What is the share market? What Does It Do and How Does It Work with examples

Investing in equities is necessary to gain returns that outperform inflation. Therefore, it is important to understand the workings of the share market and all of its associated parts. Just like how we go to local stores or supermarkets to purchase our items, we can go to the share market to make investments. Transactions in stocks involve buying or selling shares. The primary goal of the share market is to enable this process by connecting buyers and sellers.

Unlike a supermarket, the share market is not a physical place; it exists in electronic form. Transactions can be made there – buying or selling stocks – and to carry out such dealings you will need to enlist the services of a registered intermediary known as a stockbroker, which we’ll look at later on.

India has two main stock exchanges – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Other exchanges that existed at an earlier time are no longer functional. Thus, when discussing the Indian share markets, we generally mean either NSE or BSE. Many older exchanges like Bangalore Stock Exchange (BgSE), Madras Stock Exchange (MSE), Calcutta Stock Exchange (CSE) have either merged with either BSE or NSE, or have simply closed.

  • Market Participants and the need to regulate them

There is a need to regulate individuals and entities who participated in the market to ensure fair and orderly functioning of financial markets. The market participant can be classified into various categories, which are as follows:  

  • Domestic retail participants are everyday people engaging in market transactions, just like us.
  • People of Indian origin who are based overseas are referred to as Non-Resident Indians (NRIs) or Overseas Citizenship of India (OCI).
  • Domestic Institutions- These are corporate entities in India.
  • Domestic Asset Management Companies (AMC)- Mutual fund firms such as SBI, HDFC, Edelweiss, and ICICI Pru are all domestic Asset Management Companies.
  • Foreign Institutional Investors- such as asset management companies, hedge funds, and other corporate entities, are non-Indian investors.

Irrespective of who participates in the market, each person’s goal in the market is to make money through successful transactions.

Money triggers strong reactions in people like desire and fear. Thus, it’s easy to succumb to dubious methods. Unfortunately, India is no exception when it comes to such practices. As a result, the Indian share markets need someone who can set specific rules (called regulation and compliance) and make sure that these are followed by all players, thus making the trading arena equal for everyone.

  • Regulator

The Regulator is a government body that oversees the industry. In India it is The Securities and Exchange Board of India. This body is responsible for ensuring that all businesses comply with the laws and regulations that apply to them. The Regulator has the authority to take action against any business if they violate any of these rules, ranging from issuing warnings to enforcing fines or taking more serious courses of action.

We will understand in detail about share market regulators in the upcoming chapters.