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What is Share Market? How Does Stock Market Work

What is Share Market? How Does Stock Market Work

A share market is a place where buyers and sellers of shares (stocks) come together and determine the price and execute transactions. Basically, the prices of shares in the share market are determined by demand and supply. A share is a part ownership of a company. If a company has issued 1000 shares and if you own 10 shares then you have a 1% ownership of the company. The share markets provide a forum for buyers and sellers to get together and decide what shares are worth. The prices are determined on the basis of ability and willingness to pay for shares.

Five important functions that share markets perform

  • Shares markets help in price discovery. How do you decide that Reliance share is worth Rs.950 or Infosys share is worth Rs.2200. These prices are decided based on demand and supply. Analysts share information and research about a company and based on that investors form an opinion about what a share is worth.
  • Share markets bring about a linkage between price and value. Every company is valued based on how much cash flows it can generate over time. Once the value is determined, the share price could be either above the value or below the value. Share markets move the prices of stocks so that price and value converge in the long run.
  • Share markets are an important source of wealth creation. For example if you had invested Rs.1 lakh in Havells in 1996, it would be worth Rs.28 crore today. That is the kind of long term wealth creation that share markets can provide. For people looking to create long term wealth, the share market is the right place.
  • Share markets provide liquidity. This is perhaps the most important function. You may hold an asset and may not know where the buyer is. Alternatively, you may want to buy an asset but may not know who the seller is. Since buyers and sellers come under a single platform in the share market, there is liquidity and this lowers risk in the market.
  • Share markets are a forum for entrepreneurs and corporates to raise fresh capital. When you need to raise money to fund your expansion and diversification plans, then you can bring out an IPO through the share market. Once the share is listed it gives your company fresh funds and also a platform for buying and selling the shares of your company.

Who regulates the share markets

The share market is obviously a very important linkage between buyers and sellers of shares and between investors and businesses. So proper regulation is a must! Here is how it is done…

  • The companies listed on the stock exchanges are regulated under the Companies Act 1956 and that automatically becomes a first level of regulation for the shares traded on the stock exchanges. Share markets are also known as stock exchanges
  • There is a regulation of investors and brokers by the stock exchanges. The two principal stock exchanges viz. BSE and NSE regulate the brokers and investors in terms of risk management systems, through circuit filters and through real time monitoring of trades.
  • The overall regulation of stocks markets is done by the Securities and Exchange Board of India (SEBI). The stock exchanges are also regulated by SEBI. Apart from the two exchanges, registered brokers, sub-brokers, investors, custodians, registrars, merchant bankers etc are all regulated by SEBI. SEBI has far-reaching powers to regulate the share markets and all its participants.
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