What is the Stock Market and How Does It Work?

Stock market or share market is a capital market where issuing, selling & buying of shares or stocks happen for the shares of companies that are publicly listed at various stock exchanges.

What is the Stock Market?

To understand the meaning of the stock market, it’s important to understand what the stock exchange is. A stock exchange is an entity that facilitates trading of stocks and other securities. A stock is open for sale & purchase only after it is listed on the exchange. India's major stock exchanges are: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

First, the company shares its offer for sale to raise capital in the form of an IPO in the primary market, and then in the secondary market, buyers and sellers make subsequent trades/transactions of these stocks.

By buying a share, a shareholder gets equity ownership of the company, equal to the value of the shares s/he owns in the demat form. Apart from shares, other securities such as bonds, derivatives, and forex are also transacted in the stock market at different exchanges. The Security and Exchange Board of India (SEBI) is the regulatory body and looks after protecting the interests of the investors.

The markets work on fixed timings and the share price fluctuations as per several factors like company’s financial outlook, inflation, economic outlook etc. Thus an investor’s ability to understand market fluctuations is the key to trade in the share market. Thousands of companies are listed in India. To make the best stock picks, one should understand share markets basics and check share market live updates diligently.

Types of Share Market

After knowing about stock market investment, you must also understand that there are several types of share markets that function in India.

Equity Market

Equity Market is the most popular type of share market. Here, companies issue stocks to raise capital and investors buy and sell these stocks to earn profits.

Debt Market

Debt market is the bond market. Here bonds are issued by Corporates and governments to raise funds from the public. Investors buy these bonds and earn interest on them until they mature.

Commodity Market

As the name suggests, the commodity market deals with commodities such as gold, silver, crude oil, agricultural products, and more. Investors trade in commodity future contracts, where they agree to buy or sell a specific commodity at a future date and price.

Currency Market

Derivatives are financial instruments that derive value from underlying assets like stocks, bonds, currencies, or commodities. Traders use options, futures, swaps, and forwards for betting on the future value of the underlying asset.

Initial Public Offering (IPO) Market

Here companies issuing new stocks to the public for the first time. It is in a way part of the equity market.

Penny Stock Market

Next is, penny stocks markets i.e. markets for stocks that are low-priced, primarily from small companies and with Market Price Value below Rs 10. These are high-risk investments.

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Over-The-Counter (OTC) Market

Over-The-Counter stocks are traded through a network of dealers and brokers, and they are typically riskier investments. These are stocks that are not listed in major exchanges.

Over-The-Counter Exchange of India (OTCEI) is an Indian electronic stock exchange comprising small- and mid-cap companies.

Types of Share Market

The stock markets are also called as equity markets/ capital markets and act as a critical component of an economy. It facilitates the flow of capital from investors to businesses seeking funding. This capital infusion allows companies to expand operations, invest in research and development, fostering innovation, economic growth, and job creation. At the same time, markets also provide the investors (individuals and institutions) with the opportunity to earn returns on investments through dividends and capital appreciation.

What is "Trade" in the Share Market?

In the share market, "trading" is buying and selling of financial instruments such as stocks, bonds, currencies, commodities and derivatives for making profits. It can be done by individuals, institutions, or even algorithmic computer programs. However, we will focus on trading by individuals. Unlike investors, traders are more interested in earning profits by taking advantage of rising and falling markets to enter and exit positions over a shorter time frame. They focus on taking smaller and frequent risks and tapping the profits. Let’s further understand share market & know about share trading, below:

1. There are different types of trading such as day trading, swing trading, and position trading, each with its own time frame and level of risk. You can also understand these as different strategies of traders. There is no best stock trading advice. The strategy depends on the trader's profile & goals.
2. Traders make use of various techniques, strategies & market research such as technical analysis, fundamental analysis, and quantitative analysis for making informed decisions about when to buy and sell assets.
3. Not all trading is short term; it can also be done on various time frames i.e. from short-term intraday trades to long-term position trading.
4. Just like investors, traders also trade on various platforms such as stock exchanges, over-the-counter markets, and online trading platforms.
5. It is very important to note that trading carries calculated risks, and it is crucial for traders to have a solid understanding of the markets and to use proper risk management techniques. Only after due diligence can you successfully zero in on what the stocks to buy today.

How Does the Stock Market Work?

Stock markets function through different stock exchanges where investors can buy & sell assets and securities in the demat format such as stocks/shares, bonds, commodities & contracts. Investors can directly buy or sell these securities or route through broking houses or brokers as they are the intermediaries between the company and investors. Each market has its fixed closing & opening time and price of securities change according to external factors that result in highs or lows of markets.

For instance, when a company wants to raise capital, it issues stocks to the public through an IPO. An IPO is the first time purchase of a share of the company. The price of the stock is determined through supply and demand, and the value of the stock can increase or decrease based on its demand & various factors such as economic conditions, company performance, and global events.

Investors can buy and sell stocks through a broker or an online trading platform. As they have professionals who analyze live share market and share recommendations, sectoral preferences & stocks to buy today, this week, month & so on.

Just like when an investor buys a stock, s/he becomes a shareholder in the company and is entitled to a portion of the company's profits. Conversely, if the company does not perform well, the value of the stock can decrease, potentially resulting in a loss for the investor.

How to Invest in Stock Market

To invest in the stock market you must understand the stock market investment basics and techniques of market research.

