Mini Series on basics of finance- Part 2

What is the Stock Market?

The world of investments is a fascinating one. All of us have a deep driving desire to improve the quality of our life. We always seem to need more and more money to fund these desires, and stocks and shares seem to be one way of achieving that.

The trading scenario in India underwent a paradigm shift in 1993, when the National Stock Exchange (NSE) was recognised as a Stock Exchange. Within just a few years, trading on both the exchanges shifted from an ‘open outcry’ system (which literally involved shouting across the trading floor to transfer information about buy and sell orders) to an automated trading environment.

A stock market is a place where shares are bought and sold. A stock market or equity market is the aggregation of buyers and sellers of stocks. Of course, with the advent of the internet and related tools and technology, the market can exist even if the buyers and sellers are not physically present in it.

Stock market, share market and securities market are interchangeable terms used in the investment world. ‘Stock market’ or ‘share market’ refers to the market for equity shares, while the term ‘securities market’ encompasses the market for equity shares, bonds, debentures, gilts and other securities.

The stock market can be split into two main sections: the primary market and the secondary market. The primary market is where new issues are first sold through Initial Public Offerings (IPO). All subsequent trading goes on in the secondary market, where participants buy and sell stocks.

Let’s take an example here. Mahesh applied for the IPO of a company ‘XYZ’ and received allotment of 100 shares. Now, he is wondering whether to sell, hold or buy more shares of the same company. In order to take an appropriate decision, he must have some price information about XYZ’s shares. At this juncture, he is curious to know the current price of the shares of XYZ. Satisfied with the price, he decides to sell the shares. But first, he needs to find a buyer. He also needs to ensure that the transactions are transparent.

Stock markets address issues such as:

1) Providing price information for trading decisions.

2) Acting as a bridge between buyers and sellers.

3) Ensuring marketability and liquidity for the shares.

Put succinctly, it will be difficult to find investors willing to invest or participate in equity shares in the absence of stock markets.

The price of a share at any given stage is dictated by supply and demand within the market, and rises or falls every time a share is bought or sold. This effectively means that shares are priced by the collective will and attitudes of the market, which comprises all the traders and investment houses that actively trade in those securities.

This article was shared by Dalal Street Investment Journal to IFIM B School.

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