How the Stock Market Works in an Unusual Way

September 17, 2022
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The stock market works the same way any other business functions. If you ever thought the stock market was risky, then you are not alone in this world. We hear countless stories of failure and bankruptcy, which never let us sleep well. Just like the phenomenon of gravity is universal, which means it is valid everywhere, the stock market works in the same manner, which means it is universal too. Don’t be confused between how the stock market works in India and how the stock market works in the US.

The stock market is risky. For a moment, Just Forget Stocks !!

If you are reading this post on your mobile while sitting at home, the roof can fall at any moment.

In this world, everything comes with a finite risk. You just have to limit it.

To understand how the stock market works? You need to understand some important concepts.

The stock market works by the reflexes of market participants.

Consider your school as a market.

So who runs the school?

Students, teachers, staff members, cleaning staff, librarians, and others. The school works or runs with the help of their input.

Just like the hierarchy in the school, the principal, teachers, and students. Similarly, we have three categories of participants who are the issuers of securities, people who are going to invest their money; and intermediaries, who are brokers.

In the same fashion, the stock market works with the inputs of market participants.

SEBI, The Principal

All the activities in the school are conducted under the supervision of the principal. Similarly, activities in the market are conducted through SEBI rules.

SEBI stands for Securities Exchange Board of India. It is the regulatory authority for the Indian stock market and was established under Section 3 of the SEBI Act, 1992.

SEBI has the following powers:

Works for the welfare of investors, which means SEBI makes rules and norms to protect the interests of investors.
It also looks for those companies who fool investors by practicing illegal and unethical activities. Not only companies, but they also look for merchant bankers, brokers, etc.
SEBI also works to promote the development of the securities market. A company has to share its management information with securities exchanges if there is a major change in the memorandum of the company.
It also verifies whether the company is sharing the correct information with the public or not.
SEBI is also known as the regulator of the stock market. It ensures that the market is running properly or not.
It looks for the market’s faults and who is doing this. It means SEBI prevents fraudulent activities and unfair trading of shares.
It also looks for the issuance of capital and distribution of securities.
SEBI also looks for insider trading and punishes investors who try to do this and earn from it.
SEBI also promotes education for investors of all market intermediaries, such as brokers, merchant bankers, companies, etc.

Now you know why I call SEBI the principal of the market.

Brokers, The Books

Just like you can’t enter school without books, you can’t enter the market without a broker.

You can’t buy or sell shares directly on the stock market. In order to transact in the market, you need a DEMAT account with one of the registered brokers in India.

A stock broker or brokerage house is like a company that is working as an agent between us and the stock market.

I can go out and directly buy the vegetables from the market, but this is not possible in the stock market. To buy shares or equities on the market, you should have a Demat account with a registered broker.

I personally use Upstox and can also recommend it. They have the strongest customer base in the whole of India. You can open your DEMAT account by clicking on this link and can also enjoy some free gifts from my side.

In India, there are a limited number of brokers, and you should choose your broker according to your preference. Since they are participants in the market and with the help of these brokers we actually buy or sell shares, it becomes important to study how the stock market works.

The primary source of profit for brokers is a brokerage, which they apply to the buying and selling actions of investors.

Stock Exchanges, School

The stock exchange is a place like a school.

Stock means shares, and exchanges mean the shares exchanged between buyers and sellers of the same stock. Stock exchanges are those places where buyers and sellers exchange shares and money. Here, buyers and sellers meet (not physically) and transact with each other. They mutually decide on a specific price.

In India, there are 22 stock exchanges, and these exchanges are acknowledged and recognized by the government of India. The NSE and BSE are the exchanges where the bulk of trading takes place.

Assuming there is no stock exchange in India, there would be no place to buy and sell shares. People can transact with each other. You can’t go to every home in India and ask, “Hey, I have 10 shares of ABC Ltd. Do you want them at Rs. X price.?

You can also consider stock exchanges as a mediator between buyers and sellers.

Investors/Traders: Students and Teachers.

Students are here as investors, and teachers are here as sellers. Students seek value, and teachers provide them with the same.

People like you and me are called investors or traders. For a specific stock, some of us are buyers and some of us are sellers. We invest our hard-earned money in the stock of the company and expect a good return from it but why do we invest our money?

