What is Stock Market? Meaning, Types, and How It Works

Stock Market: Have you ever wondered how companies raise money and how investors grow their wealth? The stock market is a platform where investors buy and sell shares, representing ownership in companies. It helps businesses raise capital while giving investors opportunities to earn returns.  

Understanding the stock market meaning is crucial for making informed investment decisions. It consists of stock exchanges like the New York Stock Exchange (NYSE) and Bombay Stock Exchange (BSE), where shares are traded. 

Knowing what is share market and how it works allows investors to participate wisely. In this guide, we’ll cover all about the stock market, including stock market definition, types, and key terms.

What are Stocks?  

Stocks are shares of a company that investors can buy to own a part of the business. When you invest in stocks, you become a shareholder, meaning you share in the company’s profits and losses.  

There are two main types: common stocks, which give voting rights and potential dividends, and preferred stocks, which offer fixed dividends but no voting rights. 

For example, buying Tesla or Apple stocks means owning a small part of these companies. Stocks are traded on stock exchanges like the New York Stock Exchange (NYSE) and Bombay Stock Exchange (BSE), where prices change based on demand, company performance, and market trends.

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What is the Stock Market?  

The stock market is a marketplace where people trade company shares, buying and selling them based on market demand. It helps businesses raise money for growth while giving investors opportunities to earn profits.  

When a company needs funds, it issues stocks in the stock market, allowing people to become part-owners. Investors make money either by selling shares at a higher price or earning dividends. 

For example, if you buy a share at ₹100 and sell it at ₹150, you earn a ₹50 profit. Major exchanges like NSE and BSE in India facilitate these trades, ensuring smooth transactions and market regulation.

How the Stock Market Works?

The stock market is a platform where investors buy and sell company shares. It helps businesses raise capital and provides investors with opportunities to grow their wealth. Here’s how it works:  

Step 1: Companies List Their Shares (Primary Market)  

When a company needs money to grow, it sells shares to the public through an Initial Public Offering (IPO). Investors buy these shares, making them part-owners of the company.  

Step 2: Buying and Selling Shares in the Secondary Market  

After the IPO, shares are traded on stock exchanges like the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Investors trade stocks intending to earn a profit.  

Step 3: How Stock Prices are Determined  

The price of a stock changes based on demand and supply:  

• When demand for a stock increases, its price rises.

• Conversely, when more people wish to sell a stock, its price decreases.

Step 4: Trading Process in the Stock Market

Investors place buy or sell orders through brokers. When a buyer and seller agree on a price, the trade happens.  

Steps in Trading:  

1. Placing an order – You decide to buy/sell a stock through a broker.

2. Matching orders – The stock exchange finds a seller if you are buying, or a buyer if you are selling.

3. Executing the trade – The transaction is completed, and ownership of shares is transferred.  

Step 5: Settlement and Ownership Transfer  

Once a trade is completed, the stock exchange settles it within T+2 days (two working days after the trade). The shares then reflect in your Demat account, proving your ownership.  

Step 6: Role of Stock Market Indices  

Stock indices like Sensex (BSE) and Nifty 50 (NSE) track the performance of top companies. If the index goes up, it means the overall market is doing well; if it falls, the market is declining.  

This is how the stock market functions, enabling companies to grow and investors to generate wealth.

Types of Stock Market 

The stock market is divided into two main categories: the Primary Market and the Secondary Market. These markets serve different purposes, allowing companies to raise funds and investors to trade shares.  

1. Primary Market 

The primary market is where companies raise money by selling their shares to the public for the first time. This is usually done through an Initial Public Offering (IPO) or a Follow-On Public Offering (FPO) if the company wants to raise more funds later.  

How It Works:  

• A company decides to go public and registers its shares for sale.  

• Investors purchase shares straight from the company.  

• The funds raised help the company grow, expand operations, or invest in new projects.  

