The true potential of risk and return can be best understood from the stock market. While share indicates ownership, a share market is a place where the shares are bought and sold. Are they different from the stock exchange? Are they regulated? Let us answer these questions in detail.
This article covers:
- What is a stock market?
- What is a stock exchange?
- Types of the stock market
- Regulation of share market in India
- Understanding the workflow of the stock market
What is a stock market?
A stock market or equity market is a place where regular buying and selling of financial securities (equity and equity-related) takes place. These activities are facilitated by stock exchanges that operate under a strict set of predetermined guidelines, set by SEBI.
A stock market facilitates the trading of stocks of various listed companies where market forces determine share prices. A stock market, in some sense, can be considered as a marketplace where the buyers and sellers – retail investors, institutional investors as well as foreign investors – engage to trade securities such as stocks, listed bonds, mutual funds, derivatives, commodities, and other equity-related financial instruments.
What is a stock exchange?
Stock exchanges are platforms where the actual transaction of financial instruments take place. In simpler words, the exchange oversees and facilitates the trading of stocks and other equity products. The stock exchange provides real-time trading information that helps stockbrokers and traders with price discovery. Each exchange has a benchmark index that is a mathematical construct used to assess the performance of the stocks of the listed companies, helping investors determine valuations, make comparisons, and assess market mood and sentiments. The indices of the stock exchanges, thus, act as a mirror to the economic and financial status of the economy.
Among the seven stock exchanges in India, the two major ones that handle the bulk of the trade are as below:
Before we get into it, let us bring up the fact that, in general, it does not matter which exchange you choose as your platform to trade. While some exchanges are exclusive to commodity trading (such as the MCX), the NSE, BSE, the Calcutta exchange, etc., all deal with stocks. An investor may trade using any of the platforms suitable to the asset they want to trade.
National Stock Exchange (NSE): Established in 1992, NSE has a total of 7200+ companies listed on it. Though BSE is older, NSE is more actively involved in trading and has a larger turnover rate.
Bombay Stock Exchange (BSE): Famously known as Dalal street, it is the tenth-largest stock exchange in terms of market cap globally. It was established in 1875 and is the oldest exchange in India.
Types of the stock market
Primary market: Primary markets largely deal with new stocks and securities. Many companies, governments and other financial institutions look to raise funds through primary market securities like bills, rights issues, private placements bonds, FPOs, and most popularly, IPOs. Major shares, funds, and bonds are first issued in the primary market.
Secondary market: The secondary market is mainly known as the “stock market,” where the actual trading of the stocks or shares takes place. Once the company is listed on the exchanges, its shares are allowed to be traded freely by the public. Here, the investors and issuers can easily buy and sell shares based on the current price. The core of secondary markets is formed by retail investors, brokers/brokerage institutions, banks/financial institutions, etc.
Regulation of share market in India
The stock exchanges in India are regulated by the Securities and Exchange Board of India (SEBI). SEBI is responsible for the smooth and systematic conduct of the stock markets and sets in place certain predetermined norms and guidelines that need to be strictly adhered to by stock issuers and other market participants.
SEBI acts as the superintendent body of stock exchanges to ensure fair and objective trading in the market.
Understanding the workflow of the stock market
Companies are listed in the secondary markets, following which trading is initiated. This trading is facilitated by the stock exchange on which the company is listed.
The choice of stock exchange rests with the company. The company may decide the exchange on which it wants its shares to be listed on. A company can even get its shares listed on multiple stock exchanges or both major stock exchanges, i.e., NSE and BSE. For example, Reliance Industries has its shares listed on both NSE and BSE.
Once the listing is duly completed, trading is permitted. An important thing to note here is that when you buy or sell shares, it is not to the company. Rather, you buy or sell those shares from/to someone who agrees to buy/sell the shares at an agreeable price.
In real markets, the investors are huge in numbers, and it is literally impossible for the exchange to deal directly with individual investors. This is where stock brokers come into the picture. Stockbrokers and brokerage firms are registered entities that act as intermediaries between retail investors and the exchange. Stockbrokers process the investor’s buy/sell orders and charge a certain percentage of the transaction as their fees. Once you place your order with the broker, it is passed on to the exchange.
Now suppose you placed a buy order for 100 quantities; the exchange will look for a sell order at the same price and quantity because a transaction can only occur when both buyer and seller agree to transact at the same price.
Once the trade is executed, the exchange will initiate the proceedings of transfer of ownership of shares. In India, a T+2 days settlement process is followed, meaning it takes two days before your stocks start reflecting in your Demat account.
A stock market is where buyers and sellers negotiate on the price of shares and perform stock trades. The operations of the share market are conducted through an exchange where the companies are listed. Investors buy and sell shares of these companies at a price determined by market forces. SEBI, the Indian market watchdog, regulates the stock market. Numerous stockbrokers and brokerage firms work as a link between the investors and the exchanges. It is well known that investing in stock markets has rewarded investors with impressive returns over the years. Nevertheless, the risk is also considerable and should be included before making any investment decision.
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