Stock Market is a word which every individual would have heard in some walk of their life, but do you know what Stock Market is and how it works? If not, you are in the right place!
Please start your knowledge journey with the below introduction about Stock Market.
What is a Stock Market?
Stock Market, Share Market, or Equity Market is a combination of markets and exchanges where activities like buying, Selling and issuance of stocks (also called shares) takes place, transacting in shares represents ownership claim in the business, and these are listed securities on Public Stock Exchange which operate on a defined set of rules and regulations.
Stocks are also privately traded (that are not listed on Stock Exchange) that are sold to investors through various other platforms.
Though it is referred to as a stock market or equity market and its primary role is transacting in stocks/equities, we can witness trading of other financial securities – like exchange-traded funds (ETF), derivatives based on stocks, commodities, currencies, and bonds.
Now we have understood the basic definition of the Stock Market, let us know the size and working of the stock market in which we are planning to participate.
Globally, the total market capitalization of equity and all related securities rose from US$ 2.5 trillion in 1980 to US$83.53 trillion by end of 2019.
Let’s see how the stock market works?
Primary Market (IPO): As a primary market, the stock market allows companies to issue their shares to the general public for the first time by the process called Initial Public Offerings (IPO).
IPO helps companies to raise the required capital from investors; this capital can be for expansion or to meet their requirement for the company’s long-term activities. A company issues a part of ownership to its investors in the part of shares which it divides and sells its ownership partially. (By offering stocks, instead of borrowing the capital needed for expansion, the company avoids incurring debt and paying interest charges on that debt.)Once these shares are allotted through IPO for investors they hold these shares in anticipation of a rise in the share price, Dividend issue, and Bonus issue soon whenever the company earns a profit.
Secondary Market: Once these IPO’s are issued for the first time by the process called listing, the Stock market also provides a platform to transact these shares regularly by allowing participants to buy and sell these listed shares. This is referred to as a Secondary market.
Several Stock Market Participants participate and transact, some of them are:
Stock Brokers: They are registered representatives or licensed professionals who buy and sell securities on behalf of investors. They mainly act as an intermediary between the stock exchange and investors in the process of buying and selling stocks. They help retailers to open a trading and Demat account with them to do the above-mentioned transaction in the stock market.
Fund Managers: These are professionals who invest in a portfolio based on their analysis; they represent Mutual Funds, Hedge Funds, and other big players who participate in the market.
Lead Managers: They represent companies such as private companies who want to go public through IPO; they take care of listing on the stock market on behalf of companies.
Until now we have seen the basics of the stock market, now let’s see why the stock market exists!!
Why Stock Market exists?
From a business point of view: For any business, promoters cannot accumulate the resources from their pocket, they need to borrow from someone to run the business, borrowing from a financial institution will have a commitment and also obligation of paying interest so the concept of stock market emerged where a part of ownership is sold to the public and raise capital that will be used for further expansion or any long-term activity for the business.
From an investor point of view: Everyone cannot start a business as it involves some risk and expertise which most lack, but individuals can indirectly invest in a business through the stock market by buying publicly listed companies through the stock market and become an investor in the business and are eligible for profits in the company.
Investors can be of various types namely FIIs, DIIs, HNIs, Banks, and Retailers.
From an economic point of view: As people start investing in the stock market, money flow will increase, and also the flow of funds is accountable since transactions happen through regulated channels (Banks, Stock Brokers, Market Intermediaries, etc). This will have a check on money and growth in the industrial and the service sector signifies growth in the economy. This will also increase transparency since they will declare the results from time to time and also update the exchange if any major changes in the organization.