Stock Market can be referred to as a place where buying, selling, and issuance of shares of public listed companies takes place. There can be multiple stock trading venues in a country which allow transaction in stocks, and other forms of securities.
Once new securities have been sold in the primary market, they are traded in the secondary market at the price agreed upon by both buyers, and the seller. In India, besides secondary, primary markets are governed by the Stock Exchange Board of India (SEBI).
Both the terms stock market, and stock exchange are used interchangeably. However, the latter term is a subset of the former. Imagine, if one says that he/she trades in the stock market. It means that they buy, and sell shares/equities on one, or more of the stock exchanges that are part of the overall Stock Market.
How Stock Market works-
A stock market is a designated market for trading various types of securities in managed, controlled, and secure environment. In addition to bringing together hundreds, or thousands of clients who wish to buy, and sell shares it ensures fair pricing practice, and transparency in transactions.
In past, it offers paper-based share certificates but in today’s digital age it operates electronically. Operating under the defined rules, the stock market acts as a primary, and secondary market.
As a primary market, the stock market allows companies to sell their shares to the public through the process of an initial public offering. It helps them to raise the required capital from investors. To facilitate this process a company needs a marketplace where they can sell these shares. The stock market acts as a facilitator, and the marketplace to the companies. For this priceless service they receive fees from companies, and their financial partners.
Following the IPO the stock exchange also serves as the trading platform that facilitates regular buying, and selling of the listed shares. Moreover, this constitutes the secondary market. For every trade that occurs on its platform during the secondary market activity Stock Market earns a fee for that.
Stock Exchange also maintains the news of all the company’s announcements, and financial reporting which can be usually accessed on their official website. They often create, and maintain various market-level, and sector-specific indicators that provide a measure to track the movement of the overall market. For instance- S&P 500 Index, Nasdaq 100 Index.
A stock exchange also supports various corporate level, and transaction-related activities.
Functions of Stock Market-
- Fair dealing in security transactions- Depending on the rules of demand, and supply they are required to ensure that all the participants have instant access to data. Thereby helping in fair, and transparent pricing of the securities.
For example- Suppose 3 buyers have placed an order for purchasing the shares of Microsoft at $100, $105, and $110. On the same token, 4 sellers are willing to sell the shares of Microsoft at $102, $108, $110, and $120. The market needs to ensure that the best buy, and best sell are matched, which is $110 in this case.
- Efficient Price Discovery- They need to support an efficient mechanism for price discovery. Price discovery refers to the act of deciding the favorable price of a security by assessing supply, demand, and other factors associated with the transaction.
- Security, and Validity of transactions- More participants are important for efficient working of the market. Besides, the market is required to ensure that all the participants are verified, and familiar with the rules, and regulations. Additionally, it should ensure that all associated entities operating in the market work within the legal framework provided by the regulator.
- Support all the eligible participants- A marketplace is made by a variety of participants which include investor, trader, speculator, market maker, hedger, etc. All these participants have different roles, and functions in the stock market. For instance- an investor buys, and holds stocks for a long time. Contrary to it, a trader may enter or exit from the market within seconds. The market should ensure that all such participants are efficiently fulfilling their desired roles.
Stock Market Participants-
There are many different types of players associated with the stock market. Each has its unique role, but many of the roles depend on each other for the proper functioning of the market. For instance, they can be categorized into-
- Stockbrokers- They are the registered representatives who buy, and sell securities on behalf of investors. By this, they act as intermediaries between the stock exchange, and investors.
- Portfolio Managers- They are the professionals who invest collection of securities, or portfolios for clients. They get recommendations from analysts, and set the investment strategies for the money they hold. Hedge funds, Mutual Funds Companies, and Pension Plans use portfolio managers to make decisions.
- Companies- By filing an Initial Public Offering companies from various sectors are listed on the stock exchange. Money raised from its IPO is used by the companies to meet working capital requirements or to expand the business.
- Domestic Participants-
- Domestic Retail Participants- like you, transacting in the stock markets
- Domestic Institutions- For example- LIC of India. They are those institutional investors who undertake the final assets of the country they are based in.
- Domestic Asset Management Companies- AMC invests funds collected from their client’s into securities that match declared financial objectives. For example, you can take mutual fund companies like- SBI Mutual Fund
- Financial Intermediaries- They play their role behind the scene. Moreover, ensures a smooth experience for your transactions in the Stock Market.
In the stock market securities of various companies are bought, and sold. This process leads to capital formation and economic growth. The major role of the stock exchange is valuing of securities. Its proper valuation is important because it provides signals for the allocation of scarce capital resources.
On the same token, if the securities are incorrectly priced then individuals will stop investing in them. As a result, it will affect companies, and the economy to a great extent.
Stock Market plays a great role in raising capital for business, and economic growth of the Nation.