1. The first step is to learn about how the share market works and the associated risks of participating in capital markets.
2. Do research about companies and stocks you want to invest in.
3. Determine your investment goals and risk tolerance.
4. Open demat accounts with the help of a SEBI registered broker. Make sure the accounts are linked to your active bank account. This will help you make instant transactions.
5. You would require PAN, Aadhar, canceled cheque (with your name & bank details visible), proof of income & address proof to open a Demat/Trading account.
6. Once you have successfully opened your Demat & Trading accounts you can navigate through the mobile app of brokers. Login to the trading platform & buy shares of your choice. Here you can also access resources such as historical as well as latest technical charts, stocks performances, stock market live updates, and research recommendations. You can also monitor your investments regularly and add or exit according to your portfolio performance & market conditions.

In all, Investing in the share market for beginners is much more systematic and convenient these days. All you require is to spend some time understanding the share market dynamics.

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Stock Market Trading Time in India

The stock market trading hours in India are determined by the Securities and Exchange Board of India (SEBI). The market operating hours are uniform across all stock exchanges in the country, which includes BSE and NSE.

The NSE/BSE trading hours are as follows:

Pre-opening Session

Pre opening session starts at 9:00 am and ends at 9:15 am. In these 15 minutes, orders can be placed, modified, or canceled, but no trades take place.

Regular Trading Session

This session starts at 9:15 am and ends at 3:30 am. These are regular market hours and orders placed during the pre-opening session are executed and trades take place.

Closing Session

This session starts at 3:30 pm and ends at 3:40 pm. During this time, the closing price of all securities is determined, and the final settlement price is arrived at. Also, note that the stock market remains closed on public holidays and weekend, i.e. Saturdays and Sundays. Further, there are some exceptions such as special trading hours on certain days, such as during the festive season eg. Muhurat Trading during Diwali, and during some unexpected market volatility. SEBI reserves the right to announce these special occasions as required..

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Bull and Bear Markets

Bull and bear markets are two very popular terms used across the globe to describe the overall sentiment of the stock markets. The bull market refers to the market that is experiencing a period of growth and rising prices, while the bear market is a period of decline and falling share prices.

A bull market has high investor confidence, increasing stock prices, and strong economic growth. During a bull market, investors are generally optimistic and are more likely to buy stocks, which lead to further price increases. In a bull market, there is usually a high demand for stocks, and this demand drives prices higher.

On the other hand, a bear market has low investor confidence, falling stock prices, and weak economic growth. During a bear market, investors are generally pessimistic and are more likely to sell stocks, which lead to further price declines. In a bear market, there is usually a low demand for stocks, and this lack of demand causes prices to fall.

The distinction between bull and bear markets is important for investors, as it can help them make informed decisions about when to buy or sell stocks. Investors may choose to invest in a bull market to take advantage of rising prices, or they may choose to wait for a bear market to buy stocks at a lower price.

It is worth noting that the distinction between bull and bear markets is not always clear-cut, and there may be periods of volatility or uncertainty that make it difficult to determine the overall trend of the market.

What Time Do Stock Markets Open?

Bombay Stock Exchange (BSE): 9:15 AM Indian Standard Time (IST) - Monday to Friday The National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE), which are the two major stock exchanges in India, are open from Monday to Friday. The regular trading hours for both exchanges are from 9:15 am to 3:30 pm Indian Standard Time (IST).

However, both the exchanges have pre-opening sessions that start before regular trading hours. The pre-opening session is from 9:00 am to 9:15 am IST.

It is important to note that sensex trading time in India may be subject to change due to unforeseen circumstances or market conditions, and that investors should always check the current NSE & BSE trading hours to ensure they are up-to-date. Additionally, both exchanges have extended trading hours for trading in specific segments, such as currency futures and options, which are open till 5:00 pm IST.

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Why Invest in the Stock Market?

Investing in share markets help you build a corpus from your savings, along with protection from inflation and taxes. There is a substantial potential for high returns over the long term from share market investments. You should invest in stock market:

• You get the opportunity to participate in the growth of successful companies. Being an equity holder of a company you get ownership in a company with voting rights and the potential for dividends.
• You have enough avenues to diversify and reduce portfolio risk.
• Returns from the share market act as inflation hedge to maintain purchasing power.
• You can get access to professional management through mutual funds and ETFs/
• There is ample liquidity to easily buy and sell securities.
• It is easy to participate in the stock market these days. You can gain easy access to investment opportunities through online brokerages and investment apps.

What Are the Risks of Online Share Market Trading?

Online share market trading is certainly convenient and cost-effective. However, there are several risks that investors should be aware of, such as:

Market Risk

The value of stocks fluctuate based on market conditions. It is thus important for investors to be aware about market risks. They may experience losses if the market declines.

Technology Risk

When you use technology, technical issues can always crop. You are exposed to technological risk in cases of system outages or slow response times, which is beyond the control, as it can impact your ability to buy or sell securities.

Cybersecurity Risk

Online vulnerability to cyber attacks is well known. You should thus keep your customer ID & password secure and ensure that you do not share these details with anyone. Compromising your user credentials can compromise security of personal and financial information.

Fraud Risk

Always be aware of investment scams & stay away from Ponzi schemes. It can result in the loss of your hard earned money.

Operational Risk

Online trading platforms may experience operational issues, such as errors in trade execution or settlement, which can impact overall portfolio.

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Lack of Knowledge Risk

Online share market trading requires knowledge about investment, stocks, and trading strategies. Lack of knowledge can lead to poor investment decisions, resulting in financial losses.