The share market is a platform where buyers and sellers come together to trade on publicly listed shares during specific hours of the day. People often use the terms ‘share market’ and ‘stock market’ interchangeably. However, the key difference between the two lies in the fact that while the former is used to trade only shares, the latter allows you to trade various financial securities such as bonds, derivatives, forex etc.

The principal stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Stock markets are venues where buyers and sellers meet to exchange equity shares of public corporations. Stock markets are vital components of a free-market economy because they enable democratized access to trading and exchange of capital for investors of all kinds. They perform several functions in markets, including efficient price discovery and efficient dealing.

The U.S. stock market is regulated by the Securities and Exchange Commission (SEC) and local regulatory bodies.

Types Of Share Markets

Share markets is classified into two parts: Primary markets and Secondary markets.

1. Primary Share Markets

When a company registers itself for the first time at the stock exchange to raise funds through shares, it enters the primary market. This is called an Initial Public Offering (IPO), after which the company becomes publicly registered and its shares can be traded within market participants.

2. Secondary Market

Once a company’s new securities have been sold in the primary market, they are then traded on the secondary stock market. Here, investors get the opportunity to buy and sell the shares among themselves at the prevailing market prices. Typically investors conduct these transactions through a broker or other such intermediary who can facilitate this process.

What Is Traded On The Share Market?

There are four categories of financial instruments that are traded on the stock exchange which include:

1. Shares

A share represents a unit of equity ownership in a company. Shareholders are entitled to any profits that the company may earn in the form of dividends. They are also the bearers of any losses that the company may face.

2. Bonds

To undertake long term and profitable projects, a company requires substantial capital. One way to raise capital is to issue bonds to the public. These bonds represent a “loan” taken by the company. The bondholders become the creditors of the company and receive timely interest payments in the form of coupons. From the perspective of the bondholders, these bonds act as fixed income instruments, where they receive interest on their investment as well as their invested amount at the end of the prescribed period.

3. Mutual Funds

Mutual funds are professionally managed funds that pool the money of numerous investors and invest the collective capital into various financial securities. You can find mutual funds for a variety of financial instruments like equity, debt, or hybrid funds, to name a few.

Each mutual fund scheme issues units that are of a certain value similar to a share. When you invest in such funds, you become a unit-holder in that mutual fund scheme. When instruments that are part of that mutual fund scheme earn revenue over time, the unit-holder receives that revenue reflected as the net asset value of the fund or in the form of dividend payouts.

4. Derivatives

A derivative is a security that derives its value from an underlying security. This can have a wide variety such as shares, bonds, currency, commodities and more! The buyers and sellers of derivatives have opposing expectations of the price of an asset, and hence, enter into a “betting contract” with regards to its future price.

How the Share Market Works

In a nutshell, stock markets provide a secure and regulated environment where market participants can transact in shares and other eligible financial instruments with confidence, with zero to low operational risk. Operating under the defined rules as stated by the regulator, the stock markets act as primary markets and secondary markets. As a primary market, the stock market allows companies to issue and sell their shares to the public for the first time through the process of an initial public offering (IPO). This activity helps companies raise necessary capital from investors.

This essentially means that a company divides itself into a number of shares (for example, 20 million shares) and sells some of those shares (say, 5 million shares) to the public at a price (for instance, $10 per share).

To facilitate this process, a company needs a marketplace where these shares can be sold. This marketplace is provided by the stock market. If everything goes according to plan, the company will successfully sell its 5 million shares at a price of $10 per share and collect $50 million. Investors will then own company shares, in the expectation that their value will rise or that they will receive dividend payments, or both. The stock exchange acts as a facilitator for this capital-raising process and receives a fee for its services from the company and its financial partners.

Functions of a Share Market

A stock market serves the following main functions:

Fair Dealing in Securities Transactions

Depending on the standard rules of supply and demand, the stock exchange needs to ensure that all interested market participants have instant access to data for all buy and sell orders, thereby helping in the fair and transparent pricing of securities. It should also perform efficient matching of appropriate buy and sell orders.