Example: Imagine a startup wants to expand and needs ₹100 crore. It decided to sell 10 lakh shares at ₹1,000 each through an IPO. Buying these shares makes investors partial owners of the company.  

2. Secondary Market  

The secondary market is where investors buy and sell shares that were already issued in the primary market. Instead of buying from the company, investors trade stocks with each other through stock exchanges like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).  

How It Works:  

• If an investor wants to sell their shares, they list them for sale on the exchange.  

• Another investor buys those shares at the agreed price.  

• The company does not receive any money in this process; it is a trade between investors.  

Example: If you buy 50 shares of a company in an IPO and later decide to sell them at a higher price, you do so in the secondary market. The stock exchange helps match buyers and sellers for smooth transactions.  

The primary market helps companies raise money, while the secondary market provides liquidity, allowing investors to buy and sell stocks freely.

Understanding Stock Exchange in the Stock Market

A stock exchange is a regulated platform where stocks and other securities are bought and sold. It ensures transparency, provides liquidity and facilitates smooth transactions in the stock market. Some of the main roles of a stock exchange include:

Trading Platform: Provides a structured marketplace where stocks and other securities are traded.

• Price Transparency: Displays real-time stock prices, helping investors make informed decisions.

• Liquidity: Allows investors to buy and sell stocks easily, ensuring smooth transactions.

• Regulated Environment: Ensures fair trading practices under regulatory oversight.  

Major Stock Exchanges in India 

India has two primary stock exchanges where most trading happens:  

1. National Stock Exchange (NSE) 

Founded in 1992, the National Stock Exchange (NSE) is the largest stock exchange in India. It facilitates trading in stocks, indices, mutual funds, IPOs, ETFs, and derivatives. Transactions occur electronically through a limit order matching system, ensuring transparency and anonymity.  

2. Bombay Stock Exchange (BSE)

The Bombay Stock Exchange (BSE), founded in 1875, is the oldest stock exchange in Asia. Initially operating through floor trading, it has now transitioned to an electronic trading system. With thousands of listed companies, it ranks among the largest stock exchanges globally.

Most companies in India choose to list on either NSE, BSE, or both, allowing broader access to investors.  

Regulators and Intermediaries in the Stock Market

Regulators and intermediaries ensure smooth functioning and investor protection in the stock market.

• Securities and Exchange Board of India (SEBI): The Securities and Exchange Board of India (SEBI) regulates the Indian stock market, ensuring fair trading, preventing fraud, and overseeing financial intermediaries to protect investors.

• Clearing Corporations: Clearing corporations, such as the National Securities Clearing Corporation Ltd (NSCCL) and Indian Clearing Corporation Ltd (ICCL), facilitate trade settlements and prevent defaults by buyers or sellers.  

Role of Depositories in the Stock Market

A depository is a financial institution that helps in the electronic transfer of securities. Earlier, stock transactions involved physical share certificates, but now they are stored digitally in Demat accounts.  

India has two main depositories:  

1. National Securities Depository Limited (NSDL)

2. Central Depository Services (India) Limited (CDSL)  

These depositories work through depository participants (banks and financial institutions) to manage investors' Demat accounts.  

A stock exchange plays a vital role in the stock market, making stock trading transparent, efficient, and accessible for both companies and investors.

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Essential Terms to Know About Stock Market  

Understanding basic stock market terms is crucial for investors. Here are some key terms that help in making informed decisions:  

 Shares: Shares represent ownership in a company. Investors who buy shares become partial owners and can gain profits or face losses based on market performance.

• Stock Index: A stock index tracks the performance of a group of stocks. Examples include Sensex (BSE’s top 30 companies) and Nifty50 (NSE’s top 50 companies).

• Stock Market Broker: A broker is an intermediary who helps investors buy and sell stocks in exchange for a commission. 

• Demat Account: A digital account where investors hold shares and securities in electronic form, eliminating physical share certificates.

• Trading: The process of buying and selling shares through a stock exchange using a trading account.

