You might have come across a series of questions like what is a stock market, how does it work, how I can earn money through the stock market, etc. To answer all these questions and with the motive of spreading financial awareness amongst the youngsters, we are coming up with a series of blogs titled “beginner’s guide to the stock market”. In this series, we will be covering all the basics of the stock market from scratch.
In this blog, we will be discussing;
Before understanding what is a stock market, we have to understand the meaning of stock.
Stock is the general term that is used to describe the ownership of the company. Stocks can be bought and sold on the exchanges through a broker. Owning the stock of a particular company gives you the right to vote in the shareholder’s meeting, get the dividend when and if it is declared. Your voting power increases if you own the majority of the stocks of a particular company. In short, you can indirectly control the company by choosing its board of directors.
In simple words, when you need groceries, you go to the local supermarket in the same way when you are willing to invest in stocks or mutual funds you usually buy them through the stock market. Stock markets can be also called equity markets or share markets. The one who buys the stock of the company is called a buyer and the one who sells the stock of the company is called the seller.
Many large and well-known companies have been listed on the stock exchanges. Along with stocks, bonds and derivatives are also traded on the stock exchanges. Participants in the share market range from small individual stock investors to larger investors. Small investors are called retail investors and large investors are called high net worth investors. Along with individuals’ different institutions and corporations can also invest or trade on the stock exchanges.
The Indian institutions who invest or trade on the stock exchanges are referred to as Domestic Institutional Investors (DII’s) and the foreign institutions who invest or trade on Indian exchanges are referred to as Foreign Institutional Investors (FII’s).
The stock markets work through the network of exchanges- you may have heard somewhere about the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), these are the official stock exchanges in India.
The Bombay stock exchange (BSE) was established in 1875, It is one of the oldest and largest stock exchanges in India. In 1956, BSE became the first stock exchange to be recognized by the Government of India under the Securities Contracts Regulation Act. Currently, there are 4744 companies listed on this exchange. In 1986 the Sensex index was established to track the overall performance of the index.
National Stock Exchange (NSE) was established in 1992. NSE is located in Mumbai, India and it is the 11th largest exchange in the world by market capitalization. NSE is the no.1 derivative exchange in the world by 2020. Currently, there are 1600+ companies listed on NSE. ‘Nifty50’ is the key index of NSE which is used to track the overall performance of the companies listed on the exchange.
SEBI is the non-statutory body that regulates the security markets in India. It was established by The Government of India in the year 1988 and has given statutory powers in the year 1992 by SEBI Act, 1992. Both NSE and BSE are monitored by SEBI.
The price of the stock is decided based on supply and demand. There are always two groups in the market. One group is referred to as buyers, one who buys the stock, and another group is referred to as sellers, one who sells the shares. A potential buyer bids a specific price for a stock, and a potential seller asks a specific price for the same stock.
When bid price and ask price matches, trade takes place on a first-come, first-served basis if there is more than one bidder at a given price. In this way, the price of the stock is decided.
If the number of buyers is greater than the number of sellers, the price of the stock increases as the seller tends to sell costlier. When the number of sellers is greater than the number of buyers, the price of the stock tends to decrease. I hope that, in today’s blog of beginner’s guide to the stock market, I was able to explain to you what the equity market is and how it works.
I hope that, in today’s blog of beginner’s guide to the stock market, I was able to explain to you what the equity market is and how it works. Please let us know your thoughts and your queries in the comment.
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