All You Need To Know : How Stock Markets Function?

What Is A Stock Market?

Stock market refers to the collection of markets and exchanges where regular buying, selling and issuance of shares of a publicly listed company take place. These transactions are organized by institutionalized formal exchanges or over-the-counter (OTC) marketplaces that operate under a defined set of regulations. 

There can be multiple stock trading centers in a country or a region that allows stock trading and other securities related transactions. Stock markets and share markets can be used interchangeably. If an individual says that he/she buys and sells in the stock market, then it means that he/she buys and sells shares or equities on a stock exchange like NSE and BSE.

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SEE ALSO:  What Is A Stock Market?

All You Need To Know: How Stock Markets Function?

What Are Stock Exchanges?

Stock exchange is an organized and regulated financial market where securities like bonds, notes and shares are bought and sold at a price governed by the forces of demand and supply (market forces). Stock exchanges serve two purposes:

1) As primary market where corporations, governments, municipalities and other incorporated bodies raise capital by channelizing savings into a productive venture.

2) As secondary market where investors are enabled to sell securities, thus reducing the risk of investment and maintaining liquidity in the system. Stock exchanges impose a very stringent set of rules and regulations, listing requirements and statutory requirements that are binding on all listed trading parties.

Previously, trades were conducted on the floor of the stock exchange by giving verbal orders and instructions and this was called open outcry system. In modern exchanges, trades are conducted over a phone call and online (Electronically enabled transactions). Most exchanges are auction exchanges where buyers and sellers enter competitive bids on a trading day. The first ever stock exchange was opened in Amsterdam way back in 1602. Currently, the three largest stock exchanges are:

i) New York stock exchange, NYSE

ii) London stock exchange, LSE

iii) Tokyo stock exchange, TSE

Indian Stock Market

There are two main stock exchanges in India: Bombay stock exchange BSE and National stock exchange NSE. There are other stock exchanges like Calcutta stock exchange and Magadh stock exchange, but the trade volume in these stock exchanges is extremely low when compared to that of NSE and BSE.

Bombay stock exchange was founded in the year 1875 at Dalal Street, Mumbai (then Bombay). BSE is Asia’s first stock exchange with a market capitalization of more than $4.9 trillion on as of April 2018. BSE was the first stock exchange to be recognized by the Indian Government in 1957. The open outcry system of trading was replaced by electronic trading system in 1995. BSE Sensex is one of widely tracked indices in India. The BSE is a Partner Exchange of the United Nations Sustainable Stock Exchange initiative, since September 2012.

SEE ALSO:  What Is A Stock Exchange?

National stock exchange is the leading stock exchange in India. NSE too is located in Mumbai, the financial capital of India. NSE was founded in 1992 as the first demutualized electronic exchange in India. NSE is the first stock exchange to provide a modern and fully automated screen based electronic trading system and offers easy and hassle free trading facility to investors spread across India. The market capitalization of NSE is $2.27 trillion as on April 2018.

Below is the list of active stock exchanges in India:

• Bombay Stock Exchange (BSE), Mumbai
• National Stock Exchange of India (NSE), Mumbai
• NSE International Exchange, Gandhinagar
• Calcutta Stock Exchange, Kolkata
• Magadh Stock Exchange, Patna
• India International Exchange (INX), GIFT City, Gujarat
• Metropolitan Stock Exchange of India, Mumbai

Below is the list of defunct stock exchanges in India:

• Ahmedabad Stock Exchange (closed in 2018)
• Delhi Stock Exchange (closed in 2017)
• Guwahati/Gauhati Stock Exchange (closed in 2015)
• Jaipur Stock Exchange (closed in 2015)
• Madhya Pradesh Stock Exchange (closed in 2015)
• Madras Stock Exchange (MSE) (closed in 2015)
• OTC Exchange of India (closed in 2015)
• Pune Stock Exchange, was located in Pune (closed in 2015)
• Uttar Pradesh Stock Exchange (closed in 2015)
• Vadodara Stock Exchange (closed in 2015)
• Bangalore Stock Exchange (closed in 2014)
• Cochin Stock Exchange, was located in Kochi (trading stopped in 2005, closed in 2014)
• Inter-connected Stock Exchange of India (closed in 2014)
• Ludhiana Stock Exchange (closed in 2014)
• Bhubaneshwar Stock Exchange (closed in 2005)
• Coimbatore Stock Exchange (requested exiting trading in 2009)
• Hyderabad Stock Exchange (closed in 2007)
• Mangalore Stock Exchange (closed in 2004)
• Trivandrum Stock Exchange

