What is Stock Market and How Does it Work?

Published by Sharekhan Education | May 9, 2020

What is Stock stock market and How Does it Work?

A stock market is an electronic marketplace (exchange) where buyers and sellers come to trade in stocks or shares. In India, there are two major exchanges where buying and selling stocks take place, BSE and NSE.

To understand the stock market it becomes important to understand what is a stock or share.

A stock or share represents part ownership in a company. When a company needs money to run its business, it issues shares or stocks at a price determined by the market through a process of price discovery based on demand and supply. Once the price discovery process concludes, the company issues shares to individuals who pay for them at the discovered price. This process takes place through an initial public offering in the primary market. The shares then get listed in the secondary market (on the exchange) where the buyers and sellers trade in these stocks. They place bids on the exchange, and when orders match, trades occur, and prices tend to change. Based on the demand and supply of the stock, price either rises or falls. Higher demand for the stock increases the price and higher supply of the stock reduces the price.

The buyers and sellers usually trade through brokers and brokerage firms who are registered with the stock exchange. Once the buyer and seller place their orders, the broker passes the order to the exchange which matches the orders. All this is conducted electronically. If an order is matched it gets executed and it takes two days after the trade day (T+2) for settlement to occur. The settlement is a process by which the buyers are delivered shares into their Demat accounts (which allow the buyers of the shares to hold them in electronic format) and sellers of the stock are paid the amount due to them after deducting brokerage, other charges, and taxes.

How does the stock market work?

The functioning of the stock market occurs due to various market participants such as the regulator of the exchange known as Securities and Exchange Board of India (SEBI), brokers and brokerage firms which conduct trade on clients behalf, stock exchanges where stocks are traded and investors and traders who buy and sell shares in the market.

By Enrolling yourself in this stock market course, you can learn the basics and the various aspects of trading.