What is Stock Market and How Does It Works?

Welcome to the world of finance where stock market and cryptocurrency are ruling. Here I will talk about “Stock Market” and “How it works”. In this comprehensive guide, I will take you on a journey to understand the basic introduction, inner workings and the key concepts of the stock market.

Whether you’re a beginner looking to dip your toes into the world of stock markets or an experienced investor seeking to boost up knowledge, this this guide will cover all the basic to advance topic. So, let’s dive in and explore the fascinating world of stock markets together!

Definition

Giving one definition of Stock Market is not fair as their are multiple definition given by Finance Experts and Finance Sources:

• A stock market is also known as equity market and share market.

• Stock market is a place where public and investors buy and sell shares of public traded companies, known as stocks/ share and bonds.

• Stock Market is a place/ platform where companies share are bought and sold. It provides a way for companies to raise capital by issuing shares to the public and for investors to trade these these shares. Sometimes bonds, debentures and other financial instruments of companies are also included in Stock Market that’s why it is also known as Share Market.

• Stock Market is like a giant Store where people can buy and sell pieces of companies. These pieces are called “shares” or “stocks”, and it represents the ownership in those companies.

What is Stock Market?

Stock Market is a place/ platform where companies share are bought and sold. It provides a way for companies to raise capital by issuing shares to the public and for investors to trade these these shares. Sometimes bonds, debentures and other financial instruments of companies are also included in Stock Market that’s why it is also known as Share Market.

Stock Market is like a giant Store where people can buy and sell pieces of companies. These pieces are called “shares” or “stocks”, and it represents the ownership in those companies.

For an example: Imagine you own a company, and you want to grow your company business. To do this, you can sell stock and shares of your company to investors. These investors will then own a part of your company business and will receive a portion of the profits.

The stock market is a market where they shares are traded. It’s like a platform where buyers and service meet to exchange shares. The price of the shares can go up or down depending on how were the company is growing and how much investors are interested and willing to pay for them. All these stock market are played under Stock exchanges, in India there are two main stock exchange, like National Stock Exchange(NSE) and Bombay Stock Exchange (BSE).

If company wants to be listed in stock market than company have to go public through an IPO (Initial Public Offering), SEBI (Securities and Exchange Board of India) plays a crucial role in this process.

Example: Young boy Naman, an entrepreneur who wants to start a pickle shop. He invests his own shavings of ₹500,000 to set up the shop.

Step 1: Saving Investment

Naman uses his own money to set up the pickle shop. He buys equipment, rents a location, and hires staff.

Step 2: Bank Loan for Expansion (₹1,000,000)

As pickle shop grows because of his saving investment, Naman needs more money to expand his business. He takes loan of ₹1,000,000 from bank to open second shop of pickle in different location.

Step 3: Angle Investors (₹5,000,000)

Naman wants to expand his pickle business to other states. He needs more funds and money, as the fund he needs is too much that’s why he approaches Angle Investor (Private Investors) who invest ₹5,000,000 in his pickle business.

Step 4: IPO (Initial Public Offering)

Naman’s pickle business is now very successful, and he needs even more money to expand further, He decided to go public by listing his company on stock market through IPO. naman’s company is now listed on the stock market, Investors can buy shares of his pickle company, and Naman can use the money raised to more expand his business world wide.

That’s a basic overview of the stock market! There is so much more to learn and understand, but this should give you a good starting point.

History of Stock Market

The stock market had a rich and wonderful history that spans over 4 centuries. Here’s a brief overview:

Early Beginnings (1600s)

the early modern stock market was originated in Amsterdam in the 17th century. Dutch East India company founded it in 1602, issued stocks and bonds to raise capital for its trading expeditions.

London Stock Exchange (1698)

The London Stock Exchange (LSE) was established in 1698, this stock exchange is one of the oldest stock exchange in the world. Than trading was started in coffeehouses and taverns.

New York Stock Exchange (1792)

The New York Stock Exchange (NYSE) was established in 1792 under the Buttonwood Agreement, named after the buttonwood tree outside 68 Wall Street. Buttonwood Agreement was signed by 24 stockbrokers on May 17, 1792. The agreement established the rules and procedures for buying and selling securities.

Offline Trading (Pre-1970s)

Before today online trading technology stock markets was operated offline. Here’s how:

• Floor Trading: In this trading brokers and traders are gathered on the floor of trading, where they shout out buy and sell orders.

• Open Outcry System: In this type of trading buyers and sellers meets personally face to face in a place, such as trading floor, trading pit, to make bids and offers on individual stocks. Prices were only determined through an open outcry system.

• Paper-Based Trading: In this type of trading trades were recorded on paper, and settlement and settlement took place through physical transfer of certificates.

• Telephone Trading: In this type of trading brokers played the main role, as they use telephones to communicate with clients (to buy and sell stocks/shares) and execute trades.

Online Shift (1970s-1990s)

After a online trading there was a significant shift towards online trading because technology was growing and electronic trading was introduced.

• NASDAQ (1971): The National association of Securities Dealers Automated Quotations (NASDAQ) was launched, providing electronic quotes for over the counter securities. The Nasdaq Stock Market is an American stock exchange based in New York City.

• NYSE’s Designated Order Turnaround (DOT) System (1976): NYSE introduced the DOT system, which allows brokers to send orders electronically to the trading floor.

