What is Share Market and How it Works? – Technical Slate

What is Share Market and How it Works?

A very popular and interesting investment in today’s time is stock market. Many people including the youth and new generation are involved in dealing with stocks. Now the query arises what is share market, what it includes and where is the stock exchange situated. We’ll thoroughly discuss about the aspects of share market in this blog.

What is Stock/Share?

A share is the smallest part of the capital of a business which is divided among the shareholders in the ratio of their shareholding in that company. Share capital refers to all the shares of a business. And the owner of shares is called as shareholder (or stockholder).

It is an indivisible unit of capital which expresses the ownership relation between the shareholder and the enterprise. The denominated value of a share is called its face value and the aggregate of the face value of the issued share capital is called the overall capital of a business.

It sometimes also called as stock (or capital stock), which consists of all the shares of a company in the ratio of their ownership in the company. So basically a share is a fractional portion of stock.

There are types of shares like equity shares, preference shares, redeemable or irredeemable shares, bonus shares, deferred shares, right shares, ESOP (employee stock option plans).

What is Share Market?

A share market (also known as stock market or equity market) is a place where all the desired buyers and sellers of stock or a share are aggregated representing the ownership and claims of businesses of an existing company or an enterprise. It can include the stocks which can be traded either privately or through a listed company.

As a conclusion of this, a public company is listed on a stock exchange so it can deal or trade its securities directly through stock exchange and in compare to this a private limited company which sells its securities privately through equity crowdfunding platforms.

Stocks are traded on the basis of the company’s domicile. The stock will be traded on the stock exchange of that country only. For example, The American Depository Receipts (ADRs) will be traded only on American stock exchange.

The size of share market has increased from US$2.5 trillion in 1980 to US$93.7 trillion at the end of 2020. This is the market capitalization of all the securities which are publicly traded worldwide. In the year of 2016, largest stock markets are of America (around 56%) then of Japan (around 7.5%) then of China (around 5.5%).

Some basic terminology about share market

The following are also the key participants in share market.

Securities Exchange Board of India (SEBI)

SEBI is the regulator of stock markets of India, it ensures and generates transparency and efficiency in working of stock market. It provides the legal framework and working discipline of stock market and gives guidance to the brokers, investors etc. about the working management of stock market. It also works for protecting the interests of buyers, brokers, exchanges etc.

Stockbroker and brokerage

A stockbroker is an individual or a firm or an institution which works as a middleman and intermediator between the buyer and seller. It works and execute the buy and sell process in return of a fee or a commission known as brokerage.

Investors and traders

Investors and traders are those individuals or firm who are willing to buy the stock of a company either directly or with the help of a broker by paying brokerage.

Stock Exchange

The facilitator of all trading of shares and bonds is the stock exchange.
BSE and NSE are the two main exchanges of India.

Stock Exchanges in India

Here is the list of officially operating stock exchanges in India. These are the stock and commodity exchanges which function under SEBI guidelines or other defunct ones:

National stock exchange (NSE):

The National stock exchange of India ltd. or NSE is situated in Mumbai, and it is one of the two principle large stock exchanges of India. The Nifty 50 index was launched in 1996 by NSE. It is the world’s largest derivatives exchange in 2021 by number of contracts traded according to the statistics maintained by Futures Industry Association (FIA).

It is a derivative trade body. It is under the ownership of leading banks, financial institutions and insurance companies. It was established in earlier 1992 and was the first dematerialized electronic exchange in India. Vikram Limaye is the MD & CEO of NSE.

Bombay stock exchange(BSE):

Bombay stock exchange ltd. (BSE) is also a stock exchange which is located in Dalal Street of Mumbai. It was formulated in the year 1875 by Premchand Roychand, a Rajasthani Jain businessman, who was a cotton merchant.

It is said to be the oldest stock exchange of Asia and 10th oldest in the world. In the 1850s, 5 stock brokers gathered under a banyan tree in front of Mumbai town hall. Later, they shifted their location & after that, they shifted their location again. Afterwards, with many to and fro and shifting, the location was finally situatred in the Mumbai and that street came to be called as “Dalal Street” (Broker Street).

