What is Stock Market?
Updated: Jul 3, 2021
Definition A place where buying and selling of shares of public listed companies is done is referred to as a stock market. The markets works by providing a platform to facilitate seamless exchange of securities. In simple terms, if A wants to sell shares of Reliance Industries, the stock market will help him to meet the seller who is willing to buy Reliance Industries. However, it is imperative to be aware of the fact that to trade in stock market, the involvement of a registered intermediary i.e. the stock broker is must. With the involvement of information and technology, the trading is done through an electronic medium. Hence stock market can be defined as a mechanism which offers a company and people to earn money through buying and selling shares.
Working of the stock market Working of the stock market is very simple. The market operates in an environment which is both secure and regulated to assist the participant of the stock market to transact in shares and other financial instruments. The market is regulated by Security Exchange Board of India (SEBI). With the help of this regulatory body, any sort of unscrupulous activity in the market is eliminated. Operating under the defined rules as stated by the regulator, the stock markets act as primary markets and as secondary markets.
As a primary market, the stock market allows companies to issue and sell their shares to the common public for the first time through the process of Initial Public Offering (IPO). This activity helps companies raise necessary capital from investors. This practically means, a company divides itself into a number of shares (say, 20 lacs shares) and sells a part of those shares ( say 5 lacs shares) to the common people at a price say (Rs.10 per share). To facilitate this process, a company needs a marketplace where these shares can be sold. This marketplace is provided by the stock market. If everything goes as per the plans, the company will successfully sell the 5 lacs shares at a price of Rs.10 per share and collect 50 lacs worth of funds. In return of this investment by the public, the company pays an amount to them referred to as dividend. The stock exchange acts as a facilitator for this capital raising process and receives a fee for its services from the company and its financial partners.
Major Stock Exchange in India There are two main stock exchanges in India where majority of the trades take place - Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Apart from these two exchanges, there are some other regional stock exchanges like Bangalore Stock Exchange, Madras Stock Exchange etc but these exchanges do not play a meaningful role anymore.
National Stock Exchange NSE is the leading stock exchange in India where one can buy/sell shares of publicly listed companies. It was established in the year 1992 and is located in Mumbai. NSE has a flagship index named as NIFTY50. The index comprises of the top 50 companies based on its trading volume and market capitalisation. This index is widely used by investors in India as well as globally as the barometer of the Indian capital markets.
Bombay Stock Exchange
BSE is Asia’s first as well as the oldest stock exchange in India. It was established in 1875 and is located in Mumbai. It has a total of 5,295 companies listed out of which 3,972 are available for trading as on August 21, 2017. BSE Sensex is the flagship index of BSE. It measures the performance of the 30 largest, most liquid and financially stable companies across key sectors.
Different Market Participants of the Stock Market There are a lot of individuals and corporate houses who trade in a stock market. Anyone who buys/sells shares in a stock market is termed as a market participant. Some of the categories of market participants are as follows:
1. Domestic Retail Participants - These are individuals who transact in the markets. 2. NRI’s and Overseas Citizen of India (OCI) - These are people of Indian origin who reside outside India. 3. Domestic Institutions - These are large corporate entities based in India (for example: LIC of India). 4. Domestic Asset Management Companies (AMC) - The market participants in this category would be mutual fund companies like HDFC AMC, SBI Mutual Fund, DSP Black Rock and many more similar entities. 5. Foreign Institutional Investors - FIIs are Non-Indian corporate entities such as foreign asset management companies, hedge funds and other investors.
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