What Is Stock Market And How Does It Work?

Most articles on investment management mention stock markets. Your investment advisor may often recommended you to include stock market investments in your portfolio. Has this ever made you think what a stock market actually is? You can find different interpretations of the term ‘stock markets’ in subsequent paragraphs.

To start with, there is no singular definition of stock markets. But in simple words, a stock market is a place where buyers and sellers meet to trade in stocks. Stocks are nothing but shares of a listed company. As a shareholder, you get the ownership rights in the company you invest in.

All the authorized and regulated stock exchanges are also collectively referred to as stock markets. BSE and NSE are the biggest stock exchanges in India.

Stock market working

Stock markets work on the principles of negotiation and bargaining. Buyers quote the ‘bid’ price - the amount a buyer is willing to pay for company stock. Sellers quote the ‘ask’ price - the price at which the seller is willing to sell a company stock.

The interaction between the bid and ask prices leads to the market valuation of a stock. In other words, stock price discovery is based on the economic theories of demand and supply.

The bid-ask spreads often present traders with opportunities to book profits. Nowadays, advanced technologies have led to the development of algorithms or protocols that will instantly calculate the bid price, ask price, and bid-ask spread for a particular stock. In short, most of the complex price-setting calculations are executed by computer systems. These quotes are updated in real-time too.

Since it is impossible to track every stock listed on an exchange, stock market movements are often monitored using stock market indices. These indices are a basket of select stocks that are considered to be representative of the entire stock market. The commonly used stock market index in India is BSE SENSEX which is a collection of 30 actively traded stocks in the Bombay Stock Exchange and is considered to be a representative of the Indian economy.

Apart from stocks, you can trade in bonds, mutual funds, and derivatives as well in the stock markets. Derivatives are useful for hedging your risks arising out of stock market transactions.

Trading in stock markets

With technological advancements, stock market trading has become very easy. In the past, trades used to happen physically on the exchange floor. But now, you can trade in stock markets online from the comfort of your home. You may choose a broker who provides you a robust online trading platform with in-built technical indicators for monitoring market momentum.

You just need a Demat and a trading account for online stock trading. A Demat account means an account that holds your physical securities in dematerialized or electronic form. In other words, a Demat account means a digital repository of your physical security certificates.

The documents required for Demat account are as follows:-

1) PAN card

2) Identity and address proof (Passport, Aadhar card, driving license, election card, etc.)

3) Bank account details

4) Income proof especially for derivative trading (e.g ITR acknowledgment)

5) Passport size photographs.

These are the basic documents required for Demat account. Additional documents, if any, may be requested by your broker

Many brokers allow you to open Demat and trading accounts online at zero costs. Some brokers offer you subscription plans that significantly lower your brokerage charges. You may also avail of the Margin Trade Financing (MTF) facility from your broker to profit from expensive yet lucrative trades. You may choose a broker who charges nominal interest rates on margin shortfalls.

The Bottom Line

Stock markets are long-term investment avenues that have high wealth generation potential. The risk of losses arising out of market volatility gets evened out in the long-run. Thus, the longer you remain invested in stock markets, the greater will be the growth rate of your money. You can master stock trading with discipline, patience, practice, and the selection of the right broker.