• ECNs (1990s): Electronic Communication Networks enabled traders to execute trades electronically, by passing traditional floor based trading.

Modern Online Trading (2000s-Present)

• High Frequency Trading: This type of trading enables rapid execution of trades, by using powerful computer programs to transact a large number of orders in fractions of second.

• Online Brokerages: This type of trading involves brokers and retail investors to trade securities through online brokerages.

• Mobile Trading: This type of trading can be done any where through mobile apps, which can be download from Play Store or Apple Store. Some of the apps are: Upstock, Zerodha, Groww etc.

• Cloud Based Trading: This type of trading technology enables scalable, secure, and efficient trading infrastructure.

The evolution of Stock Market from offline to online has increased efficiency, accessibility, and transparency. As technology will always become advance, we can except even more innovative developments in the world of stock market.

What is Stock Exchange?

Stock Exchange is a stock market place where companies shares are bought and sold. Stock exchange provides a platform for businesses and companies to raise capital by issuing shares to the public and for investors to trade these shares. “It is a place where people can buy and sell pieces of companies”.

Being listed on stock exchange enhances the company’s reputation, visibility and credibility. Stock exchange provides opportunities to investors and public to grow their wealth by buying and selling shares.

Every country have their own stock exchanges. And it works according to the country’s financial economy and needs of share market. In this world there are so many countries having their own stock exchanges, some are:

• New York Stock Exchange (NYSE)- America

• London Stock Exchange (LSE)- England

• Tokyo Stock Exchange (TSE)- Japan

• Shanghai Stock Exchange (SSE)- China

• Australian Securities Exchange (ASX)- Australia

• Toronto Stock Exchange (TSX)- Canada

All these stock exchange plays a vital role in their countries economy and fullfills the share market need.

Some of the Indian Stock Exchanges:

There are so many stock exchanges in India, In which some stock exchanges are closed and some are still working.

Main Stock Exchanges

• Bombay Stock Exchange (BSE): Bombay Stock Exchange is one of the oldest and biggest stock exchange in India. It was established in 1 January 1986 (39 years ago).

• National Stock Exchange (NSE): National Stock Exchange is 2nd biggest stock exchange of India. It was established in 27th November 1992.

Other Stock Exchanges

• Calcutta Stock Exchange (CSE): Calcutta Stock Exchange is 2nd biggest stock exchange of India. It’s trading volume is very low.

• Delhi Stock Exchange (DSE): Delhi Stock Exchange was established in 1947 and this Stock Exchange is closed now due to several reasons.

• Madras Stock Exchange (MSE): Madras Stock Exchange was established in 1920 and this Stock Exchange is also closed now due to several reasons.

• Hyderabad Stock Exchange (HSE): Hyderabad Stock Exchange was established in 1940 and is also closed now due to several reasons.

• Bangalore Stock Exchange (BgSE): Bangalore Stock Exchange was established in 1957 and is also closed now due to several reasons.

• Ahmedabad Stock Exchange (ASE): Ahmedabad Stock Exchange was established in 1894 and is also closed now due to several reasons.

• Cochin Stock Exchange (CSE): Cochin Stock Exchange was established in 1978 and is also closed now due to several reasons.

• Inter-Connected Stock Exchange (ISE): Inter-Connected Stock Exchange was established in 1978 and is also closed now due to several reasons.

• Magadh Stock Exchange (MSE): Magadh Stock Exchange was established in 1983 and is also closed now due to several reasons.

• Mangalore Stock Exchange (MgSE): Mangalore Stock Exchange was established in 1983 and is also closed now due to several reasons.

• Pune Stock Exchange (PSE): Pune Stock Exchange was established in 1982 and is also closed now due to several reasons.

• Vadodara Stock Exchange (VSE): Vadodara Stock Exchange was established in 1990 and is also closed now due to several reasons.

• Calcutta stock exchange is still working now but it’s trading volume is very low. Calcutta stock exchange closed their trading in 2017 but in 2018 they again started trading. But still it’s trading volume is very low, and this stock exchange is trading in only few shares.

What is IPO?

IPO refers to Initial Public Offering, IPO is when a private company or business issues there stock/share to the public for the first time. It allows the company to raise capital from investors and become a publicly traded company.

the concept of IPO came from (1600s), when Dutch East India company issued talks stocks stocks to raise stocks to raise capital for their trading expenditure.

What is SEBI?

SEBI was established in April 12, 1992, through the act of SEBI 1992. It is a government agency responsible for regulating and over seeing the securities market in India. Dear main goal is to protect investors and promote a fair and transparent trading.

SEBI’s Role in IPO

When a company or a business decides to go public through an IPO, SEBI plays a vital role in this process. SEBI plays a important role in the IPO process, they ensures that the information provided by company are accurate or not.

Conclusion

“In this post, we covered the basics of the stock market, including what the stock market is, what a stock exchange is, what an IPO is, and the role of SEBI. We also explored the history of the stock market and how it evolved into online trading.

Now that you have a solid understanding of the stock market basics, you’re ready to start your investing journey. If you have any questions or need further clarification, feel free to ask.

In our next post, we’ll dive into the details of NSE, BSE, Nifty, and Sensex. Until then, best wishes for your investing journey!”

Please provide a feedback as your comment will help us improve our future articles and better cater to your interests and needs.