Most beginners approach the stock market only from the viewpoint of an investor. But to truly understand how the stock market works, you must look at the entire ecosystem—companies, investors, brokers, regulators, and all the processes behind buying and selling shares.
This article explains everything from scratch using a simple story you can relate to. By the end, you’ll clearly understand:
✔ Why the stock market exists
✔ What the stock market actually is
✔ How the stock market works behind the scenes
✔ Primary vs. Secondary market
✔ Brokers, Demat accounts, Depositories, SEBI
✔ How share prices are decided and why they change every second
Let’s begin the journey.
1. Why Does the Stock Market Exist?
The stock market exists for two major reasons:
1️⃣ To help companies raise capital
Companies need money to grow—open new branches, expand operations, hire teams, launch new products, etc.
Instead of taking risky bank loans, they can:
- Convert their business into a public limited company
- Issue shares to the public through an IPO (Initial Public Offering)
- Use this capital to expand without debt
2️⃣ To help people grow their money
Individuals like you and me invest in the stock market to:
- Grow wealth over time
- Beat inflation
- Earn dividends
- Generate returns better than traditional savings instruments
The stock market is the only place offering 12–20% long-term growth potential, which no FD or RD can match.
2. What Is the Stock Market? (Simple Definition)
The stock market is:
“A marketplace where shares of publicly listed companies are bought and sold.”
Imagine a giant digital marketplace—like Amazon—but instead of products, shares are traded.
To understand shares and ownership better, let’s use a story.
3. Understanding Shares Through a Simple Story
Meet Jignesh Bhai, a supermarket owner from Jamshedpur.
For 10 years:
- He built a profitable business
- Earned ₹5 lakhs profit per month
- Built a reputation in the city
His business has two characteristics:
1) Ownership
Jignesh owns 100% of the business.
2) Valuation
Let’s assume his supermarket is valued at ₹1 crore.
How Shares Are Born
To bring in a partner, Jignesh must divide ownership.
So he divides his business into 1000 units, called shares.
Total valuation = ₹1 crore
Number of shares = 1000
Value per share = ₹1,00,00,000 / 1000 = ₹10,000 per share
Now:
- Jignesh can sell 500 shares to a new partner
- The partner pays 500 × 10,000 = ₹50 lakhs
- Each now owns 50% of the business
This is the origin of shares: units of ownership.
4. Why Companies Decide to Go Public (IPO)
As the business grows, Jignesh wants to expand nationwide—100–200 new stores.
He needs big capital.
His options:
Option A – Bank Loan (Debt)
Risky. If business fails, loan becomes a burden.
Option B – Sell shares to local people
Time-consuming and limited.
Option C – Go Public
This means:
- Converting business to a public limited company
- Doing an IPO
- Allowing the public to buy shares
- Raising large capital
- Giving existing founders an exit (reward for early work)
This is why most companies choose the IPO route.
5. What Happens During an IPO? (Primary Market)
Let’s apply this to Jignesh’s company:
- Total shares: 1000
- He offers 15% (150 shares) to the public
- Price per share at IPO: ₹20,000
150 people buy 1 share each → money goes directly to the company
This stage is called:
📌 Primary Market
Where money flows from investors → to the company.
6. What Happens After Listing? (Secondary Market)
Once the IPO is over:
- Those 150 shares now belong to investors
- Trading begins on the stock exchange
If a new person wants to buy shares:
- They cannot buy from the company
- They must buy from an existing shareholder
This stage is:
📌 Secondary Market
Where money flows from one investor → to another
(NOT to the company)
This is the everyday stock market you see on your screen.
7. How Are Share Prices Decided?
Share prices depend on two major factors.
1️⃣ True Valuation (Company Performance)
A company’s share price rises when:
- Revenue increases
- Profits increase
- Expansion happens
- Debt decreases
- Future potential improves
Likewise, bad performance reduces valuation.
2️⃣ Demand & Supply (Market Sentiment)
Example:
If 100 new investors want Jignesh’s share…
But only 1 share is available…
Price goes up due to demand.
If many people want to sell, but buyers are fewer…
Price goes down due to supply.
Demand & supply are affected by:
- News
- Announcements
- Results
- Management changes
- Competition
- Global trends
- Market psychology
This is why prices move constantly.
8. Why Do Share Prices Change Every Second?
Because:
- India has millions of active participants
- Thousands of trades happen every second
- Each trade updates the LTP (Last Traded Price)
Share price = the price of the last completed trade.
That’s why it changes every moment.
9. Who Can Access the Stock Market? (Brokers)
You cannot directly go to NSE or BSE and buy shares.
You must use a broker like:
- Zerodha
- Groww
- Upstox
- Angel
- ICICI Direct
Brokers act as intermediaries:
- You place an order
- Broker finds a seller or buyer
- Broker executes the trade
- Broker charges a small brokerage fee
10. Demat Account vs Trading Account
When you open an account with a broker, you actually open two accounts:
1️⃣ Demat Account
- Stores your shares electronically
- Works like a digital locker
- Replaces old paper share certificates
2️⃣ Trading Account
- Stores your money
- Used to buy or sell shares
- Funded from your bank account
Flow looks like this:
Bank → Trading Account → Purchase → Shares stored in Demat
11. Who Keeps Your Shares Safe? (Depositories)
Your shares are NOT with your broker.
They are stored with government-regulated depositories:
- CDSL
- NSDL
These ensure your holdings are safe even if a broker shuts down.
12. SEBI – The Watchdog of the Stock Market
The stock market involves:
- Huge money
- Millions of investors
- Thousands of companies
This creates risk of:
- scams
- pump-and-dump schemes
- manipulation
- fraud
SEBI (Securities and Exchange Board of India)
The regulator ensures:
- No manipulation
- No fraud
- Fair practices
- Protection for investors
- Transparent functioning
Because of SEBI, investors can trust the Indian stock market.
Conclusion: What You Now Understand
By now, you should clearly know:
✔ Why companies come to the stock market
To raise capital and reward founders.
✔ Why investors participate
To grow wealth, earn dividends, or trade.
✔ What the stock market actually is
A platform to buy/sell shares of publicly listed companies.
✔ How the stock market works behind the scenes
Through brokers, depositories, and exchanges.
✔ How share prices are decided
Based on valuation + demand & supply.
✔ Why prices change every second
Because of continuous trading activity.
✔ Who protects the stock market
SEBI, making sure everything runs smoothly.
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