Often people think that stock market is too complicated and they shy away from the opportunities it holds. While from far, it may look complicated as to how the Indian stock market works, when you start learning about it by joining a stock market basics course, you can eventually understand that it is all about understanding and practice.
Here in this article, we will give you an overview of how the markets work, trading and settlement cycles, how stock prices are determined, key terms you need to know when trading in the stock market, and other topics.
How are stocks traded?
For understanding how stocks are traded, you need to understand how the market is structured.
The market has certain participants such as –
- Companies
- Investors and traders
- Stock brokerage houses
- Stock exchanges
- SEBI
Now, SEBI, as you may know, is the regulatory body for the entire stock market. It frames the rules for how the market will work and then tracks whether other participants are adhering to the rules or not.
Then comes the stock exchanges, and in India, there are two major stock exchanges, which are NSE and BSE. The stocks are traded on these exchanges. So, here is the process of how stocks are traded –
- Firstly, a company issues its stocks to the general public for capital raising, debt repayment, or for other financial needs, or to become a public entity and more credible
- Now, once the stocks are issued, one can subscribe to these stocks in the primary market
- Then the company allots the stocks to the people who have subscribed to the same
- Once the stocks are allotted, then the company, if it is a private limited one, goes public by listing its shares on the stock exchanges.
- Once the company is listed, the people who bought stocks in the IPO or promoters, and institutional investors who have the shares of the company, can trade their holdings in the market, which is the secondary market.
- Now stocks of the company become available in the secondary market, and then anyone who wishes to buy or sell the stocks can take part in it.
- To understand the entire process in detail, you must join a share market learning course online.
What is Settlement Cycle?
Now, for understanding how stocks are traded, you also need to know about the settlement cycle or trading cycle.
It is the time taken to complete the entire process of trading shares, from buying the shares to getting the shares in the account, and if someone is selling the shares, then getting the sale proceeds credited into his or her account.
Earlier, the settlement cycle was long enough, but now both stock exchanges, as per SEBI’s guidelines, have been moving towards T+1 and even T+0 settlement cycles.
So, what does this T+1 or T+0 mean?
T is referred to as the Trading Day, which means the day on which your trade gets executed. So, suppose you placed a trading order today, and it gets executed today only, so the T will be today.
Now, if the stock has a T+1 settlement cycle, then on the next business day of the trading day (T), the ownership of the stock will be forwarded to the buyer, and the funds (sale proceeds) will be credited to the seller’s account.
Now, if the settlement cycle is T+0, then on the very same day of trade execution, this entire cycle will be completed.
Now, how will you know which stock has what settlement cycle? For this, you must enroll in the best stock market course to have experienced mentors to help you understand how to find out different settlement cycles for different stocks.
How are stock prices determined?
When you look at a trading terminal, you can see that the stock prices are changing too fast, within even a blink of an eye, for many stocks. So, how the prices are determined, you must be wondering if you are a beginner in the stock market, right? While you can learn about this in detail by joining a stock market basics course, here is the fundamental of stock price determination, and it is nothing but demand and supply.
On the stock exchanges, there are both buyers and sellers for different stocks. Now, if the number of buyers is more than the number of sellers and given that fact that the number of shares available is limited, the demand increases, so does the price of the stock, as buyers may increase their bid to buy the shares. In the contrasting scenario, when sellers are more in number, they can pull the prices down as when they sell their stocks, the number of stocks increases in the market, which drags the prices down.
The prices are determined when the lowest ask price by a seller matches the highest bid price by a buyer of a stock. The intersection of these two prices determines the price of the stock, and it keeps changing depending on the liquidity of the stock.
Key Terms You Need to Know
- Bull Market: This is a phase in the market when the overall market prices are increasing, which boosts investors’ confidence, and more investors pour money into the market.
- Bear Market: This is the phase opposite of a bull market, when the general price level in the market is declining, with negative investor sentiment, and more investors are selling their possessions in the market.
- Liquidity: This can be defined as the ease with which any stock can be bought or sold in the market. If you can easily buy a stock or sell it, it is usually considered to be highly liquid, and vice versa.
- Volatility: This is the measure of fluctuations in the market. This indicates the risk quotient of the market and individual securities as well.
- Bid and Ask Prices: The Bid price is the highest price that has been offered by the buyer, while the Ask price is the lowest price asked by the seller. A trade takes place when these two intersect.
Wrapping up
The best way to understand how the stock market works is by getting into it. Joining the best stock market course will help you understand all these concepts, and then, for actually witnessing and realizing how it is done, you can Open A Free Demat Account and start your trading journey.