The share market or stock market basics start with its regulatory authority Securities and Exchange Board of India (SEBI).
SEBI – Its role
- The Securities Exchange Board of India (SEBI) is the regulatory authority in India to protect the interests of the investors and to regulate the stock market.
- SEBI’s primary focus is on risk management by addressing the market risks, operational risks, systemic risks in the market and enforcing the measures and reforms. SEBI has been continuously drafting risk management policies to enhance the investor’s protection.
- Recently SEBI has banned 85 entities due to violation of trading provisions in the market.
What are stock exchanges?
- A stock exchange is an online platform, introduced with the demat and trading account, used to perform trading activities in the stock market. You can buy and sell stocks and other securities on the stock exchange. Major stock exchanges in India are the Bombay Stock Exchange and the National Stock Exchange.
- Before the inception of these online stock exchanges and online trading accounts, investors had to go to stockbrokers to execute a trade in the stock market.
- For every trade in the stock market, stock exchanges are the counterparty party as they are the surveillance system over trades executed in the market and manage risk. Sock exchanges, through clearing corporations, guarantee the trades. Thus, when you deal in stock markets, it’s completely safe.
Accounts Required for stock trading
The online trading system involves trade execution through a demat account and trading account. An investor can not approach stockmen changes directly. They require a broker’s trading services.
Demat account meaning
- Demat account refers to an online repository provided by a stock broker or depository participant registered with SEBI and central depositories. Investors require an online demat account to store your shares as well as other securities, like Debentures, Government securities, currencies, bonds, mutual funds electronically.
Trading account meaning
- A trading account facilitates investors with an online trading platform to place trade orders online without visiting a stock broker or stock exchange. It is a single destination to access multiple stock exchanges.
Types of share markets
- Primary market
The primary market is also known as the IPO market. It is the market where privately held companies offer their shares to go public for subscription and raise capital. Through IPO, the companies get listed in the stock market. IPOs can be fresh issues of shares or an offer-for-sale where existing shareholders of the company sell their stakes in the company.
- Secondary market
The secondary market is the market to trade shares of listed companies. After the IPO process, these shares are available to trade on the stock exchanges in the secondary market after a period of 10 days.
- For investors, the secondary market is an efficient trading platform.
- For companies, the secondary market is a monitoring channel.
Why do investors prefer share investments?
Stock markets have the potential to provide significantly higher returns in the following way:
- Growth Returns: You can invest in shares to take advantage of their appreciated value in the long run. Let’s say you have invested Rs.50,000 in the year 2000 that has become worth Rs.5 lakhs today with the growth of the company you have invested in. Such significant returns are the result of your informed decisions and the company’s efficient management.
- Dividend Income: You can invest in share markets to earn regular dividends. Dividend distribution is solely the decision of the company. It is the net profit of the company distributed among shareholders in proportion to shares they hold in the company.
How does the stock market work?
- Stock markets bring buyers and sellers together through stockbrokers.
- Stockbrokers are SEBI-registered intermediaries and registered members of a recognized stock exchange for providing the screen-based trading system.
- Stock brokers are the medium that links you with the stock market.
- Whenever a buyer or a seller places their trade orders on the stock exchange, stockbrokers forward these trades to the stock exchange to execute the order.
- Stock markets have their own clearing corporations that handle the trading transactions to ensure quick credits, debits, delivery.
- Buyers look for the execution at the lowest available price, and sellers look for the highest available price of a security.
This is the working system of the stock market. You can easily open your online demat account and trading account online to connect with the stock exchanges through brokers.