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HOW DOES A STOCK MARKET WORK ?

HOW DOES A STOCK MARKET WORK ?

By now, we know how primary market works and how funds are raised through different ways, so now let’s master the secondary market as well.

Secondary market is a market where securities are traded after being initially offered to the public in the primary market or listed on stock exchange. Before investing in Equity first, let’s understand the basics of secondary market and how it functions.

After the funds are raised by companies in the primary market, the stocks gets traded in the secondary market, primarily known as stock market.

Broadly stating there are 4 participants in the Financial Market

stock market

Stock Market is run by 4 participants, mainly

  • Buyer
  • Seller
  • Broker
  • Stock Exchange and SEBI-the regulator for the stock market.
  • Firstly, there are investors or traders who are also called Buyers in the market, who buy or trade in marketable securities such as equity, derivatives, commodity or currency derivatives. The counterparty to buyers are the sellers in the market who are already holding securities in the market. Buyers and sellers quote their prices in the market. The price is determined by demand and supply in the market, therefore execution of trade is done at an Equilibrium price.

    Secondly, there comes stock exchanges on which companies are listed and shares are traded on this platform. As per The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.”

    The stock exchanges can be regional or national exchanges which are permitted to have nationwide trading. National Stock Exchange is nationwide exchange in India incorporated in 1992, headquartered in Mumbai. It is the first stock exchange to facilitate electronic form of trading in India. It has its Nifty 50 stock index consisting of 50 stocks across 1696 stocks in the stock exchange which full fill the criteria to be included in the stock index.

    Another Stock exchange is the Bombay Stock Exchange, incorporated in 1987, in Mumbai. It is famous for being the world’s fastest stock exchange. More than 5500 publicly listed companies is a part of BSE. BSE has S&P BSE Sensex as its stock index consisting of 30 stocks being the part of it after fulfilling the criteria.

    Apart from these two major stock exchanges in India, are regional stock indexes such as

  • Calcutta stock Exchange
  • Cochin stock Exchange
  • Pune Stock Exchange
  • Thirdly, Brokers and sub brokers are intermediary for investors who want to put in their money in buying and selling of shares and securities on behalf of their clients. The brokers must be registered with SEBI to initiate trades for their clients. The buyer asks the broker to put an order to buy/sell this particular security for “xyz amount “. In typical sense, the order which he puts is called “Sauda”. The broker/sub-broker would get the brokerage on each transaction which his clients makes and that is revenue income and what profit/ loss arising out of the sale of the security would be revenue source for the investor. Capital appreciation would not be considered a revenue as that will be the net value of the investment you carry. Investors can deal in Intraday, Cash or delivery. Delivery can be long term investment.

    The last participant is the regulator for this market. Stock market functions according to its rules and guidelines. Stock Market being a volatile and risky market, needs to be regulated to protect investors, for this purpose, SEBI (SECURITIES EXCHANGE BOARD OF INDIA) came into existence. SEBI became the autonomous body through SEBI Act of 1992.

  • SEBI has the responsibility to look upon primary and secondary market in India
  • It has the responsibility of both, development and regulation of the market. It comes up with comprehensive measures ensuring that the investors benefit.
  • Its basic objectives are as follows:

  • Regulating the stock Market
  • Protecting the rights of investors
  • Promoting and development of the stock market
  • The concept of stock index and eligibility criteria will be specifically explained in the next article

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    WHAT IS A STOCK INDEX ? - The Capitalist

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