• Initial Public Offering (IPO): When a company sells its shares to the public for the first time to raise funds, it is called an initial public offering (IPO).

• Portfolio: A collection of investments, including stocks, bonds, mutual funds, and other assets owned by an investor.

• Market Capitalisation: The total value of a company’s shares, calculated by multiplying the share price by the number of outstanding shares.

• Bull Market: A market condition where stock prices are rising, and investor confidence is high.

• Bear Market: A period when stock prices are falling, often due to economic downturns.

• Volatility: The degree of price fluctuations in the stock market. Higher volatility means higher risk and potential for larger gains or losses.

• Moving Average: A stock indicator that smoothens price trends over a specific period, helping investors analyse market direction.

• Bid Price: The maximum amount a buyer is ready to pay for a stock.  

• Ask Price: The minimum price a seller agrees to accept for a stock.  

• Market Order: An order to buy or sell a stock instantly at the available market price.  

• Limit Order: A request to trade a stock at a set price or a more favourable one.

• Dividend: A company’s profits are distributed to shareholders, either in cash or additional shares.

• Dividend Yield: The ratio of a company’s annual dividend to its stock price, indicating the return on investment from dividends.

• Earnings Per Share (EPS): A company’s net profit divided by its total shares, showing profitability per share.

• Call Option: Gives the right to buy a stock at a set price in the future.

• Put Option: Gives the right to sell a stock at a set price in the future.

• Derivatives: Financial contracts whose value depends on an underlying asset, such as stocks, bonds, or commodities.

• Bonds: Debt instruments issued by companies or governments to raise funds. Investors earn regular interest and get the principal amount back upon maturity.

• Mutual Funds: Investment funds that pool money from investors to buy a diversified portfolio of stocks, bonds, or other securities.

• Real Estate Investment Trusts (REITs): Companies that own or finance real estate properties and distribute profits to investors in the form of dividends.

• Over-the-Counter Market (OTC) Trading: Trading stocks outside the stock exchange, often for smaller companies that don’t meet listing criteria. OTC markets facilitate direct transactions between buyers and sellers without a centralized exchange.  

These terms provide a strong foundation for understanding the stock market and making informed investment decisions.

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Why the Stock Market Matters?

The stock market has a crucial role in the economy and provides various benefits to investors. It helps businesses raise funds for growth while offering individuals opportunities to build wealth. Here’s why the stock market is important:  

1. Supports Economic Growth: Companies raise capital by selling shares, which allows them to expand, invest in new projects, and create jobs. A well-functioning stock market contributes to overall economic stability and progress.  

2. Encourages Corporate Transparency: Publicly traded companies must follow strict reporting rules, making financial information more accessible. This transparency helps investors make informed decisions and strengthens trust in the market.  

3. Provides Investment Opportunities: The stock market allows individuals to invest in businesses and earn returns over time. Historically, it has offered growth potential that outpaces inflation, making it a valuable tool for long-term wealth building and retirement planning.  

4. Acts as an Economic Indicator: Stock market performance often reflects the overall health of the economy. Rising stock prices generally indicate business growth and investor confidence, while declining prices may signal economic challenges.  

5. Ensures Liquidity: Investors can quickly buy or sell stocks whenever needed, making it easier to access cash or adjust investment strategies without major delays.  

6. Helps in Efficient Capital Allocation: The stock market directs funds toward businesses that show strong potential, helping productive companies grow while reducing investment in struggling ones. This ensures better resource distribution across industries.  

Therefore, the stock market is a vital part of the economy, offering investment opportunities and driving business growth. It also creates career paths in trading, research, and financial advising, making it a strong field for professional growth. Understanding the market can help individuals build wealth and explore rewarding career options.

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Disclaimer: This content is for informational purposes only. PW (PhysicsWallah) does not guarantee success in the stock market. Investments involve risks, and outcomes depend on individual knowledge, skills, and market conditions.