The stock market is where investors can trade in different financial instruments, such as shares, bonds and derivatives. The stock exchange is a mediator that allows buying/selling of shares.

In India, the two primary stock exchanges are the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Further, there is a primary market where companies list their shares for the first time. Secondary markets allow investors to buy and sell shares issued during the initial public offering (IPO).

Few simple points to know about how the Stock Market works:

Working of the Stock Market

Before you learn the basics of trade, it is essential to know about how does stock market work? Here is its working explained in detail:

  • Participants:

    The Stock Exchange Board of India (SEBI), stock exchanges, brokers, and traders/investors

The stock exchange provides a platform for trading in financial products. The companies (listing their shares), brokers, traders, and investors must register with SEBI and the exchange (BSE, NSE, or regional exchanges) before trading.

Steps to Invest in the Indian Stock Market

  • IPO:

    The companies file a draft offer document with the SEBI. This document comprises information about the company—shares being diluted, price band, and other details. On approval, the company offers its shares to investors through an IPO on the primary market.

  • Distribution:

    The Company issues and allots shares to some or all investors who bid during the IPO. The shares are then listed on the stock market (secondary market) to enable trading. This platform is a medium offered for the initial investors to exit their share market investments. In addition, investors who failed to receive allotment during the IPO are given the opportunity to buy shares on the secondary market.

  • Stock Brokers:

    Broking agencies (registered with SEBI and the stock exchange) are intermediaries between the investors and the Indian stock market. On receiving instructions from the clients, the brokers place their orders on the market. On matching a buyer and seller, the trade is successfully executed. A confirmation is received from the stock exchange and sent to both the buyer and seller.

Historically, this procedure was manual and thus time-consuming and cumbersome. However, with online trading platforms, the entire procedure of matching buyers and sellers is done through the internet. This has reduced the transaction time to a few minutes.

Nonetheless, there are thousands of potential investors and converging all of them in one location is impossible. Stock exchanges and broking agencies play a crucial role in this situation.

  • Order Processing:

    This occurs when an order is placed by brokers on behalf of their clients on the exchange where it is processed. There are several parties involved in the entire processing. When buyers and sellers are matched, the stock exchange sends a confirmation to both parties to avoid defaults. The executed trades are settled, which is the process where the buyer receives the shares and sellers receive their funds. The Indian stock market adopts the T+2 settlements, where the settlement occurs within two working days from the day of the transaction.

Following the stock market basics and understanding how it works will help make investing profitable and prevent investors from taking unnecessary risks.