Stock Market What is it? and how it works?

What is the stock market?

When we think of the Market, the first thing that comes to our mind is a place or a shop where we can buy the things we need. E.g., Food, Clothes, Groceries, Medicine, etc.

Similarly, the stock market is also a place where we can buy stocks, bonds, ETFs, and other financial instruments. In simple words, the stock market is the “stock exchange.” The word “exchange” means to trade or barter. It means it is a financial institution where company stocks and government bonds are traded.

The stock market is a place where stocks of companies, also known as shares, are traded, i.e., financial instruments are bought and sold. A Stock Market is also known as an equity market or share market.

Why is the stock market necessary?

Maybe only a few of us know that the first stock exchange in the world was the Amsterdam Stock Exchange, which some people established. The idea behind establishing the Stock exchange was to provide funding for those who wanted to start new businesses. And for raising funds, they came up with the idea of issuing shares that investors could buy.

But this is not the only thing behind the establishment of the Stock Exchange.

Let’s assume that you want to invest in some ABC company. What first thought comes to mind? What about security and safety? Before investing, we always think about the safety of our hard-earned money.

Similarly, when stocks/shares are exchanged between people or institutions, it becomes necessary to have documentation and records to avoid fraud and to have control over the transactions. People need to be confident that the transaction and the exchange they are making are safe and secure.

And this is how the exchange house or exchange board, was created. Today, we all know it as the stock market or stock exchange.

Stock Market: How it Works?

Suppose you want to buy some vegetables or fruits. So you don’t go directly to the farmer to buy them. Right?

Here, some people might say that they do go directly to the farmer. But what if you need to buy different vegetables or fruits at the same time?

Would you go to different places to buy different things? Exactly not! For example, if you want to buy an apple, would you go to Kashmir, or to Nagpur to buy oranges, or to Kerala to buy coconuts?

So, it is not possible to go to different places to buy different things. That’s why we have vegetable and fruit vendors at our places. They buy them from farmers and sell them to us.

Similarly, as we don’t go directly to the farmer to buy vegetables or fruits. The farmer sells vegetables to brokers in a big vegetable market. The broker then auctions the vegetables and fruits to the small vendors. and that Small vendors bid on them and buy them. Afterwards, the shopkeepers add their profit and sell it to us.

Now you will understand easily how the stock market works.

There may be some differences, but the basic concept remains the same. A company that wants to raise funds to fulfil its financial needs, such as expansion of business, payment of debts, or other production-related work, will issue an IPO in the market.

Let’s assume that a company named “ABC” wants to raise a $100 million fund. The company decides to sell 100,000 shares in the stock market. On the other side, some investors want to invest in new companies. Now, suppose you are also an investor and want to buy 1000 shares of “ABC.”. Now The company wants to sell their shares, and as an investor, you want to buy them. But who will guarantee this transaction? Who will ensure the safety of this transaction?

That’s where the stock market comes in.

The stock exchange not only allows transactions between the company and the investor, Also, it ensures the safety of that transaction. Here, the Stock Exchange works as a mediator. In reality, The exchange itself does not carry out the transaction. Instead, broker firms carry out the transaction on behalf of the exchange. However, the exchange is responsible for its security.

Types Financial Instruments in the Stock Market?

1. Stocks (Shares/Equities): Represent ownership in a company. Companies must list on a stock exchange to trade publicly. Learn more about stocks here.
2. Bonds: Loans issued by governments or companies, promising principal repayment with interest.
3. Derivatives: Complex instruments like futures and options, used to hedge against market risks.
4. ETFs and Mutual Funds: Pooled investments offering diversified exposure to stocks or bonds.

Stock Exchanges in Indian

The Indian stock market is a vibrant and growing market, offering a wide range of investment opportunities for both domestic and foreign investors. There are two main stock exchanges in India: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Bombay Stock Exchange (BSE)

• Established in 1875, the BSE is the oldest stock exchange in Asia.
• It has over 7,000 listed companies, making it the largest stock exchange in India.
• The BSE offers trading in equities, currencies, debt instruments, derivatives, and mutual funds.
• It has a popular equity index, the S&P BSE Sensex, which is the most widely tracked stock market benchmark index in India.

National Stock Exchange (NSE)

• Established in 1994, the NSE is a newer stock exchange but has grown rapidly to become the largest stock exchange in India by trading volume.
• It has over 2,000 listed companies.
• The NSE offers trading in equities, derivatives, and debt instruments.
• It has a popular equity index, the Nifty 50, which is the second most widely tracked stock market benchmark index in India.

Key Highlights

• The Indian stock market is the 10th largest stock market in the world by market capitalization.
• The market has been growing steadily in recent years, with the BSE Sensex index rising by over 100% in the past five years.
• The Indian government is encouraging foreign investment in the stock market, and there are a number of investment vehicles available to foreign investors.
• The Indian stock market is a good investment option for investors who are looking for long-term growth.

Why Invest in the Stock Market?

The stock market is a powerful tool for long-term wealth creation. With India’s stock market growing steadily, it’s an attractive option for investors seeking growth. The Indian government encourages foreign investment, providing various investment vehicles to participate.

Key Highlights

• The Indian stock market is a global leader, with significant growth potential.
• BSE and NSE offer diverse financial instruments for all investor types.
• Secure transactions build trust, making the stock market a reliable investment avenue.

For more insights, explore our guide on how to invest in the Indian stock market.

Disclaimer: Investing in the stock market involves risks. Always consult a financial advisor before making investment decisions.

Sources: BSE India, NSE India, Investopedia