Participants of the Indian stock market:

• Indian retail participants: These are the Indian citizens who buy and sell stocks for individual gains.
• NRI and OCI: These are the Indians that are living and working abroad.
• Indian Institutions: Indian companies like LIC invest heavily in stocks. This includes corporate bodies and banks.
• Indian Asset Management Companies: These companies invest pooled money through mutual funds.
• Foreign Investors: These are the investors that are foreign nationals. Foreign investments can be made by both individuals and corporate bodies.

Indian Stock Market Regulations

The Ministry of Finance MoF, Securities and Exchange Board of India, SEBI and the Reserve Bank of India, RBI are the regulatory authorities governing Indian capital markets. Regulation of the Indian stock market is extremely important as the general public is investing hard earned money and it must ensured that their investment is not lost.

The Ministry of Finance (MoF)

The Department of Economic affairs, under the Ministry of Finance MoF, directly manages the Capital Markets segment as per the directions of MoF. This segment is also responsible for formulating the rules for the efficient growth of the Indian stock market which includes derivatives, equity and debt. It formulates guidelines for safeguarding the interest of investors. The Ministry of Finance MoF regulates the Indian capital market through the following laws:

• Depositories Act, enacted in 1996
• Securities Contract (Regulation) Act, enacted in 1956
• Securities and Exchange Board of India Act, enacted in 1992

RBI

The Reserve Bank of India is also a regulator of the Indian stock market. The functions and responsibilities of RBI in this regard are as mentioned below:

• Implementation of Credit and Monetary policies
• Issuing Currency Notes
• Banker to the Government
• Regulator of the Banking System
• Foreign Exchange through Foreign Exchange Management Act, 1999
• Managing payment and settlement system

Apart from these functions, RBI is also involved in developing financial markets in India.

SEBI

The Securities and Exchange Board of India (SEBI) Act, enacted in 1992, regulates the functions of SEBI. SEBI is the supreme body responsible for governing the Indian stock markets.

The major functions of SEBI are mentioned below:

Protective Functions

• Checking price rigging.
• Prohibiting insider trading.
• Prohibiting fraudulent and unfair trading practices.

Developmental Functions

• SEBI facilitates training of intermediaries involved in the securities market.
• SEBI promotes activities of a stock exchange by adopting a flexible and adaptable approach.

Regulatory Functions

• SEBI has framed rules and regulations and a code of conduct while regulating the intermediaries like merchant bankers, brokers, underwriters and so on.
• Intermediaries have been brought under the purview of regulatory laws and private placement has been made more restrictive.
• SEBI registers and regulates the functioning of stock brokers, sub brokers, share transfer agents, trustees, merchant bankers and all those associated with stock exchanges in any manner.
• SEBI regulates the takeover of a public listed company.
• SEBI audits stock exchanges.

The participation in the stock markets of both domestic and foreign financial intermediaries is governed by guidelines and regulations framed by SEBI. Additionally, foreign portfolio investors FPIs, are allowed to participate in Indian stock markets by registering with an authorized depository participant.

How Do Share Markets Function?

A company goes public when it wants to raise money for expansion and development, by making an initial public offer IPO. A company issues shares to the general public for the first time through an IPO.  

Factor Determining Stock Price

Once the initial public offer is made and the company lists on the stock exchange, the stock price of a company moves independently of the actual success of the company. The stock price of a company goes up or down based on the demand and supply (market forces). Changes in the stock price reflect supply and demand, therefore, when a stock is deemed desirable due to recent success of the company then, its stock price goes up as the demand for the company’s stocks rise.

If the investors are not willing to buy a company’s stocks due to a recent failure in the company, then the stock price goes down. This means there is no demand for the company’s stocks. The stock price will move up once the company starts performing well. This cycle goes on.

In India, to trade in stock markets, you must have a stockbroker. All trade transactions are made only through these stockbrokers. RBI has authorized stockbrokers through which you can participate in Indian stock market.

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