The share market, also commonly referred to as the stock market, is a complex platform that facilitates the buying and selling of shares issued by companies. It is instrumental in guiding economic growth and provides individuals with an avenue to invest money with an expectation of returns. Understanding the basic framework of the share market is crucial for anyone interested in investing.
What Is the Share Market?
What Is the Share Market?” pertains to two primary concepts—equity markets and stock exchanges. Equity markets are venues where shares of companies are issued and traded. These shares represent ownership in companies and confer certain rights to shareholders, such as voting rights and dividends. Stock exchanges, on the other hand, are institutions that provide the infrastructure necessary for these transactions. Popular stock exchanges in India include the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Primary vs. Secondary Market
The share market is divided into primary and secondary markets. In the primary market, companies issue new shares through Initial Public Offerings (IPOs) to raise capital. Here, shares are sold directly to investors at a predefined issuance price. For example, if Company X issues an IPO at ₹150 per share and raises ₹50 crore, this constitutes its primary market activity.
In the secondary market, previously issued shares are bought and sold among investors. The prices in this market fluctuate based on supply and demand dynamics. If a share price of Company X in the secondary market rises to ₹200, it reflects investor sentiment, company performance, and broader economic conditions.
How Does the Share Market Work?
The share market operates through a network of exchanges where shares are listed for trading. Here’s how the process typically unfolds:
- Participants:
– Investors: Individuals or institutions seeking to buy shares.
– Brokers: Licensed intermediaries who execute buy and sell orders on behalf of investors.
– Regulators: Entities like the Securities and Exchange Board of India (SEBI) that ensure fair practice.
- Trading:
– Order Placement: Investors place orders through brokers—“market order” for execution at current prices or “limit order” for specific price targets.
– Order Matching: Exchanges use electronic systems to match buy and sell orders, facilitating transactions often in fractions of a second.
- Price Determination:
– Share prices are determined by the equilibrium between supply and demand.
Traders buy (demand) and sell (supply) based on their valuation of the stock, which is affected by multiple factors like news, earnings reports, and global market trends.
- Settlement:
– The final stage involves the actual transfer of securities and money. In the Indian context, this occurs in a T+1 or T+2 cycle—an acronym that refers to “transaction day plus one or two days.” When a trade happens on Monday (T), the settlement is completed by Tuesday or Wednesday.
What Is Settlement in the Stock Market?
Settlement in the stock market refers to the process of transferring the ownership of shares from the seller to the buyer and the corresponding transfer of money from the buyer to the seller. This process ensures that the buyer receives valid securities while the seller receives their due payment.
Settlement Cycle:
– T+1 Settlement: Introduced as part of reforms for faster settlements, implying that the transactions are settled on the next business day after the trade date.
– T+2 Settlement: A more traditional settlement cycle where transactions are completed two business days post the trade.
Calculations in INR
Consider a scenario where an investor purchases 100 shares of Company Y priced at ₹50 each in a T+1 settlement system. By end-of-day Monday, the transaction triggers:
– Cost of Shares: 100 shares × ₹50 = ₹5,000
– Brokerage Fees (assuming 0.5%): ₹5,000 × 0.5% = ₹25
– Total Cost: ₹5,000 + ₹25 = ₹5,025
– Settlement concludes on: Tuesday, where ₹5,025 is debited, and securities reflect in the buyer’s demat account.
Demat Accounts and Trading
To actively participate in the share market, having a Demat account is mandatory. Demat accounts hold securities in electronic form, facilitating easy transfer and reducing risks of physical certificates. Investors link their Demat accounts with trading accounts to conduct seamless and systematic transactions.
Factors Influencing the Share Market
Multiple factors affect share prices, including:
– Company Performance: Earnings reports, management changes, and business expansions can alter investor perceptions and affect prices.
– Economic Indicators: Inflation rates, interest rates, and GDP growth heavily influence investor confidence and market behavior.
– Global Event: Geopolitical tensions, natural calamities, and pandemic situations can lead to volatility and abrupt market shifts.
Risks and Benefits
Investing in the share market provides opportunities for wealth accumulation through capital appreciation and dividends. However, it accompanies risks such as market volatility, potential losses, and subjectivity in price movements. The key is understanding these dynamics and conducting due diligence before committing funds.
Conclusion
Understanding what the share market is and how it operates forms the backbone of making informed investment decisions. Whether it’s using the Bajaj Finserv app to interpret market data, comprehending the importance of settlement cycles, or monitoring key economic indicators, investors must navigate this intricate framework with a strategic mindset.
Disclaimer
Engaging in the Indian stock market involves substantial risks, including the potential for losing most or all invested capital. Prospective investors should carefully evaluate all risks and consider seeking advice from financial experts. Past performance does not guarantee future results, and market conditions can change rapidly, affecting individual investment outcomes. This article is for educational purposes and should not be considered as investment advice.