You see, we register ourselves with a legit broker in the market and these brokers register themselves with the stock exchange so that we can indirectly connect to the stock exchange and buy and sell shares on the stock exchange and front the top SEBI look over this.

In reality, we are the real reason the stock market works.

Assume that there are no sellers and buyers in the market. Then the market is of no use. Just like there are no students or teachers in the school, the stock is of no use.

Did you notice that these participants are linked to each other just like teachers, students, books, schools, and principal are linked to each other,

Market and its types: to know how the stock market works

A market is a place where buyers and sellers meet in order to transact. Take the example of any market. Generally, in the world of finance, there are two types of markets. One is the primary market and the second one is the secondary market.

Primary Market

In the primary market, new shares or equities are issued to investors in exchange for money. Not only securities but warrants, bonds, and fds can also be issued. These types of investments are usually for the long term.

For example, A company needs some funds. It issues shares in the primary market. When a company issues its shares for the first time, it is called an (IPO) Initial Public Offer. Here you get shares directly from the company.

You can also consider the primary market the first-hand market. Since you get first-hand shares in the market.

Secondary Market

In the secondary market, you buy shares from another person. Here you are getting shares from another person, so you can call this market a second-hand market. This type of market primarily consists of stock exchanges. The BSE and NSE are two famous stock exchanges.

For example: let’s say you want to buy shares of ITC Ltd., then you can buy them on stock exchanges.

The secondary market is made up of equity and debt markets. The role of the secondary market is to offer an efficient platform for investors and traders for buying and selling shares.

So from a company’s point of view, the primary market is the first way, and after that, the company goes to the secondary market.

Demand and supply

Demand and supply are the forces behind the stock market’s workings. The two markets that I have discussed above play a major role in the functioning of the stock market. When a company wants to raise funds for its expansion, they actually need a specific amount.

Let’s take an example of a company that needs Rs. 500 crores and, in exchange for these funds, is going to give 5 crores of shares. This makes the price of each share Rs.100.

The company is not going to take even a single rupee above 500 crores, so here the supply of shares is limited and fixed to a certain number. If the demand for these shares is greater than the supply of shares, then the price is going to increase.

This is how the stock market works on the concept of demand and supply.

Not only the stock market, but every market works on demand and supply.

That vegetable will have the highest price because it is in demand but less available in the market.

You just need to remember the following points.

If Demand > Supply for a specific share then its price is going to rise.
If Supply > Demand for a specific share then its price is going to fall.

Here is an easy way to remember

If the number of buyers > the number of sellers for a specific share, then its price is going to rise.
If the number of sellers > the number of buyers for a specific share, then its price is going to fall.

Buying and selling

Buying and selling actually tells the market how much demand is there for a specific stock. If more and more people are buying a specific stock, then it means there is a large group of people who are demanding that stock.

Earlier, I told you that you are indirectly connected to the stock market through your broker. Let’s talk a little more about that.

Let’s assume you want to buy a share of ITC Ltd., so you go to the broker’s app and place your order for the same. Your order is processed and forwarded by the broker to the market. On the other hand, the person who already has a share of ITC Ltd. wants to sell his share in the market, so he also places an order to sell through his broker’s app to the market. As a buyer and seller, you are both meeting in the market through the broker’s app.

Now you have a share of the company and the seller has your money.

In this way, the transaction is executed.

Getting Stock.

After paying the price, you get the stock in your current account, and after T+2 days, your stock will be credited to your Demat account. Here, T means trading day or transaction day, the day on which you placed the order.

Final Words on How Stock Market Works

So, in this article, you saw how there are 7-8 factors that run the stock market. If any one of them is absent, then the market won’t run or work. They are all important in their own way. There is one who looks for fraudulent activities, and there is one who works as a bridge between investors and the market. There is a specific place for buying and selling and the investors who are putting their money in.

I have tried to write in such a way that you actually understand the market participants, markets, and phenomena, their characteristics, and how they are related to the stock market.

I hope, I am able to write in an easy way and provide some insight into how the stock market works.

If you have any queries related to finance, stock, or investment, then you can leave your comments, I will respond to them and try to give you the best answer.

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Till Then,

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Rupay Rajat

Rupay Rajat is a financial and investing blog. I write about financial instruments and the stock market in the most easiest language.