Basics of Stock Market in India

Have you ever heard about the stock market also known as the share market and wondered what it is and how exactly this works!! Today we’ll go learn about the stock market in detail and understand how it’s working.

What are stocks?

Stocks or shares are nothing but just the part of a company that you can buy or sell. Buying a share simply means getting a part of that business and hoping that when the business grows, the value of that share will also grow.

Let’s say there is a company ABC with 100 shares and a market cap of 1 crore. If you buy 2 shares of the company which is worth 1Lakh each (1 crore / 100 shares), that means now you own 2% of the company by paying 2Lakhs. Now if company ABC does well in business and grows in value to 1.5 crores, your stocks will be worth 1.5L each and a total of 3L for 2 shares that you own. Similarly, if the company’s value goes down, your share's values will also go down. Because you own a share of company ABC, you become a shareholder of that company.

What is the stock market?

Stock market also known as share market is a place where you can buy or sell shares of publicly listed companies. Companies raise capital by providing their shares and investors can invest in the company’s shares. Not only shares, you can also buy or sell bonds, mutual funds, etc. at the stock market.

What is a stock exchange?

The stock exchange is a regulated marketplace where companies, investors, or firms can buy or sell all financial instruments like stocks, bonds, etc. The stock market and stock exchange sound similar but there is a fundamental difference, the stock market refers to the whole ecosystem whereas exchanges are the marketplace where trades are executed. Think of it like this, you want to buy some clothes so you go to a market which has many shops. Here the stock market is just like this market and the exchange is just like a store and clothes act as stock.

Stock markets can have multiple exchanges, the most famous ones are the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Just like a piece of cloth can be present in multiple stores, a company can list its shares in multiple exchanges. That’s why you’ll see many companies listed at both NSE and BSE. You’re also free to buy a stock from one exchange and sell it at another exchange, for example, you can buy a share of a company from NSE and when it comes to your demat account, you can sell it at BSE as well, or vice versa.

How does the share market work?

When a company needs to raise funds to expand or invest in its business, it can apply for an Initial Public Offering (IPO) with the Securities and Exchange Board of India (SEBI). This allows companies to list their shares on the stock exchange, where investors can buy and sell them.

This way Company gains capital for its business growth, expansion, and other use cases and investors get a chance to invest in the company’s shares and its growth.

When a company grows and becomes more profitable, the value of its shares usually increases in value, which in turn gives you profit on the initial capital that you invested. In addition to this, some companies distribute a portion of their profits to shareholders in the form of dividends.

Understanding Dividends

Dividends are payments made by the company to the people who own its shares (shareholders) from their profits. So any company can either share its profits with its shareholders or they can reinvest in its business growth. If you own stocks of a company, you get a portion of the company’s profits proportional to the amount of shares you hold.

• For example, if you own 2% of the company’s shares and the company declares a profit of ₹1,00,000, you would be entitled to a dividend of ₹2,000, assuming the company decides to distribute dividends.

However, it's important to note that paying dividends is not mandatory for the companies. Some companies prefer to reinvest their profits back into the business for growth, research and development, or other needs.

What are the stock market timings in India?

In India stock market is open on weekdays (Monday to Friday) from 9 am to 4 pm. But all the time from 9 am to 4 pm is not available for normal trading. These 7 hours are divided into three parts, which are pre-market sessions, normal trading sessions, and post-market sessions. Normal trading sessions are from 9:15 am to 3:30 pm.

Pre-market sessions

The pre-market session is important to come up with an ideal opening price for a company. In this timeframe, there are multiple steps involved which in turn decide the opening price of a company.

Normal trading sessions

9:15 am to 3:30 pm is the normal trading session where traders or investors can place their orders and trade without any restriction. The exchange matches the buy/sell orders and when a pair of buy and sell orders at the same price matches, the order gets executed at that common price and that price is known as LTP or last traded price.

Post-market session

3:30 pm to 4 pm is the post-market session and it’s divided into two main marts.

In both pre-market and post-market sessions, only market orders are allowed, and too in the equity segment.