How Does the Indian Stock Market Work?

For a new investor, the stock market can make them feel a lot like legalized gambling market but reality is different as it is driven by supply and demand chain where buying and selling of stocks happen. The supply is determined by the availability of number of stocks for sale and the demand indicates the reverse of it i.e., number of shares that investors want to buy from the seller. It's important here to note that if anyone bought / purchased a share, then it implies that someone was ready to sell that share  on the other end and vice versa. The demand for stock can change due to the mindset of the investors driven by following factors:  Economic fundamentals, Income / Wealth / Taste of consumers, Fear of defense failure, or Company earnings etc.,.

How Does the Indian Stock Market Work?

A Little more information & definitions related to stock market has been discussed in separate posts like:

http://subramoneyplanning.blogspot.com/2011/12/shares-vs-stock.html

http://subramoneyplanning.blogspot.com/2011/12/investment-vs-speculation.html

http://subramoneyplanning.blogspot.com/2011/12/investment-vs-gambling.html

http://subramoneyplanning.blogspot.com/2011/11/some-basics-to-be-known-other-than.html

http://subramoneyplanning.blogspot.com/2011/12/kinds-of-investments.html

http://subramoneyplanning.blogspot.com/2011/12/investment-its-characteristics.html

In continuation to understanding of basic definitions related to stock market, you should also know why a company would want to share its assets and earnings with the general public? The answer is simple because the company needs some money to smoothly operate its business. Companies have two ways to tackle this issue either through borrowing money from bankers / lenders (known as debt financing) or selling share of its stock (also known as equity financing). The second option is better for company as it has no interest amount in return to pay & risk is distributed between the investors also.

In general, the main players in the stock market are all of the individual stock exchanges in the country. India's major stock exchanges are

    1)         the Bombay Stock Exchange, or BSE, which has SENSEX as its stock index and

    2)         the National Stock Exchange of India, or NSE, which has S&P CNX Nifty as main stock index

As a developing country, India's stock exchanges follow fairly closer to other emerging Asian stock markets.

Let's use an example to explain one of the many ways how the stock market works in real-time to have a better idea.

Every transaction in the stock exchange is carried out through licensed & authorized members by SEBI called Stock Brokers.

You must open an account with any of the authorized stock brokers from SEBI by sending a cheque or transferring money through online money transfer facility for Rs.10,000.  

The amount is automatically deposited into your registered trading account. Now you can log onto that broker's trading platform with the username & password provided by them and place an buy order for 100 shares of Company XYZ's stock, which is currently trading at Rs.10 in NSE. Broker uses it's network to tell the NSE that there is a demand for 100 shares of Company A's stock. 

The NSE searches in its network for someone who is ready & willing to sell his 100 shares of Company A and instantly both the trades of buying and selling of stocks between you & seller are executed. The trade information is sent to a clearinghouse where the information is processed and the shares will now be registered to you. 

Basically, the clearinghouse will designate 100 shares of Company A to Broker and they will designate those 100 shares as yours.

To have a simplified explanation, it is a marketplace where the exchange of stocks between the buyer & seller of a stock takes place. If the price of your stock goes up then you win! If it drops, then you lose!. So now you might have understood clearly how the stock market works.

Categories: BSE, How Indian Stock Market Work, Investment, Investment Planning, NSE, Stock Exchange, Stock Market, Tutorials