What is a Stock Market? Definition and Types of Stock Market

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

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 a 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 the borrowing companies. Before we answer how a stock market works, it is important to understand the key participants of the stock markets.

The investors/traders : These are individuals who buy and sell shares of publicly listed companies.
Stock brokers : Stock brokers like Samco, act as an intermediary and all trades are entered onto the stock markets through a trading platform provided by the stock brokers.
Stock Exchanges : Stock exchanges like BSE and NSE are where trades are placed and order matching happens.
SEBI: The Securities and Exchange Board of India, is the market regulator and is in charge of monitoring the stockbrokers and stock exchanges to protect the interest of investors.

How Does a Stock Market Work?

Let us understand how a stock market works through the below flow chart.

While the working of a stock market might seem lengthy and complicated, in reality order matching takes place in microseconds. The BSE, with a response time of 6 microseconds, is the fastest stock exchange in the world! In India, a Demat and trading account is compulsory to trade in the stock markets. Stock brokers like Samco provide the required trading platform through which you can participate in the stock markets. So, open a Demat account with Samco today and get access to a unique 3-in-1 Demat, Trading and Mutual Fund investing account. Get started on a journey to create infinite wealth with Samco today! Also, don’t forget to read our article on the ‘Best Long Term Stocks to Buy now in India’.