Every day in our daily life in television news, in the newspaper we hear the stock market has gone up the next day we see the headline that the stock market has gone down. So the first thing that comes to our mind is what is the stock market?
Stock Market is a market where buyers and sellers come together to trade stocks i.e. shares of companies. Stock markets are similar to every market we see in our daily life, like the fruit & market, gold markets, cloth markets etc. The only difference is that in stock markets people come together to trade shares. Let us understand what is the stock market and how does it work in detail.
What is the Stock Market
“A stock market, equity market or share market is the aggregation of buyers and sellers (a loose network of economic transactions, not a physical facility or discrete entity) of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms”.
Let us understand Stock Markets in simple words, a stock market is a place where buyers and sellers trade their shares/stocks. These shares represent ownership in the company which means if we have shares of Reliance Industries we become owners of Reliance Industries to the extent of ownership in the company.
For Ex. if we hold 5000 shares of Reliance and Reliance has a total share capital of 1,00,000 share then we become 5% owner in Reliance. This is similar to partnership firms where people have a 20% or 10% share in profit but in the case of companies, the share of the company’s ownership is represented in terms of shares, like 100 shares or 500 shares representing ownership in the company.
Companies in India are of 2 Types which is publicly listed companies and private companies. Difference between these companies is only that share of public companies are listed on stock exchanges and share of private companies are not listed. You cannot buy shares of private companies on exchanges, they can only be bought privately from a shareholder of the company.
For Ex. Reliance Industries, Infosys, TCS are all public companies similarly companies like Flipkart, Swiggy, Ola, Oyo, Zomato are examples of private limited companies. Shares of Flipkart cannot be bought from the stock market, they can be bought only from a shareholder of Flipkart privately.
How does Stock Markets Work?
Stock Markets works like any other market where people come together to buy and sell.
To buy/sell stocks you first need a place where you can find a buyer/seller for completing your transaction. The place is called the Stock Exchange where people come together to buy/sell shares. In India, there are mainly two stock exchanges BSE (Bombay Stock Exchange) & NSE (National Stock Exchange) where people can buy/sell shares. There are more than 5500 publicly listed companies on BSE & more than 1300 publicly listed companies on NSE.
Now after finding a stock exchange you cannot directly trade share with another person, you need an intermediary to complete your transaction. The intermediary is called Stock Broker, the stockbroker is an intermediary through which you can buy/sell shares. The Stockbroker buys/sells shares on your behalf by creating a trading account through which you can buy/sell shares. Now if you want to buy shares and keep it with you, you need a Demat account which is also provided by your stockbroker.
You can buy/sell shares on stock exchanges with the help of stockbrokers without physical interaction with the opposite party. For Ex. If you want to buy 5 shares of Reliance Industries at Rs.1600 per share & a seller wants to sell 5 shares at Rs.1610 per share. This transaction would not be complete until you as a buyer increase Rs.10 or the Seller decrease price by Rs.10, Suppose both of you agree at the price of Rs.1605 per share then the transaction would be complete.
Now your broker will take Rs.8025 (Rs.1605*5 Shares) + brokerage charges from you and it will give to the broker of the seller and the broker of the seller would then pass it to the person who sold the shares. This transaction to complete requires a trading account which is provided by the broker and if you wish to hold to shares you require a Demat account which is also provided by your stockbroker.
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Purpose of Stock Markets
Now that you have understood what is stock markets and how it works, the next question that comes to mind is what is the purpose of stock markets. Stock Markets have basically 3 purposes, they are as follows:-
1) Access to Capital – Lot of companies need access to more capital for growth and development purposes. For more capital, these companies have the option of debt financings such as bank loan/debentures/company deposits and other option is to sell equity shares in the company. Most companies prefer 2nd option where they sell their equity shares to the public from a process called IPO (Initial Public Offerings) & these companies get listed on stock exchanges.
2) Easy Exchange of Ownership – The Biggest Benefit of Stock Markets is easy to exchange ownership. Whenever you buy/sell stocks you trade ownership of a company with another person. You can get ownership by buying the shares of the company you like easily on the stock markets.
3) Fair Trades – Another purpose of stock markets is fair trades among investors, In stock markets, there are many buyers and many sellers which means there cannot be an unfair advantage to any single person prices would be fair overall leading to good sentiments among buyers and sellers.
Hope you are able to understand what is the stock market and how it works.If you any question do let us know in the comments section below and we will make sure to reply and Thank You very much for reading.