How the stock market works

The stock market operates as a marketplace where traders and investors buy and sell shares. These shares represent a partial ownership in companies. In India, stocks are traded electronically on the National Stock Exchange (NSE) as well as the Bombay Stock Exchange (BSE) through stockbroking platforms. The stocks are traded through the Trading account and stored in a Demat account. The Securities and Exchange Board of India (SEBI) regulates the Indian stock market to ensure fair trading and investor protection. 

Capital appreciation, dividends, and short-term trading opportunities are the main factors that attract traders and investors to the stock market. Stock prices are influenced by economic conditions, performance of the sector, market sentiments and the company’s profitability. 

Companies raise funds by issuing equity shares through Initial Public Offerings (IPOs). These shares are later traded on exchanges. Stock investments are high-risk, high-reward, and their value fluctuates based on business performance, market trends, and regulatory changes.

What is a Stock Exchange?

A stock exchange is one of the most important institutions when it comes to the stock market as it serves as a regulated platform where financial instruments or securities such as stocks, derivative instruments, exchange-traded funds (ETFs), commodities, and currencies are bought and sold. 

There are two major stock exchanges in India, namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These are regulated by the Securities and Exchange Board of India (SEBI) to ensure smooth functioning of the markets, transparency, as well as investor protection. Shares of listed companies are traded on these exchanges.

The Bombay Stock Exchange (BSE) was founded in 1875 and is the oldest stock exchange in Asia while the National Stock Exchange (NSE) was established in 1992. The SENSEX is the benchmark index of the BSE, while NIFTY50 is the benchmark for the NSE. These indices are most widely used by market participants to gauge market sentiments and make their trading decisions.

Key Stock Exchanges Around the World

Just like India has the BSE and the NSE, countries across the globe have different stock exchanges which see major trading activity. 

North America

The New York Stock Exchange (NYSE), founded in 1790 with benchmark index NYSE Composite, and the National Association of Securities Dealers Automated Quotation System (NASDAQ), established in 1971 with benchmark index NASDAQ Composite, are the two major stock exchanges that operate in the United States of America. The Chicago Mercantile Exchange (CME), founded in 1848, is another exchange in the US but it is known for derivatives trading rather than stock trading. The Toronto Stock Exchange of Canada, with the benchmark index S&P/TSX Composite Index,  is another major stock exchange in the North American Continent.

Europe

Euronext is the major stock exchange in the European Union. France’s CAC40, Netherlands’ AEX and AMX, and Belgium’s BEL 20 are the major benchmark indices of the Euronext. Further, the UK-based London Stock Exchange (LSE) and the Germany-based Deutsche Börse AG are the more popular stock exchanges in the European Union, with FTSE 100 and DAX as the benchmark indices, respectively.

Asia

In addition to India’s National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), there are several other important exchanges in Asia. Japan has the Tokyo Stock Exchange, with TOPIX and Nikkei 225 as the benchmark indices. China has the Shanghai Stock Exchange, with the SSE Composite as the major index and the Shenzhen Stock Exchange, with the SZSE Component as the main index. Hong Kong has the Hong Kong Stock Exchange with the Hang Seng Index. South Korea has the KOSPI index traded on the Korea Stock Exchange.

Other prominent stock exchanges in the world include Saudi Arabia’s Saudi Stock Exchange with the Tadawul All Share Index (TASI) and Australia’s Australian Securities Exchange with the S&P/ASX 200 as the benchmark index.

Understanding Market Indices

Market indices are tools that help the market participants gauge the overall sentiments in the stock market and make informed trading decisions. These indices are composed of several stocks belonging to a certain category. They can be based on market capitalisation, sectors or themes, or any other defining factor.

If the constituents of a certain index are going down, the index will also see a downtrend, and vice versa. All stocks that form an index may not have the same weightage in the index and thus the movement in the index may vary based on which stock is seeing momentum. 

Some major indices on the Indian stock market are listed below:

NIFTY50: It is composed of the 50 top-performing companies listed on the National Stock Exchange (NSE). It is a benchmark index which gives a bird’s eye view of the Indian stock market.

SENSEX: This index is the counterpart of the NIFYT50 but is on the Bombay Stock Exchange (BSE) and comprises 30 stocks.

NIFTY BANK: This is a widely watched index made up of the major banking stocks listed on the NSE. It is a sectoral index.

NIFTY IT: This index encompasses most of the stocks in the information technology sector that are listed on the NSE.

NIFTY MidCap100: This index is made up of the top 100 midcap stocks listed on the NSE. It is an index based on the market capitalisation and helps market participants to gauge the broader market scenario.

NIFTY SmallCap100: This index is made up of the top 100 small-cap stocks listed on the NSE. It is an index based on the market capitalisation and helps market participants to gauge the broader market scenario.

Role of Brokers and Brokerage Accounts

A broker refers to a licensed entity that acts as a middleman between the stock exchange and the trader or investor. Brokers place trades and execute orders on behalf of their clients while also providing advisory services. 

Brokers provide basic knowledge of the stock market through educational sessions, share detailed research on stocks along with risk management strategies and help new investors navigate the stock market. Brokers also allow investors to avail portfolio management services (PMS) and facilitate trading through desktop applications, web trading platforms and mobile phone applications.

There are two types of brokers which offer different types of brokerage accounts. First are traditional brokers, which offer a wide variety of services and charge a premium brokerage fee. These brokers help their clients with retirement planning, portfolio management, and capital gains tax advisory, alongside trading in securities. Given their extensive industry knowledge, they have the means to provide personalized investment strategies. They are generally preferred by High-Net worth Individuals and institutional investors.

The second type of broker is known as a discount broker. These brokers focus majorly on allowing their clients to execute trades while charging a lower commission or brokerage. They provide quick and easy online trading platforms and make the stock market more accessible for retail traders and investors but do not always provide investment advisory services.

Brokerage accounts are those that allow traders and investors to avail the services provided by their brokers. 

Conclusion

The stock market plays a crucial role in the Indian economy by facilitating the buying and selling of securities through regulated exchanges like the NSE and BSE. With SEBI ensuring transparency and investor protection, market participants can engage in stock trading for capital appreciation, dividends, and short-term opportunities. Market indices such as NIFTY50 and SENSEX serve as key indicators of market performance, helping investors make informed decisions. Stockbrokers and brokerage accounts further streamline trading by offering execution services, research insights, and investment guidance, making the stock market accessible to all types of investors.