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What is a Stock Market?
Definition of Stock Market:
As the name suggests, a stock market is a marketplace where buyers and sellers meet to trade i.e. buy and sell shares of publicly listed companies. A stock market is fondly known as a share market, equity market or share bazaar.
In simple terms, if Ram wants to sell 10 shares of Reliance Industries at Rs 1990/ share, he will place a sell order on the stock exchange. The stock exchange will then find a buyer who wants to buy 10 shares of Reliance Industries at Rs 1990/ share. So, the stock market is a virtual market where the buyers and sellers meet to trade shares.
The two types of stock markets are:
Primary markets
Secondary markets
The primary market is a marketplace where companies raise capital for the very first time. The process of issuing shares to the general public for the first time is known as an Initial Public Offering or IPO.
Once the shares are issued in the primary market, they are traded i.e. bought and sold in the secondary market via a stock exchange.
Stock exchanges are further divided as:
National stock exchanges
Regional stock exchanges.
The Bombay Stock Exchange and National Stock Exchange are the only two national stock exchanges in India, with the BSE being the oldest stock exchange in Asia. The BSE is also the 10th largest stock exchange in the world with a market capitalisation of 2.1 Trillion Dollars.
The movement of the market is mapped using the 2 primary indices, SENSEX and NIFTY. Sensex is the index used by the BSE to gauge the movement of the 30 biggest Indian companies whereas NIFTY is the index used by the NSE to measure the movement of the 50 largest companies in India.
What is the Purpose of a Stock Market?
The main purpose of a stock market is to facilitate the movement of funds (capital) from the savers (investors) to the borrowers (companies).
When companies require capital for growth and expansion, it can either raise this capital by taking debt from investors (debentures) and banks (bank loans) or it can issue equity shares to shareholders.
Companies issue equity shares to the shareholders via the stock market. So, the primary purpose of a stock market is to help companies raise capital for growth and expansion. The secondary purpose of a stock market is to help individual investors (savers) participate in the growth and profits of borrowing companies.
Before we answer how a stock market works, it is important to understand the key participants of the stock market.
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