How Share Market Works
How Share Market Works
How Share Market Works: A Beginner’s Guide
In the realm of the stock market, a share does not represent a tangible asset but rather signifies ownership in a company.
Companies have the flexibility to issue any number of shares to fulfill their financial needs. To engage in the buying or selling of securities, individuals must connect with a broker or an exchange.
The value of shares can fluctuate based on the dynamic forces of supply and demand in the stock market, resulting in potential increases or decreases in share prices.
How Does the Share Market Work?
Investors have the opportunity to generate profits in the stock market through two distinct approaches: long-term and short-term investments.
Long-term investments are commonly referred to as equity investments, whereas short-term investments are known as debt investments.
The Indian stock market has gained significant popularity among both individual retail investors and institutional investors.
Its appeal extends to international investors, attracted by the potential for high returns, particularly in the primary markets.
The Indian Stock Market functions as a financial market where a diverse range of securities, including equities, bonds, ETFs, and derivatives, are traded on exchanges at prices determined by the forces of supply and demand.
In India, the Securities and Exchange Board of India (SEBI) serves as the regulatory authority overseeing the stock exchanges.
The country boasts two major stock markets: the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE).
The share market operates as an organized, regulated, and centralized platform that brings together investors and companies. Its primary objective is to facilitate the raising of capital for business expansion through the sale of shares.
How Can You Invest in Shares Market?
There are two major stock exchanges in India:
Bombay Stock Exchange (BSE).
The Bombay Stock Exchange (BSE) is one of the major stock exchanges in India. It is located in Mumbai (formerly known as Bombay) and holds a prominent position in the country’s financial landscape.
Established in 1875, the BSE is recognized as the oldest stock exchange in Asia. It plays a crucial role in facilitating the trading of various securities, including stocks, bonds, derivatives, and mutual funds.
The BSE operates under the regulatory framework set by the Securities and Exchange Board of India (SEBI) and provides a platform for companies to raise capital and investors to buy and sell securities.
With its extensive history and widespread participation, the BSE is an integral part of India’s capital market ecosystem.
National Stock Exchange (NSE).
The National Stock Exchange (NSE) is one of the major stock exchanges in India. It is headquartered in Mumbai and was established in 1992.
The NSE is a technologically advanced stock exchange that operates on a fully automated trading system known as the National Exchange for Automated Trading (NEAT). It provides a platform for the trading of various financial instruments, including equities, derivatives, bonds, and exchange-traded funds (ETFs).
The NSE has gained significant prominence in India’s financial landscape and is known for its robust infrastructure, transparency, and efficient trading mechanisms.
It operates under the regulatory framework established by the Securities and Exchange Board of India (SEBI).
The NSE has played a vital role in enhancing liquidity, improving market efficiency, and providing equal access to investors across the country.
As one of the largest stock exchanges in India, the NSE has a wide range of listed companies and is known for its benchmark index called the Nifty 50.
This index comprises the top 50 actively traded stocks across various sectors, providing investors with a representative snapshot of the overall market performance.
Overall, the NSE has made significant contributions to the growth and development of India’s capital markets, offering a secure and transparent platform for investors and companies alike.
Who Regulates Share Markets in India?
In India, the regulation of the stock market, stock exchanges, and Depository Participants is overseen by the Securities and Exchange Board of India (SEBI). Established in 1992 under the SEBI Act, SEBI assumes the responsibility of ensuring the smooth and transparent operation of the stock markets.
SEBI exercises comprehensive administrative control over the stock markets, including the formulation of rules and regulations. It plays a vital role in conducting inspections to uphold the integrity of the stock markets and safeguard the interests of investors.
With its regulatory authority, SEBI aims to foster a fair and efficient market environment, promoting investor protection and maintaining market integrity.
By enforcing guidelines and overseeing market participants, SEBI contributes to the transparency and credibility of the Indian stock market.
Who Are Stockbrokers?
Stockbrokers serve as financial intermediaries, facilitating the buying and selling of shares by offering services such as opening Demat accounts and trading accounts.
In exchange for their services, stockbrokers charge a nominal brokerage fee. These brokers or brokerage firms are registered with SEBI and play a crucial role as a bridge between investors and the stock markets.
