian Share Market:
There are sure essential participants involved in the working of the Indian share market.
a) Securities and Exchange Board of India (SEBI):
SEBI regulates the stock market in India. SEBI is established to protect the interest of the investors in the stock market. For this purpose, SEBI has laid down the regulatory framework for the operation of the stock market. It also has powers to penalize the players in the stock market who do not abide by its rules.
b) Stock Exchanges:
The stock exchange is an integral part of the share market. It facilitates investors to buy and sell company shares in a regulated electronic environment. In India, there are two major stock exchanges-
a) The Bombay Stock Exchange, or BSE, was founded in 1875 and is India's and Asia's oldest stock exchange. It is India's largest stock exchange, headquartered in Mumbai, Maharashtra
b) The National Stock Exchange (NSE) was founded in 1992. It is India's first stock exchange to offer investors a decentralized electronic trading platform.
Both the BSE and NSE follow the same hours of trading, trading mechanism, and settlement process.
A broker is an intermediary whose work is to facilitate the buy and sell orders for investors. In return, brokers charge a small fee or commission.
d) Investors and Traders:
Companies issue shares to their investors to raise money in the form of equity. That is in the form of part ownership of a company. Buying and selling of equity on the stock exchange platform are called trading.
How does the share market function?
Indian share market work through a network of exchanges, clearing corporations and brokers. They work as a mediator between stock market investors and listed companies.
Their indices represent share markets. Nifty and Sensex are respective separate indices of the NSE and BSE, respectively, in India. Based on market volume and popularity, these indices comprise shares in the biggest large-cap companies. There are other indices for different sector companies or a specific segment of companies in terms of their market cap. Indices rise and fall in response to underlying stocks' performance, and investors use them to predict the market's direction.
The bid-ask spread is another crucial aspect to understand while learning about how the stock market works. The term "bid" refers to the price buyers are willing to pay for a stock, which is generally lower than the seller's "ask" price.
How does trade on Stock Market look like?
1)& You specify the number of stocks to be sold or purchased after providing your Trading and Demat Account details to the broker. Supposing you want to buy some shares:
2) The broker verifies that your account has sufficient funds to execute the trade.
3) Your order is then sent to the stock exchange for execution. For example, if you've issued a purchase order, it'll be matched with the sell order.
4) The exchange then confirms the transfer of ownership of shares. The shares will then be reflected in your account in T+2, i.e. two working days after the day of the trade.
Emerging markets, such as India, are rapidly transforming into engines of future growth. Understanding the basics of the stock market and how it works will assist you in profiting from this growth. However, you'll need a Demat account and a trading account to start investing in stocks. Despite the volatility in the stock market, with proper education and knowledge of the markets, you can benefit in the long term by investing in the stock market.
ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.