If you read the book ‘Rich Dad Poor Dad’ by Robert Kiyosaki, you get a slight idea about how rich people get rich. The book mentions assets and liabilities. According to it, assets are something that puts money in your pocket each month. That way, you get multiple streams of income.
The book mentions a lot of assets, but one asset which many people invest in is the stock market. It’s considered the ultimate investment, which can make or break even the most seasoned investors.
But have you ever wondered how stock market works? Especially in India? It turns out it is an often asked question, so we have decided to explain it the simplest way here.
What is the Stock Market?
Before you understand how stock market works, let us take a look at the very basics. What exactly is the stock market? The stock market is a general name for the network of exchanges and over-the-counter venues where investors buy and sell shares in publicly traded firms using top online brokerage platforms.
People occasionally use the term “stock market” to refer to the Bombay Stock Exchange or the National Stock Exchange. However, these exchanges are only parts of a larger worldwide market.
Participants of the Stock Market
The stock market is a place where people buy and sell stocks, bonds, and other financial instruments. Stock exchanges make this trading easier. It works as a platform, or marketplace, that connects buyers and sellers.
To understand how stock market works, you need to know who is involved. Four important players in the Indian stock market are:
Securities Exchange Board of India (SEBI)
SEBI oversees the stock markets in India. It makes sure that India’s securities markets run smoothly and openly. It also makes sure that everyone’s interests are protected and that no one gains an unfair advantage.
To protect investors’ interests, SEBI sets rules that exchanges, corporations, brokerages, and other participants must follow.
Stock Exchange
Investors can buy and sell stocks, bonds, and derivatives on the stock market. Stock exchanges make this trading possible. There are two main stock markets in India.
- The Sensex is the index for the Bombay Stock Exchange (BSE).
- Nifty is the index for the National Stock Exchange (NSE).
Stockbrokers and Brokerages
A broker is a person or company that acts as a middleman between investors and the stock market. They carry out buy and sell orders for a fee or commission.
Investors and Traders
Shares are parts of a company’s market value. People who buy stocks to become part owners of a firm are called investors. This equity is bought or sold when trading.
How Transactions Actually Happen
When corporations issue stocks, they can be exchanged on the secondary market after they are listed on the stock exchanges. Stockbrokers and brokerage businesses operate as middlemen between investors and the stock exchange. They buy and sell equities that are listed on the exchanges. This is how it goes around:
- Your broker sends your order to buy shares to the stock exchange. The stock market looks for a sell order for the same stock.
- Once a buyer and seller agree on a price, the deal is done. After that, the stock exchange tells your broker that your order has been verified.
- The broker then sends you this notice. All of this happens in real time and in seconds.
- The stock exchange also checks the information of the purchasers and sellers of shares to make sure that neither party defaults.
- Then it helps the real transfer of shares from sellers to buyers. The term is called the settling cycle.
It used to take weeks to settle trades in stocks. But now, this has been cut down to T+2 days.
For instance,
If you buy a stock today, you’ll get credit at the end of the day. The stock exchange also makes sure that stock trades are honoured throughout the settlement.
The stock market is no longer safe if the settlement cycle doesn’t materialise in T+2 days. This indicates that trades may not be honoured. The process usually goes around like:
- Stockbrokers know who their clients are by a special code that each investor gets.
- After an investor buys or sells stocks, the stockbroker gives them a contract note that has information about the transaction, like the date and time of the sale.
- An investor has to pay more than just the price of a stock. They also have to pay brokerage fees, stamp duty, and securities transaction tax.
- When a sale happens, these fees are taken out of the selling proceeds, and the investor gets the rest of the money.
There are many people and groups involved in the communication chain at the broker and stock exchange levels, such as the brokerage order department and the traders on the exchange floor.
Conclusion
Now, you must have a clear idea how stock market works. Make sure that before you invest, you research the stock carefully, as it can either go high or low. Remember, the stock market isn’t a “get rich soon” scheme; it takes patience and persistence to grow wealth.
