How does the stock market work step by step?

The stock market is a platform where shares of publicly traded companies are bought and sold, driving price fluctuations based on supply and demand. The process involves companies issuing shares (IPOs), investors buying and selling those shares through brokers, and the stock exchange facilitating the transactions.

Stock markets operate through stock exchanges, such as the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India. These exchanges facilitate transactions between buyers and sellers using an electronic order-matching system.

The stock market operates through a series of structured steps that create a secure and transparent environment for buying and selling shares. It all starts with company listing, where a business issues shares to the public through an Initial Public Offering (IPO) and gets listed on a recognised stock exchange.

Next comes investor account setup. To trade in the stock market, investors must open a demat account and a trading account with a SEBI-registered broker. Once accounts are in place, placing an order is the next step. Investors use a trading platform to place buy or sell orders for specific stocks.

These orders go through order matching, where the stock exchange matches buy and sell orders based on price and time priority. Once matched, trade execution takes place electronically. The trade is then processed through clearing and settlement. In India, this follows a T+1 cycle, meaning trades are settled one business day after the transaction.

Finally, there is share delivery. The buyer receives the shares in their demat account, and the seller gets the payment. Each of these steps is regulated by the Securities and Exchange Board of India (SEBI) to ensure transparency, investor protection, and overall market efficiency.

The stock market is an ecosystem with several stakeholders who perform specific roles to facilitate smooth functioning.

Major Participants Include:

• Retail Investors: Individuals who buy and sell shares for personal investment
  

• Institutional Investors: Large entities such as mutual funds, insurance companies, and pension funds
  

• Stock Exchanges (BSE, NSE): Platforms where trades take place
  

• Stockbrokers: Registered intermediaries who execute trades on behalf of investors
  

• Depositories (CDSL & NSDL): Hold and manage shares in dematerialised form
  

• Clearing Corporations: Ensure settlement of funds and shares post-trade
  

• SEBI: Regulatory authority ensuring transparency and investor protection
  

Together, these participants contribute to an orderly and efficient stock market system.

The stock market in India is broadly divided into two main types, each serving a distinct function.

Types of Share Markets:

• Primary Market: Where companies issue new shares to the public through IPOs. The funds raised go directly to the company.
  

• Secondary Market: Where existing shares are traded among investors. This is the market most people refer to when they talk about “stock market trading.”
  

The transition from the primary to the secondary market marks the beginning of public trading of a company’s shares.

Trading in the secondary market is carried out through various modes and instruments. Technology and regulations make the process efficient and secure for all parties involved.

Modes of Trading:

• Delivery Trading: Shares bought are held for a longer period
  

• Intraday Trading: Buy and sell transactions occur on the same day
  

• Futures and Options: Derivative contracts used for hedging or speculation
  

• Margin Trading: Investors borrow funds from brokers to buy shares
  

Each trading method has its own set of risks and benefits, suited for different investor profiles.

The prices of stocks in the secondary market are driven by supply and demand. Several factors influence price movements, making the stock market dynamic and volatile.

Factors Affecting Stock Prices:

• Company Performance: Earnings, revenue, and management outlook
  

• Economic Indicators: Interest rates, GDP growth, inflation
  

• Market Sentiment: News, trends, and investor perception
  

• Global Influences: Geopolitical events, global market trends
  

• Technical Factors: Chart patterns, volume, and historical performance
  

Prices are continuously updated in real-time based on buyer and seller activity in the market.

The stock market operates through a well-structured process involving key participants, trading mechanisms, and price discovery. Understanding how it works can help investors make informed decisions and navigate the market more confidently.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.