What is Share Market And Understand The Basics With How Does It Work

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).

The BSE and NSE :

Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE was established in 1875. The NSE was founded in 1992 and started trading in 1994. Both exchanges follow the same trading mechanism, trading hours, and settlement process.

As of Jan. 30, 2024, the BSE had 5,315 listed firms, whereas the rival NSE had 2,266 as of Dec. 31, 2023. Almost all the significant firms of India are listed on both exchanges. The BSE is the older stock market, and the NSE is the largest in volume.

Types of Share Markets : 

Share market have two types which are following.

Primary Share Market :

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.

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.

Trading and Settlement :

Trading on both exchanges is through an open electronic limit order book where order matching is done by the trading computer. There are no market makers, and the entire process is order-driven by investors matched with the best limit orders. Buyers and sellers remain anonymous.

What Is Traded On The Share Market?

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

Shares

A share represents a unit of equity ownership in a company, and shareholders are entitled to any profits in the form of dividends and bear any losses the company may face. Many investors manage their shares through a Share trading app.

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.

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.

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 Does the Stock Market Work?

Companies raise money on the stock market by selling ownership stakes to investors. These equity stakes are known as shares of stock. 

By listing shares for sale on the stock exchanges that make up the stock market, companies get access to the capital they need to operate and expand their businesses without having to take on debt. Investors benefit by exchanging their money for shares on the stock market. As companies put that money to grow and expand their businesses, it profits the investors as their shares of stock become more valuable over time, leading to capital gains. In addition, companies pay dividends to their shareholders as their profits grow.

How does the Actual Trading Occur?

After opening a Demat Account and Trading Account, you can use the trading platform to choose an individual stock, specify the number of shares you want to buy or sell and execute the order.

Once you execute the order, the broker checks whether your account has the requisite funds. If there are enough funds, your order is finally executed on the stock exchange. For instance, if you have issued a purchase order, it will be matched with a similar sell order.

The exchange then confirms the transfer of ownership of shares. You then receive an intimation about the settlement, and the shares start to reflect in your demat account after two working days.

Market Statistics :

Earlier, the Bimal Jalan Committee report estimated that barely 3% of India's population invested in the stock market, as compared to 27% in the United States and 10% in China. The Economic Times estimates that as of April 2018, 6 crore (60 million) retail investors had invested their savings in stocks in India, either through direct purchases of equities or through mutual funds.

Morgan Stanley has noted that the Indian stocks have been through four bear markets in 25 years, or since foreign investors became actively involved with Indian equities. The Economic Times estimate that the Indian stock market sees a bear market on average once every 3 years, similar to the US market. It uses the Nifty 50 index as a reference point and identifies eight 20% drops in the last 25 years.

According to SEBI, during FY 2022–23, 73% of mutual fund units were redeemed within 2 years of investment. Only investments in 3% of the units continued for more than 5 years.

Another study conducted by the SEBI, approximately 89% of individual stock traders in the equity Futures & Options (F&O) segment incurred losses during the financial year 2021-22.

Share Market Subsidiaries :

NSE Indices Limited

NSE Clearing Limited

NSE NSEIT

NSE Infotech Services Limited

NSE Cogencis Information Services Ltd

NSE IFSC Clearing Corporation Limited (NICCL), or simply NSE International Clearing

NSE IFSC Limited, or simply NSE International Exchange

NSE Investments Limited

NSE Data & Analytics

NSE Academy Limited[41]