STOCK MARKET CONCEPT

Definition of 'Stock Market'



Definition: It is a place where shares of pubic listed companies are traded. The primary market is where companies float shares to the general public in an initial public offering (IPO) to raise capital.

Description: Once new securities have been sold in the primary market, they are traded in the secondary market—where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon. The secondary market or the stock exchanges are regulated by the regulatory authority. In India, the secondary and primary markets are governed by the Security and Exchange Board of India (SEBI).

A stock exchange facilitates stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India's premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange.

Working of the Stock Market

Before you learn the basics of trade, it is essential to know about how does stock market work? Here is its working explained in detail:

  • Participants:

    The Stock Exchange Board of India (SEBI), stock exchanges, brokers, and traders/investors
The stock exchange provides a platform for trading in financial products. The companies (listing their shares), brokers, traders, and investors must register with SEBI and the exchange (BSE, NSE, or regional exchanges) before trading.

Steps to Invest in the Indian Stock Market

  • IPO:

    The companies file a draft offer document with the SEBI. This document comprises information about the company—shares being diluted, price band, and other details. On approval, the company offers its shares to investors through an IPO on the primary market.

  • Distribution:

    The Company issues and allots shares to some or all investors who bid during the IPO. The shares are then listed on the stock market (secondary market) to enable trading. This platform is a medium offered for the initial investors to exit their share market investments. In addition, investors who failed to receive allotment during the IPO are given the opportunity to buy shares on the secondary market.

  • Stock Brokers:

    Broking agencies (registered with SEBI and the stock exchange) are intermediaries between the investors and the Indian stock market. On receiving instructions from the clients, the brokers place their orders on the market. On matching a buyer and seller, the trade is successfully executed. A confirmation is received from the stock exchange and sent to both the buyer and seller.
Historically, this procedure was manual and thus time-consuming and cumbersome. However, with online trading platforms, the entire procedure of matching buyers and sellers is done through the internet. This has reduced the transaction time to a few minutes.
Nonetheless, there are thousands of potential investors and converging all of them in one location is impossible. Stock exchanges and broking agencies play a crucial role in this situation.

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