How the Stock Market Works? 

  In today’s article, we will learn about the share and the stock market, and how the Stock Market works.

To expand and to run their business, companies need money to achieve their agendas. There are a number of ways, a company can raise funds, like taking loans from banks or big institutions, private investors and venture capital, and Stock Market.

The companies can raise funds in two ways

1. Debt Financing
2. Equity Financing

Let's understand these in detail:-

1. Debt Financing:- It means, a company takes a loan from Banks/financial institutions and they have to pay the interest at a certain rate of interest. The loan has to return at maturity. It means the company returns the money with the interest.

2. Equity Financing:- In this, companies don't take loans, they raise funds from the private investors, venture capital, or Stock Market. In this, the company doesn't have to pay the interest or any money as in the case of debt financing.

How the Stock Market Works?

So, the question that arises here is, what the investor will get by investing as the company is not returning their money to them. 

The answer is simple, the investors get the shares of that company and they became the partner of the company. An investor can sell its share to get funds back.

So, raising funds from the Stock Market is known as Equity Financing. Anyone can invest in any company in Stock Market and can become a partner in the particular company.

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The Stock Market is a place for companies where they can raise funds from the public. Those companies who have raised money from the public, are known as public limited companies.

The company raises funds from Initial Public Offerings (IPO) when they raise money for the first time from the public.

For example, there are a lot of companies, who bring their IPO's this year and raised money. Like, Indigo Paints, Irfc, Barbeque Nation, Kalyan Jewelers, Laxmi Organics.

The Lot size and Price band of the share are decided by the company. For example, Indigo paints have a lot size of  10 shares with the price band of rupees 1488-1490.

An IPO generally lasts for 3 to 10 days. After that, the shares are allotted to the investors who have applied for the IPO. But in IPO, one can only buy shares from the company, later you can sell them after the listing of the company on the Exchange(NSE/BSE).

Point to note:-

When an investor buys shares in an IPO, he buys shares directly from the company. But when an investor buys shares in the Stock Exchange, then he buys shares from the other investor. It means, the share and money are exchanges between the investors on the Stock Exchange.

For example, Indigo Paints bring its IPO on Jan 20, 2021. The share was allotted to the investors on Jan 28, 2021, and the share was listed on the Exchange on Feb 2, 2021. It means, from Feb 2, the shares of the Indigo paints can be exchanged between the investors. They can buy/sell their shares. 

Now the whole process is become online and very convenient. You can buy/sell the shares of the listed company by just sitting anywhere.

The Stock Exchange uses an Automatic Order Matching System: When the order of a buyer & a seller match, then the transaction is complete or the order gets executed.

To buying and selling of the shares, one must have a D-mat account with a Stock Broker. As it is very compulsory if you want to invest in the Stock Market. Whenever you buy shares, it gets transferred to the D-mat account.

Also Read, Who are Stock Brokers in share Market?

You can buy/sell shares through the broker, and they will charge you some brokerage charges. You can do intra-day trade as well. For this, you should have Trading Account. Intra-day trade means buying and selling the shares on the same day. We don't need to open these accounts separately. Usually, when we open a D-mat account, we also get a Trading Account.

For account opening, we just need Pan-card, Adhar Card, and bank passbook. After the successful account opening, Brokers provide you few trading platforms like

1. Web-Based Trading

2. Mobile Application Based Trading

You don't need big money to start in the stock market, you can invest with minimal capital. 

The Market hours are 9:15 AM to 3:30 PM. It means you can buy/sell in these hours.

National Stock Exchange and Bombay Stock Exchanges are two big exchanges in India where the total listed companies on both the exchanges are 8000+.

Nifty is the main Index of NSE: Nifty is made of National +Fifty: Fifty because fifty has 50 companies, and Nifty’s performance is based on these 50 companies.

Also Read, What are Sensex and Nifty?

There are two benefits to investing in the stock market-

1. Dividend - A company entitles its shareholders to an amount per share from profit, which is known as a dividend. It is decided by the Board of Directors.

2. Capital Appreciation -  When the prices of the shares increase, is known as capital appreciation.

For example, You buy 100 shares of XYZ company @ the price of 500 each and after some time, the price of the share rose to 700. So now, you have invested 50000 rupees and after some time, its value is rupees 70000. It is called capital appreciation. 

The increase in the price of the company totally depends on the performance and its earnings. The performance also increases the Market valuation of the company as well as the share price of the company.