How does Stock Exchange Investment Work ?

The golden rule of investing is to only invest in things that you truly understand. However, to avoid missing out on opportunities, people often overlook the importance of working hard to learn how things work. For example, many people invest in the stock market without fully understanding it. Even seasoned investors may struggle to grasp the complexities of the stock market.

This article aims to shed light on the stock market by providing an overview of what it is, who participates in it, how stock prices are determined, and how stock trading occurs in the Indian Stock Market.

What Is The Stock Market?

A stock market is a platform that enables the buying and selling of stocks between different buyers and sellers. It is widely regarded as a key indicator of an economy’s overall confidence and liquidity and is often referred to as the barometer of the economy.

Stock Market Participants

There are different types of market participants in stock markets. Let us see who they are in detail and understand the functions they perform.

Traders and investors  

The stock market relies on the participation of traders and investors to function. Traders typically do not hold securities for an extended period. Instead, they actively trade stocks and other securities, which adds liquidity to the market.

On the other hand, investors have a long-term approach and show their confidence in a company by purchasing its stocks. This includes individual and institutional investors, such as mutual fund houses, pension funds, and hedge funds. Institutional investors gather funds from many investors and invest them across various securities.

Regulators

Regulators are crucial for the proper functioning of any system, including the stock market. Regulators protect investors’ interests and uphold market fairness in the stock market. The SEBI is the regulatory authority for the Indian stock market. Besides preventing fraudulent activities, SEBI strives to educate investors on investment matters.

Stock exchanges

Stock exchanges serve as platforms for trading financial instruments such as stocks, bonds, derivatives, etc. These exchanges aim to promote transparency and equal access to investors nationwide.

The two primary stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Listed companies in India trade their stocks on either or both of these exchanges.

Traditionally, physical securities trading took place on the stock exchanges, where buyers and sellers would meet to trade securities. However, this method has been replaced by electronic trading. Modern stock exchanges use computerized systems to connect buyers and sellers located at different locations.

Stockbrokers

Authorized intermediaries by the exchange, known as stockbrokers, facilitate the buying and selling of financial securities on the stock exchange for investors in return for fees or commissions.

Full-service brokers execute trades and provide investors with crucial information and advice to make informed investment decisions.

Depositories

Like banks protect your cash, depositories securely store stocks and other financial securities in non-paper form while facilitating ownership transfer between buyers and sellers.

The National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) perform these critical functions in India.

How Are The Stock Prices Determined?

The two key factors which determine stock prices are demand and supply. 

When do stock prices increase?	When do stock prices decrease?
Demand > Supply, i.e. Buyers > Sellers for a stock.	Demand < Supply, i.e. Buyers < Sellers for a stock.

Numerous factors influence demand and supply, which, in turn, impact stock prices. These factors include:

• Market conditions that may skew perceptions of certain stocks
• Macroeconomic factors such as GDP, inflation, interest rates, and currency changes
• Industry-specific factors like the growth rate and government initiatives
• Company-specific factors, such as dividend declarations, bonus announcements, mergers, and capex plans

Given the constantly changing demand and supply, stock prices tend to fluctuate. The stock exchanges, such as BSE and NSE in India, use algorithms to determine and display the stock prices based on the demand and supply of stocks.

How Does The Actual Stock Trading Happen In The Stock Market In India?

Once you have a Demat and trading account, you can attempt to place the order to buy or sell any stock you want by informing your stockbroker or through a stockbroker’s trading platform. If your account has enough funds, your buy order would be placed on a stock exchange, and the computerized system would match your buy order with a similar sell order and vice versa.  

Your purchased shares would transfer to your Demat account within two trading days after trade execution. For instance, if you bought shares on Tuesday, you will have your shares transferred to your account on Thursday. Until you sell those shares, the depository will store them on your behalf. For selling the stock, a similar process would be followed.

After opening a Demat and trading account with an exchange-registered stockbroker, you can proceed to place buy or sell orders for any desired stock. To do this, you can inform your stockbroker or use their trading platform. If your account has sufficient funds, your buy order will be placed on the stock exchange, and the computerized system will match it with a corresponding sell order, and vice versa.

Once the trade is executed, your purchased shares will be transferred to your Demat account within two trading days. For instance, if you bought shares on Tuesday, they will be transferred to your account on Thursday. The depository will store these shares on your behalf until you sell them. A similar process will be followed when selling the stock.

Final Thoughts

To sum up, here are the key takeaways from this blog:

• Learning the stock market basics can help you know what is happening with the hard-earned money you have invested in the markets.
• The stock market operates smoothly due to the involvement of various participants like brokers, regulators, traders, etc, and each occupies a significant role in the ecosystem.
• The stock market plays a significant role in a country’s economy by connecting those in need of funds with investors and providing an indication of the economy’s overall health.