Stock Market

A stock market is a place where shares of public listed companies are traded.

A stock exchange facilitates individuals as well as institutions to buy and sell company stocks and other securities. A company share maybe bought or sold if its listed on a stock exchange.

The two main stock exchanges in India are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). NSE was established in 1992, BSE was founded in1875 and that makes BSE the oldest stock exchange in South Asia. The market capitalization of NSE is over $1.6 trillion and that of BSE is $ 1.7 trillion. 1700 + companies are listed on NSE and 5,500+ companies are listed on the BSE. BSE ranks 10th & NSE ranks 12th for the largest stock exchanges in the world. BSE is the fastest stock exchange in Asia with a speed of 200 microseconds.

Securities Exchange Board of India (SEBI) established on April 12, 1992 under SEBI Act 1992 is the regulatory authority for Stock Exchanges In India(similar to RBI as the regulatory authority for Banks in India).SEBI in January 2000 approved online trading and today its possible for us to buy and sell company shares sitting at the comfort of your home or through a mobile app installed in you mobile phone.

A share is a unit of ownership in a company. A share is bought with the intend of making a gain either by capital appreciation (increase in price of the share) or through dividends declared by the company.
Let me explain in simple terms what a share and share market is, through an example;

Mr. Khader opens a garment shop named ‘Good Look Textiles’ in a small town. Mr. Khader invested Rs.100,000 to setup the shop.

Over 5 years ‘Good Look Textiles’ did extremely well and has 5 branches opened in nearby places. Now Mr. Khader wants to expand the’ Good Look Textiles’ into even bigger company.

Mr. Khader now goes to a place called stock market and submits application for listing ‘Good Look Textiles’. Now the stock market studies the application for ‘Good Look textiles’ and agrees to list the company for trading in the stock exchange. So now our ‘Good Look Textile’ is going to be selling its share first time to public, this is called Initial Public Offer (IPO) and the IPO always happens in a market called Primary Market.

Now ‘Good Look Textiles’ is going to sell 50,000 shares of Rs.1000 as Initial Public Offer to the general public and all shares got sold as people think ‘Good Look Textile’ is a good company share, to buy. Now the role of primary market ends here.

Here on the 50,000 shares of our ‘Good Look Textile’ will be traded in open market daily, in the stock exchange and this is called the secondary market. Now people can buy and sell the shares of ‘Good Look Textile’ in the share market and price may go up or down from the initial price of Rs.1000/-

Now how does the price of ‘Good Look Textile’ go up or down? Assume ‘Good Look Textile’ buys a Shirt knitting unit which can produce better quality shirt. Now the news spreads in the market and people expect ‘Good Look Textile’ to make more profit in the coming years and are ready to buy the share at Rs.1500/- each. Now the price of ‘Good Look Textile’ shares goes up. Likewise, a loss making event or news can bring down the share price of the company.

This is just for understanding the mechanism of how a stock markets functions in a simple way. In reality there are lot of intricacies, legal frame work and mechanism through which a stock market operates.

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