For example, there may be three buyers who have placed orders for buying Microsoft shares at $100, $105, and $110, and there may be four sellers who are willing to sell Microsoft shares at $110, $112, $115, and $120. The exchange (through automated trading systems) needs to ensure that the best buy and the best sell are matched, which in this case is at $110 for the given quantity of trade.

Efficient Price Discovery

Stock markets need to support an efficient mechanism for price discovery. This refers to a critical function of the markets: The price of any stock is determined collectively by all of its buyers and sellers. For example, an IPO may be priced at $15 but it's real value might be $12 or $17. Its value is established by the demand, or lack of it, for the stock.

Or, let’s say a U.S.-based software company is trading at a price of $100 and has a market capitalization of $5 billion. One day, a European Union (EU) regulator imposes a $2 billion fine on the company, which essentially means that 40% of the company’s value may be wiped out.

While the stock market may have imposed a trading price range of $90 and $110 on the company’s share price, it should efficiently change the permissible trading range to account for the possible changes in the share price. Otherwise, shareholders may struggle to trade the stock at a fair price.

Liquidity Maintenance

The stock market needs to ensure that whoever is qualified and willing to trade gets instant access to place orders and that the orders are executed at a fair price.

Security and Validity of Transactions

The market needs to ensure that all participants are verified and remain compliant with the necessary rules and regulations, leaving no room for default by any of the parties involved.

Additionally, it should ensure that all associated entities operating in the market adhere to the rules and work within the legal framework imposed by the regulator.

Stock Market Participants

Along with long-term investors and short-term traders, many different types of players are associated with the stock market. Each has a unique role, but many of the roles are intertwined and depend on each other to make the market run effectively.

• Stockbrokers, also known as registered representatives in the United States, are licensed professionals who buy and sell securities on behalf of investors. The brokers act as intermediaries between the stock exchanges and the investors by buying and selling stocks on behalf of the investors. An account with a retail broker is needed to gain access to the markets.

• Portfolio managers are professionals who invest portfolios, or collections of securities, for clients. These managers get recommendations from analysts and make the buy or sell decisions for the portfolio. Mutual fund companies, hedge funds, and pension plans use portfolio managers to make decisions and set the investment strategies for the money that they hold.

• Investment bankers represent companies in various capacities, such as private companies that want to go public via an IPO or companies that are involved in pending mergers and acquisitions. They take care of the listing process in compliance with the regulatory requirements of the stock market.

• Custodians and depot service providers are institutions that hold on to customers’ securities for safekeeping to minimize the risk of their theft or loss. These institutions also operate in sync with the exchange to transfer shares to/from the respective accounts of transacting parties based on trading on the stock market.

• Speculators engage in directional bets in the market with individual stocks or broader indexes. Speculators can take long positions by buying shares, or a short position by short selling. Some speculators hold on to their positions for a relatively long time based on fundamental or technical analysis. Others trade quickly and often, as in the case of day traders.

• Arbitrageurs are traders who identify mispricing in the market for relatively low-risk profits. By doing so, they keep the market more efficient. Algorithmic and high-frequency trading (HFT) programs are often engaged in this type of arbitrage.

Share Market Classes in Mumbai

Laqshya is one of the best Share market training institute in Mumbai providing trading classes, classroom training and practical sessions with an option to choose training batches from weekdays to weekends. Laqshya has Share market training centres across Mumbai.

Our Share Market course fees in Mumbai is at affordable ranges, also we provide Stock market courses offline and online in Mumbai.

Share Market Certification Course in Mumbai

Our Stock market course for beginners in Mumbai offers an in-depth and organised curriculum with stock market workshop which covers essential topics such as Stock market technical analysis, Financial market, Capital market, Stock exchange, Portfolio management, and Risk assessment.

After completion of our Share market certification course you will get a recognised share market certificate which you can demonstrate your expertise to potential employers and clients, setting yourself apart in the competitive financial industry. With hands-on training and guidance from seasoned professionals, you'll gain the skills and confidence needed to make informed investment decisions and achieve financial success.

Conclusion

Today, investing in stocks can be considered as one of the best ways to generate long term wealth. With a strategic investment plan, any investor can achieve their long term financial goals with the help of the share market.