Calcutta Stock Exchange:

Calcutta stock exchange is the oldest government owned stock exchange in Asia which is situated in the Lyons Range in Kolkata. 16 leading stock brokers of Calcutta started working in rented small premises and founded it on December 1st, 1863. It is the second largest bourse in India.

It was reconstituted in its current form in 1908. Calcutta stock exchange was asked to quit by SEBI but the matter was sub judice. In the last three years many stock exchanges were asked to exit the SEBI and were closed including Bangalore stock exchange, Hyderabad stock exchange and Madras stock exchange.

India international exchange (India INX):

The India International Exchange Limited (India INX) is a subsidiary of Bombay Stock Exchange Limited and also it is India’s first International stock exchange. It is located in the Gift City of Gujarat, International Financial Services Centre.

Metropolitan stock exchange(MSE):

Metropolitan Stock Exchange of India Limited (MSE) is a government owned stock exchange. It is under the ownership of Ministry of Finance, Government of India and is recognized by SEBI. It was officially notified to be a ‘recognized stock exchange’ by Indian Companies Act, 1956 by Ministry of Corporate Affairs, Government of India. India’s top private sector bank, public sector banks, and domestic financial institutions are its shareholder.

National commodity & derivatives exchange ltd.(NCDEX):

National Commodity & Derivatives Exchange Limited (NCDEX), a commodity and derivatives based exchange in India which is run by and is under the ownership of Ministry of Finance, Government of India. It provides a separate platform for commodity and derivatives to those market seekers who are interested in it and also it has independent BODs.

It is a Government company registered under Companies Act, 1956 and commenced its business operations on 03rd December, 2003. Its office branches are situated in Mumbai, New Delhi, Jaipur, Kolkata, Hyderabad, Indore, and Ahmedabad.

Multi commodity exchange (MCX):

Multi Commodity Exchange of India Limited (MCX) is an exchange in India which is commodity based. It is currently situated in Mumbai and formulated by Government of India in 2003 and run under the ownership of Ministry of Finance, Government of India. It is India’s largest commodity exchange and it deals in gold, metals (non-ferrous), energy and agricultural commodity. MCX was included in the top global commodity exchanges in terms of future contracts trade.

Types of Markets

There are 2 types of share market to understand i.e. Primary & Secondary.

Primary market

A company lists its shares in the primary market by opening an IPO (Initial Public Offer). It means that the company is selling its shares first time to the public. The primary market gives an opportunity to the company for raising capital, creating investment and paying off liabilities.

IPO is a public offering which is opened for a limited period of time. Against the determined price of the shares, the investors can bid for shares and can buy the shares on that determined price. The company is then said to be listed, because its shares are available to the public and the shares can be allotted to the bidders.

Secondary market

Secondary market is a place where the securities are freely traded after being first traded and offered to public in the primary market.

Trading Process in Share Market

As we know, the process of trading involves the broker and byer. Firstly, you ask the broker about investment, then your brokers passes the order of shares to stock exchange. After this, the stock exchange searches the sell order for same shares.

Once the seller and buyer both are found, a final price is determined for transaction. After this, the stock exchange gives a confirmation that the order is final.

In addition to this, stock exchange also confirms about the parties, their details so that the parties do not pertain to be defaulting parties.

Then, the actual transfer of ownership is made between the buyers and sellers.

Before, this process used to take 1-2 weeks to complete, but nowadays it takes T+2 working days (i.e. trade + 2). This process is shown in the following flow chart:

BUYER – BROKER A – STOCK EXCHANGE – BROKER B – SELLER

Pricing of Shares in the Stock Market

The main role in determining the price of shares is demand and supply of stock. The prices of stock changes very fast and the BSE & NSE have fixed pattern to determine the price of stocks which is identified on the basis of volume traded.

The prices work on the demand and supply like when the demand for stock is more than the supply for stock, the price increases and vice versa.