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What Is Stock Market & How Does It Work?

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The stock market is a platform where investors or traders buy, sell, and trade stocks, commodities, or shares of listed companies. It is where investors and traders can participate in the ownership of companies or speculate on their future value.

The terms “stock market” and “stock exchange” are frequently used interchangeably. Traders and investors in the stock market buy or sell shares through different stock exchanges. With its large population and thriving economy, India is a significant growth driver. The Indian stock market primarily operates through its two major exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). 

Understanding NSE & BSE

India has two main stock markets: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE is older and has more listed firms than the NSE.

Trading on both markets happens electronically, using a system where orders are matched by computers. They have similar trading hours and rules and are supervised by the Securities Exchange Board of India (SEBI). The Sensex and Nifty are popular indices for the Indian markets.

Understanding the Stock Market

The stock market brings together people who want to buy and sell securities (like stocks). Stock markets set share prices and reflect the economy. They offer transparency, liquidity, and fair pricing.

In India, most stock trading happens at the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been around since 1875, while the NSE started in 1992 and began trading in 1994. 

How the Stock Market Works

Companies gather money from the stock market by selling parts of their ownership, known as shares, to people who want to invest. When companies sell these shares on the stock exchanges, they receive the funds they need to grow without borrowing money.

Investors benefit by buying these shares because when companies do well, the value of the shares goes up, giving investors profits. Companies also share their profits with investors by paying them dividends.

What Are the Functions of a Stock Market?

The stock market is a fair place where people easily trade or invest in stocks. It ensures that everyone can access stock pricing information, making it easier to determine fair prices. Additionally, it simplifies the process of buying and selling stocks.

Various individuals participate in the stock market, including long-term investors, quick traders, those aiding market smoothness, and others managing risks.

How Stock Markets Are Regulated?

In India, the stock market is overseen by different authorities, with the leading watchdog being the Securities and Exchange Board of India (SEBI). Established in 1992 under the Securities and Exchange Board of India Act, SEBI’s primary goal is to safeguard investors’ interests and foster the growth of India’s securities market.

While SEBI is the primary regulator, the Reserve Bank of India (RBI) also ensures financial stability. The RBI manages monetary policies, regulates banking, and oversees foreign investments, supporting SEBI’s efforts. These regulatory bodies contribute to the country’s economic growth by helping companies raise funds. Before delving into how Indian stock markets are regulated, let’s first grasp the essence of what stock markets entail.

What Is the Significance of the Stock Market?

The stock market is an essential part of a free-market economy. It helps companies gather funds by selling stocks and bonds and lets investors be part of a company’s success. Investors can make money through the growing value of their investments (capital gains) and earn regular payouts called dividends.

It acts as a platform where people’s savings and investments are directed to beneficial opportunities, helping companies grow. This process adds to the country’s economic growth by increasing the available capital for investment.

What Is an Alternate Trading System?

Alternative Trading Systems (ATS) are different ways to trade stocks, separate from the usual stock markets. ATS helps big traders avoid affecting regular market prices. It’s less public and has fewer rules, focusing mainly on how people behave.

Here are some examples:

  1. Electronic Communication Networks (ECN): ECNs let big traders and brokerages directly trade without middlemen. It is helpful because traders from anywhere can easily trade stocks, even after regular trading hours. But traders pay fees for each trade, which can add up.
  2. Dark Pools: These are controversial because they hide trades. Big investors make large trades away from the public eye. It’s less transparent.
  3. Crossing Networks: Like dark pools, these hide trades and keep them away from public records. It’s suitable for traders who want to stay anonymous.
  4. Call Markets: These wait until enough orders come in before making trades. Auctioneers decide a fair price before trading happens.

ATS gives big traders other ways to trade, separate from the usual public stock markets.

FAQs

  1. How to invest in stock market?

    You must first find a SEBI-registered member or broker to invest in the stock exchange. Then you need to register as an investor before beginning to invest. 

  2. How to earn money in stock market?

    Do market research on the shares and build a portfolio that you think can generate consistent returns over a long period.

Also Read:
How To Make Passive Income
AI Stocks
What is compounding

How to Invest in Shares Pre-IPO

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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