Apr 23, 2020
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WHAT IS THE SHARE MARKET AND HOW DOES IT WORK

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WHAT IS THE SHARE MARKET

Shares are bought and sold in a share market. The stock market is a share market and apart from shares of companies other financial instruments like mutual funds, bonds, and derivative contracts are also traded in the stock market.

Broadly speaking there are 2 types of share market-Primary and Secondary.

The Primary share market

The main purpose of a company entering a primary share market is to raise funds. It is in the primary market in which a company is registered and thus an issue shares to the public thus raising money.

Most companies get listed on the stock exchange through the route of the primary market.

An IPO is an Initial Public Offer and happens when a company is selling shares for the first time in the Stock market. After this the company becomes Public.

When a company wants to go for an IPO it has to furnish all details like its promoters, its financials, its business, price band, and stocks being issued.

The Secondary Share market

In the secondary share market, investors trade in already listed securities through buying and selling them. In the secondary market, the transactions which take place are between traders who buy and sell shares at the prevailing share prices. Usually, a broker is employed to carry out these transactions.

Also, the secondary market entry can be made by buying shares from traders, and traders can also exit the secondary market by selling all their shares.

For companies, the Share market is an opportunity to raise funds and for the investors, it is a platform through which you can buy and sell shares and make a profit by going for the right shares at the right prices.

Once an investor becomes a shareholder he earns a part of the profits earned by the company through dividends. Also if the company underperforms then the shareholder has to bear the loss too.

Also, all market participants need to get registered with the authoritative body like SEBI to be able to trade in the stock market.

HOW DOES THE SHARE MARKET WORK

A stock market is a simple place. The concept behind how it works is very simple. It operates as an auction house and enables buyers and sellers to negotiate on share prices and also buy and sell them.

The stock market works through a wide network of exchanges. Companies list shares of their stock on the exchange to raise money and funds and to grow their business and investors buy and purchase those shares. Then the investors trade, buy and sell those shares amongst each other and the exchange tracks the demand and supply of each listed stock thus determining its trading price.

The price of the security is determined by the demand and supply of the security and also it depends on the level of stock market participants, which includes traders and investors, who are willing to buy and sell. Most of these calculations are done through computer algorithms.

Sellers quote a price for their share and then buyers offer a ‘bid’which is the highest amount they are willing to pay and is usually lower than the amount asked by the seller. This difference is known as the bid-ask spread.

Thus for a trade to occur either the buyer has to increase his bid or the seller has to decrease their asking price. This is how the stock market functions.

Thus by trading in a stock market can prove very profitable if you know about the companies of whom the stocks are listed and thus it is critical to have complete knowledge of the companies and trades so as to make merry at the stock market.

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Stock Trading
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