Invest only in the things that you understand. This proverb is the golden rule of investment. Sometimes in fear of missing out (FOMO), we avoid doing the hard work learning how things works. We invest in avenues like the stock market without understanding them. Both new and seasoned investors sometimes fail to understand the stock market.
This article highlights what the stock market is, who the stock market participants are, how stock prices are determined, and how the actual stock trading happens in the stock market in India.
What Is The Stock Market?
A stock market is a marketplace which facilitates the trading of stocks among buyers and sellers. Usually, the stock market indicates the economy’s confidence and liquidity position and is therefore called the economy’s barometer.
Stock Market Participants
Here are the key stock market participants that ensure the smooth functioning of the stock market.
Traders and investors
Traders and investors are those market participants without whom the stock market cannot exist. Traders are those who usually do not hold securities for the long term. Instead, they pour liquidity into the market by trading stocks and securities.
Investors are those who show trust in the company by buying stocks for the long term. These are individuals as well as institutional investors. Institutional investors like mutual fund houses, pension funds, hedge funds, etc., collect money from numerous investors to invest it across various securities.
Regulators
Regulators play a vital role in any system, and the stock market is no exception. In the stock market, the regulators safeguard investors’ interests and ensure fairness in the market. The Securities and Exchange Board of India (SEBI) acts as the regulator of the Indian stock market. In addition to preventing malpractices, the Securities and Exchange Board of India also attempts to educate investors regarding investments.
Stock exchanges
Stock exchanges are the platforms where stocks and other financial instruments, such as bonds, derivatives, etc., are traded. The main objectives of the stock exchanges are to facilitate transparency and equal access to investors across the country.
India’s two key stock exchanges are the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The stocks of all the listed companies in India are traded in either or both the stock exchanges.
The stock exchanges used to have physical securities trading earlier, where buyers and sellers used to meet to trade the securities. However, this is not the case now. The stock exchanges adopted electronic trading, where computerised systems connect buyers and sellers located at different locations.
Stockbrokers
Stockbrokers in India are the intermediaries authorised to buy or sell financial securities on the stock exchange, on behalf of investors, in exchange for fees or commission. Full-service brokers can also help you make a wise investment decision by providing the necessary information.
Depositories
Like banks holding and safeguarding your cash, depositories are the entities that store and safely keep the stocks and other financial securities in non-paper form. They also play a vital role in transferring ownership to the stock buyers. In India, these tasks are performed by National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
How Are The Stock Prices Determined?
The two key factors determining stock prices are demand and supply.
| When do stock prices increase? | When do stock prices decrease? |
| Demand > Supply, i.e. Buyers > Sellers for a stock. | Demand < Supply, i.e. Buyers < Sellers for a stock. |
Many factors affect demand and supply and, ultimately, stock prices. Some of them are
- Market conditions skewing the perception of some stocks,
- Macroeconomic factors (GDP, inflation, interest rates, changes in currency, etc.),
- Industry-specific factors (industry growth rate, government’s initiative related to industry, etc.),
- Company-specific factors (dividend declaration, bonus announcement, merger, capex announcement etc.)
Due to constantly changing demand and supply, the stock prices keep fluctuating. Based on the demand and supply of stocks, the algorithm of stock exchanges (For instance, BSE and NSE in India) determine and showcase the stock prices.
How Does The Actual Stock Trading Happen In The Stock Market In India?
Once you have a Demat and trading account, you can attempt to place the order to buy or sell any stock you want by informing your stockbroker or through a stockbroker’s trading platform. If your account has enough funds, your buy order would be placed on a stock exchange, and the computerised system would match your buy order with a similar sell order and vice versa.
Your purchased shares would transfer to your Demat account within two trading days after trade execution. For instance, if you bought shares on Tuesday, you will have your shares transferred to your account on Thursday. Until you sell those shares, they will be stored by the depository on your behalf. For selling the stock, a similar process would be followed.
Final Thoughts
Learning the basics of the stock market can help you know what is working behind each of your investment actions. The smooth running of the stock market is facilitated by multiple stock market participants. The stock market holds an important place in the country’s economy by being the bridge between fund seekers and investors and indicating the overall health of an economy.
We, at WealthDesk, help you have an easy investment journey by enabling you to invest in WealthBaskets, which are the combinations of equities and ETFs that reflect an idea, theme, or strategy. SEBI registered professionals create and manage these WealthBaskets.
FAQs
You can earn from the stock through capital appreciation, dividends, or both. Capital appreciation is when a stock’s market value increases compared to the price you paid to buy that stock. A dividend is the part of a company’s profit that it shares with you for being the shareholder.
There are multiple types of stocks based on various categories. Based on ownership, the stocks can be divided into preferred and common. The stocks can be divided into large-cap, mid-cap and small-cap stocks based on market capitalisation. Based on geographical territories, there are two types of stocks – domestic and foreign.
Firstly, you need to open a Demat account with a SEBI-registered broker of your choice. The next step is to link the bank account with the Demat account. Once you complete all these steps, you can buy the stocks of different companies by informing your broker or by yourself through an online stockbroker.
Every investor has a different ideology and preferences when it comes to investment. As a beginner, you can first define your investment amount, risk preference, return expectations and time horizon. Then, understand various investment avenues, their risks, and expected returns. Next, you can invest in those avenues that best suit your investment objectives.
If the stock is traded in the market, you can buy even one share of stock.
