A share market is where shares are issued and traded. Most shares in India are traded on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The latter came into existence in 1875 while the former was founded in 1992. Traders and investors track the live share prices to determine when to buy and sell shares to book a profit. Earlier, trader had to go to the trading center, but nowadays everything is facilitated online through trading terminals.
There are two types of share markets in India:
- Primary market
Companies register here to issue shares to the public to raise money. When a private organization issues shares for the first time it is known as the Initial Public Offering (IPO).
- Secondary market
Once listed, shares are traded on the secondary market. This provides liquidity to investors who want to buy and sell their shares. Trading is done at prevailing market prices or at a mutually agreed price.
Working of the Indian share market
Trading on the share market occurs through an open electronic limit order mechanism. Orders are matched by the trading computers without any specialists or market makers. In simple terms, when an investor places a market order, the computers match it with the best limit order to execute the trade. This mechanism brings transparency for the investors. Investors may check the live share prices before placing their orders.
Trading hours and settlement cycle
The share markets are open between 9.30 am and 3.30 pm from Monday to Friday. The share market adopts the T+2 settlement cycle. This means that all executed orders for today are settled after two working days. All deliveries are dematerialized and share markets use their own clearing houses to settle the various trades done on a particular day.
The two most important indexes are the Sensex and Nifty. Sensex is the oldest index and includes 30 firms. The changes in these share prices of these firms’ results in the movement of the Sensex. The Nifty 50 includes 50 firms and represents about ~63% of the free-float market capitalization of all the stocks listed on the National Stock Exchange.
Prices of different shares vary for several reasons. Here are five factors that affect the stock prices:
Inflation is the rate at which prices increase over a period of time. Historically, low inflation means higher multiples and vice versa. On the other hand, deflation does not bode well for stocks. This is because deflation reduces the pricing power for companies.
It is common for stock prices to move according to the short-term trends. It is possible that the price of company increases and this trend continues because of the positive market sentiments. In comparison, the price may move opposite to the trend and this is known as reverting to the mean.
An important factor that drives stock market is liquidity. This is determined by investors’ interest and attention. Generally, shares that are very liquid respond quickly to even the smallest news. Most companies with large market capitalization are very liquid and have higher volumes.
- Investor Sentiment
The stock prices are influenced by the sentiments. This is an important driver but may be subjective. An investor may have a judgment about a particular stock; however, the market may focus on one news item, which prevents any price movement.
- Trading Patterns
Various investors depend on different factors while investing in stocks. Short-term investors prefer trusting fundamentals while long-term investors give importance to technical factors to make investment decisions.