The Working of a Stock Market

Stock markets work on the simple principle of price movements. Investors take advantage of the price fluctuations and buy/sell stocks accordingly. Stocks can either be traded through an exchange or through an over-the-counter market. They act as a buying and selling avenue of stocks. It is a meeting point for investors. Stocks can either be private or public. Public stocks are those which are listed on a stock exchange like NSE or BSE. Private stocks are traded through over-the-counter markets or through dealers.

Once a company gets listed through an IPO, stocks are issued in the primary market, subsequently traded in the secondary market. An investor can buy/sell these stocks through a stockbroker or brokerage firm. Once an investor places a buy order, the broker processes the order at the exchange. The price of the stock and the order confirmation details are then communicated to the investor. After a period of T+2 days, the shares are deposited in the demat account. You can then manage your portfolio based on the rise/fall of stock prices.

Types of Share Market

There are two types of trading in the Indian share market - Primary Market and Secondary Market. The primary market is the part of the capital market which deals with issuing new securities to investors. When a firm sells bonds or new stocks for the first time to the public, it creates a primary market. The company, at this point in time, gets listed in a stock exchange and becomes public. The primary market can take form through an Initial Public Offering (IPO). The secondary market, on the other hand, is all the trading that takes place subsequent to the primary market. At this stage, you can sell your shares to another investor through intermediaries like a stockbroker. Simply put, the secondary market is one where investors trade the previously issued securities without the company’s involvement. The company that issued the shares is now not a party to any further sale between investors.

Why People Invest in Share Market

Investors buy and sell shares through a share market. Investors buy shares for the specific reason of getting income. Though investing in shares has its share of risks, it can reap good returns in the long run. Shares offer you income through dividends. Hence, it acts as an annual income and as a reward for shareholders. The higher the profitability of the company, the higher its dividend rate is. Purchasing stocks of a company can give investors a sense of ownership, thereby allowing you to have a share of the profit that the company earns. Investing in shares also adds diversity to your investment portfolio. Share trading also has a stop-loss feature - if the value of your shares falls below this stop-loss limit, they will automatically be sold, thus saving you from unexpected losses.