What is Share Market & How it Works?

Hey, are you new to the Stock market? I will take you through the world of the stock market in this article. In this article, I am going to explain to you, the basics of Share Market like what is Share Market, how Share Market Works and its components with their relationship.

Share Market in India

If you are one of the average people out here in India, who has only a little bit of money to invest with a little knowledge, you may often say to yourself:

What is Share Market?

How does the Share Market works?

Can I invest, if I don’t have millions of rupees to spare?

It can be frightening at first, but once you learn the basics of investing in stocks, the stock market really isn’t all that difficult to understand just you need to know the basics of Share Market.

Before going to deep in Stock Market, let’s have a quick intro to A Stock or A Share.

What is A Share?

A stock is a little piece of a company, often called a Share or Stock. A Share represents a unit of ownership of the company from which you bought it.

If you own a share of stock in Company A, you own a tiny portion of Company A, along with all the other shareholders in that company.

For example, you bought 100 shares of Rs. 200 each of X company, then you become a shareholder of X among other shareholders.

I hope you got an idea about a Stock or Share and what does it mean? Now before going to learn about the operations of Share Market, we should learn a little bit about Share Market.

What is Share Market?

In short, the Share market is a platform where buying and selling of share happens.

A Share Market is a collaboration of buyers and sellers of stocks (shares) on a common platform called Stock Exchange like NSE & BSE in India. Share market is also known with another name like Stock Market or Equity Market.

Alongside shares of companies, other financial instruments also traded in the stock market like Bonds, Contracts and Mutual Funds.

The Stock market works as a platform where investors can buy or sell shares of publicly listed companies through Brokers. Or we can say, Share Market is an interface (through Broker) between Investors, Traders and Publicly listed companies on the Stock Exchange.

Share Market is the source for companies to raise funds and for Investors to buy ownership in business by acquiring shares of a particular company. Stock Market is a place, Where investors and companies come together as partners and share their Profit & Loss.

Stock Market is a comprehensive thing, so now we’ll dive into the types of the Share Market.

Types Of Share Market

Basically the Stock market is divided into two main types.

1. Primary Share Market

As we know that a company raises funds through the Share market by going public. The Primary Market allows a company to get registered to issue Shares to the public to raise money via Initial Public Offer (IPO).

Primary Market is the only way to get listed on the Stock Exchange for a company. Initial Public Offer or IPO is a primary mechanism for companies to offer Shares for the first time. After that company becomes Public. The company has to provide details about itself, its business, its promoters, financial instruments and Stocks being issued before filing for an IPO.

2. Secondary Share Market

After offering an IPO, the company gets listed on a particular Stock Exchange and directly available to retail investors in the Secondary Market for buying and selling their Shares. Basically, Secondary Market allows Inventors to buy and sell shares at the current price. At the secondary market, all transactions are conducted through a Broker.

How Share Market Works

To learn the basics of Share Market Working procedures, you need to understand what are the main components that form the Stock Market.

I’ve tried to write in very simple language so everyone can understand and hope that you got an idea about Share, Share Market & its types. Now we’ll move on to the Main Components of Share Market their relationship with each other.

Main Components of Share Market

Publicly Listed Companies, Stock Exchange, Trading Participants and Investors are the main components of the Stock Market these collectively form the term “Share Market”.

For better understating I am discussing the main components of Stock Market & their relationship:

1. The Publicly Listed Company & The Stock Exchange

A company applies to the Stock Exchange to offer its shares to the public through Initial Public Offer (IPO). The company must comply with stringent requirements before the shares are available to the public.

2. The Stock Exchange & The Trading Participant (Broker)

As I mentioned above, the stock exchange is a platform to trade shares but does not directly deal with investors. Stock Exchange license Trading Participants to buy and sell shares, only to simplify work and purpose. The Stock Exchange is monitoring the authority of publicly Listed companies while the Trading Participants transact with the investing public (Investors).

3. The Trading Participant & Investors

If you want to start investing in Share Market, you have to contact a trading participant (broker) for the DEMAT account. For taking care of your transactions, the broker will charge you a very small fee. The broker also provides you with Investing advice for companies, those are good to Investment in addition to their transaction services (not necessary).

How Trader Makes Profit or Loss in the Share Market?

Assume that, you have bought some share(s) in a good company, and your Company A makes a profit. Thus, the value of your stock increases because the Company is now worth more than it was before it made a profit.

Now suppose that something happens to cause Company A to fumble a bit, and the reputation of the company falls, and profits cease, you now own a tiny portion of a company that is not doing well. Therefore, the value of your stock decreases because the net worth of the company itself is declining.

That is really all there is to understand the absolute basics of the stock market before entering. The trick, of course, is to know how to choose the right companies to invest in and when to buy the shares and when to sell them. Ideally, of course, you will buy when a company is relatively new and the cost of each share is low as well. Then, when you have chosen wisely, this new company invents a miraculous product or explodes on the scene with terrific service and makes a profit. Then, right before the company loses momentum in profits, you sell and make a profit from your shares.

Example

For example, you believe the recession will cause people to turn to religion, so you buy stock in a company that manufactures Books; you pay INR 10 per share and buy 10 shares, for a total investment of INR 100.

Then, Book Printers, Incorporated lands an overseas account and becomes the exclusive Book supplier for the other regions. They are soon bringing in a huge profit, and since they are, more people want a piece of the pie. So, the cost of the stock goes up to INR 20 per share. You are ecstatic and decide to sell. Now, you sell your 10 shares to another trader for INR 20 each, for a total income of INR 200. You have doubled your money. That’s how the stock market works on a good day.

Summary

Here are the answers that can get you started on your way toward making some financial decisions that might just keep you in the black now and for years to come.

The basic premise of the stock market is to buy low and sell high. Maybe you have heard that before, but are you wondering just what you are buying and selling?

I hope you understood, what the stock market does and how Share Market Works?

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Thank You for reading.

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