Equity Basics | Functioning of stock market | Starting to trade

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Functioning of stock market

To learn more about how you can earn on the stock market, you have to understand how it works.

The stock market functions through the Stock Exchanges. The Stock Exchange brings the sellers and buyers of shares and securities under same roof. The available shares are listed and traded in the Stock Exchange among the buyers and the sellers.

Functions of a stock market

Stock markets perform the following functions:

  • Connecting those who seek money with those who can provide it.
  • Create an auction mechanism in which prices can be decided for investments.
  • Distributing the future risk of investments across many millions of individuals.
  • Connecting financial institutions together to create money.
How a trade actually takes place on a stock exchange?

If you are the owner of a restaurant and you want t0o sell your stock of goods lying in the restaurant, you might do it by word-of-mouth, or by placing an ad in the newspaper. This would certainly make the whole process a lot easier.

However, it creates a problem down the line for investors who want to sell their shares in the restaurant. The seller has to go out and find a buyer, which can be hard. A "stock market" solves this problem. Stocks/Shares of publicly traded companies are bought and sold at a stock market (also known as a stock exchange). Bombay Stock Exchange (BSE) is an example of such a market.

In your neighborhood, you have a "supermarket" (like Big Bazaar) that sells food. The reason you go to Big Bazaar is because you can go to one place and buy all of the different types of food that you need in one stop -- it's a lot more convenient than driving around to the vegetable vendor, the dairy farmer, the baker, etc. The BSE is a supermarket for shares. The BSE can be thought of as a big room where everyone who wants to buy and sell shares of stocks can go to, to do their buying and selling.

The exchange makes buying and selling easy. You don't have to actually travel to Mumbai to visit BSE -- you can call a stock broker who does business with the BSE, and he or she will deal with the BSE on your behalf to buy or sell your shares. If the exchange did not exist, buying or selling shares would be a lot harder. You would have to place a classified ad in the newspaper, wait for a call and haggle on a price whenever you wanted to sell stock. With an exchange in place, you can buy and sell shares instantly.

Stock Markets

Contribution of Stock Market

Stock Market is the best medium of raising funds. Businesses which need financing for expansion or improvement can easily raise required capital by participating in Stock Market. On the other hand, for the investors; investing in equities is a better option than investing in property or real estate as the stocks contain more liquidity than any other property. This means, stocks can be sold more easily and quickly than any other property and so, the investors can get their money back by selling the stocks anytime they need.

The prices of stocks or shares in the Stock Market have strong effects on the economy in various ways. Prices of stock influence business investment, individual household consumption and wealth of individual households. For this deepening effect, Central banks of each country keep a track of the Stock Market activities. A proper functioning of Stock Market in a country can result in low costs, increased production of goods and services and increased level of employment. In this way, an efficient Stock Market can contribute to economic growth of the country.

Indian Stock Market

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are about 22* Regional Stock Exchanges. However, the BSE and NSE that have established themselves as the two leading exchanges and account for about eighty per cent of the equity volume traded in India.

The Indian stock markets operate five days a week from 9.55 am to 3.30 pm. They are closed on Saturdays, Sundays and other declared Public Holidays.

The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FII’s and other participants in Indian secondary and primary market is the Securities and Exchange Board of India (SEBI) Ltd.

So now from a novice you have moved a step further…. You have reasonable levels of information about the markets, the risks and costs associated and several other factors. But, this is just a beginning. There are still lots for you to learn and know. Now that you have a preliminary idea, let us divulge into the details of the mechanisms and procedures that are followed while trading on the bourses (stock exchanges).













Did you know?

A stock market index is an imaginary portfolio of securities representing a particular market. It would be too difficult to track every single security trading in the country. To get around this, a smaller sample of the stock is taken that is representative of the whole market or a specified segment of the market.

Investors use indexes to track the performance of the stock market. Ideally, a change in the price of an index represents an exactly proportional change in the stocks included in the index. But it gives a general market sentiment.








































Did you know?

BSE is the oldest stock exchange of India established in 1875.

The BSE has over 7700 companies listed (as on Dec 2007) and has a market capitalisation of around Rs 71,69,985 cr.