The stock market is an organized and regulated marketplace for investors to buy and sell shares of publicly listed companies.
By buying the stocks of a company, an investor gets the status of being the shareholder or in other words, an investor becomes an owner of a fraction of that company.
Stock markets offer various choices to its investors to choose from a list of companies. Stock markets classify the stocks according to market capitalization as being in the small-cap, mid, or large-cap group, which thus helps the investors to make informed choices that aligns with their risk tolerance and financial goals.
Key Stock Exchanges in India
India’s market is primarily undertaken by two main exchanges:
Bombay Stock Exchange (BSE): The BSE is the oldest stock exchange in Asia, established in 1875. It has a long history in India’s financial service sector. Thousands of companies across various industries use it as a marketplace to raise capital and trade.
National Stock Exchange (NSE): The NSE was launched in 1994. It introduced automated trading to India, really creating an efficient and a very modern market. Taking its share, BSE and NSE together command the Indian stock market and account for most of the trading activity.
Both the exchanges are governed by Securities and Exchange Board of India (SEBI), which governs the transparency, fairness, and protection of investors in the equity market. SEBI has regulations for both the primary and secondary markets and ensures integrity and trustworthiness of the Indian financial ecosystem.
Understanding the Primary and Secondary Markets
Primary Market: Companies often use the IPO process to bring new shares to the public for the first time. Money generated via an IPO is generally used to implement strategic ventures, like developing business lines, buying assets or other products.
Secondary Market: The secondary market involves the buying and selling of shares among investors with each other. This is mainly done at prices determined by market demand and supply. Stockbrokers, who are registered with exchanges act as agents during these trades, and therefore, provide a secure and regulated platform for trading.
How the Stock Market Works
Companies raise capital by selling ownership shares to investors on the stock market in the form of stocks or shares.
This way, companies without debt can raise capital by listing their shares on a stock exchange and provide the necessary capital for expansion into the capital supplies. Investors sell their capital to the company in exchange for these shares, meaning they buy a share of the company’s future.
Since companies expand and operate using such capital, the resulting growth can increase the value of the shares of that company, making capital gains to the investors. When an organization starts making profits, they can pay their shareholders a percentage of the earnings in the form of dividends, giving investors a percentage of the corporate income.
Advantages of the Stock Market
Expansion Potential: The long-term capital mainly assists companies by providing the means to pursue growth, exploration, and research, which can lead the company forward.
Liquidity: Investors can easily enter or exit the market by buying or selling shares at a prevailing market price, which fluctuates according to supply and demand.
Regulated Processes: SEBI has very strict disclosure and compliance requirements for the marketplace which brings in complete transparency and security to the investors’ marketplace.
Secure Clearing Mechanism: Stock exchanges ensure a reliable clearing mechanism so that the purchased share is delivered to the investors’ Demat accounts, reducing opportunities for fraud.
Purpose of the Stock Market for Companies and Investors
Listing on the stock market remains a primary source of capital acquisition for companies to finance expansion, asset acquisition, or enhanced operational capacity without incurring debt.
The stock market offers a means of investing into the growth journey of the company for investors. Holding shares gives one an opportunity to grow his wealth with time since the company expands and the value of its stock increases even more.
Moreover, dividends that are given to the investors act as an additional benefit which is generated from the profitability of the company.
Therefore, the stock market turns out to be very important in the process of acquiring wealth and achieving financial growth.