Their involvement allows investors to access the stock markets and execute their transactions efficiently, providing a valuable link in the investment process.
How Can You Trade in the Share Market?
In the past, prior to the emergence of the internet, conducting stock market transactions necessitated physical visits to brokers, where you would provide instructions for your trades.
However, the advancement of digital technologies has revolutionized this process. Stockbrokers now offer digital trading platforms that enable you to trade with just a few clicks. These platforms come in various forms, including:
– Web trading applications: These are online platforms accessible through web browsers. They provide a user-friendly interface where you can view market data, analyze stocks, and execute trades directly from your computer.
– Terminal software: Terminal software refers to specialized trading applications installed on your computer. They offer advanced features, real-time market data, charting tools, and order execution capabilities, catering to more experienced traders.
– Mobile-based apps: With the proliferation of smartphones, stockbrokers have developed mobile apps that allow you to trade on the go.
These apps offer similar functionalities as web trading applications, but in a format optimized for mobile devices, ensuring convenience and accessibility.
These digital trading platforms have made investing in the stock market more convenient, efficient, and accessible, eliminating the need for physical visits and enabling investors to manage their portfolios anytime and anywhere with an internet connection.
How Does the Actual Trading Occur?
After successfully opening a Demat Account and Trading Account, you can utilize the trading platform to select a specific stock, indicate the desired number of shares for buying or selling, and proceed to execute the order.
Once you initiate the order, your broker verifies the availability of sufficient funds in your account.
If your account holds the necessary funds, the order is ultimately executed on the stock exchange. For example, if you have placed a purchase order, it will be matched with a corresponding sell order.
Following the execution of the order, the exchange confirms the transfer of share ownership. You will then receive a notification regarding the settlement, and the purchased shares will begin to reflect in your Demat account within two working days.
How to Evaluate a Stock Before Investing?
There are two primary approaches to evaluating stocks:
1. Technical analysis: This method involves studying chart patterns, graphs, and diagrams displayed on a screen. The objective is to assess price and volume trends and make stock selections accordingly.
Technical analysis considers various factors such as moving averages, Relative Strength Index (RSI), and other indicators to gain insights into potential price movements.
2. Fundamental analysis: Fundamental analysis focuses on examining factors that contribute to a company’s true value.
This involves analyzing key indicators such as Returns on Equity, Earnings Yield, Gross Profit Margin, Debt to Equity Ratio, Interest Coverage Ratio, Market Capitalization, and more.
By assessing these fundamental factors, investors can gain a clearer understanding of a stock’s potential value and make more informed decisions regarding its price.
These two approaches, technical analysis and fundamental analysis, provide different perspectives for evaluating stocks, allowing investors to consider both the market trends and the intrinsic value of the company when making investment decisions.
How are Share Market Returns Calculated?
There are two commonly used methodologies to calculate market returns:
1. Absolute Return Methodology: This approach involves using variables such as buying price, selling price, returns, and return percentage to calculate the overall returns.
By comparing the buying and selling prices, the absolute return can be determined. This methodology provides a straightforward measure of the return on investment.
2. Compounded Annual Growth Methodology: In this methodology, returns are calculated based on the entire period under consideration.
It takes into account the compounded growth rate over time, which provides a more comprehensive view of the investment’s performance.
Market experts often prefer this methodology as it considers the cumulative effect of returns over the entire period, providing a more accurate representation of the investment’s growth.
Both methodologies serve their purpose in evaluating market returns. The absolute return methodology provides a simple measure of returns, while the compounded annual growth methodology offers a more nuanced and long-term perspective on investment performance.
The choice between the two depends on the specific requirements and preferences of the investor or analyst.
Final Words
The stock market serves as an electronic platform for trading stocks and securities. Before venturing into stock market investments, the initial step involves opening a Demat and Trading Account with a reputable financial partner.
By partnering with a trusted brokerage platform, investors gain access to advanced market reports and additional benefits such as brokerage cashback and zero annual maintenance charges (AMC) for up to one year on their Demat Account.
This enables investors to make informed decisions and maximize their investment experience.
