How the Stock Market Works, Explained Simply

When a company wants to raise money to grow, it can sell small pieces of ownership called shares. If you own a share, you own a tiny part of that company. If the company grows and earns more over the years, your piece usually becomes more valuable.

Shareholders may also receive part of the profits as dividends. Our page on what a dividend is explains how that works.

A company first sells shares to the public through an IPO, an initial public offering. After that, its shares are listed on a stock exchange, where investors can buy and sell them among themselves every trading day.

Our page on IPO versus mutual fund explains how IPOs work and their risks.

In India, shares are mainly traded on two exchanges, NSE and BSE. These exchanges match buy and sell orders electronically and publish prices in real time. SEBI regulates them and the brokers who place orders.

Our page on NSE versus BSE explains the two exchanges.

A share price is simply the last price at which a buyer and seller agreed to trade. If more people want to buy than sell, the price rises. If more want to sell, it falls. What makes people want to buy or sell? Company results, news about the industry, interest rates, global events, and plain human mood.

Over days and weeks, prices are driven heavily by news, rumours, fear and excitement. That is why markets can swing sharply even when nothing has changed in the actual businesses.

Our page on risk and volatility explains these swings.

Over many years, share prices tend to follow the growth in company profits. A company that keeps growing its earnings usually sees its share price rise over time, though never in a straight line.

Our page on how mutual funds make money explains this link.

An index tracks a group of shares to show how the market is doing overall. The Nifty 50 and Sensex are the most famous in India. When people say "the market rose today", they usually mean one of these indices went up.

Our page on Nifty and Sensex explains how they are built.

Retail investors: individuals buying shares or mutual funds.

Mutual funds: pooling money from many investors.

Foreign investors: large overseas funds investing in India.

Insiders and promoters: the founders and owners of companies.

Traders: people buying and selling frequently for short-term gains.

Investing means buying a share of good businesses and holding for years. Trading means buying and selling frequently to profit from short-term moves. Most people who trade actively lose money over time. Long-term investing in diversified funds is a calmer path.

Our page on long-term investing explains why.

Markets go through long rising phases and sharp falling phases. Both are normal and both have always ended in the past.

Our page on bull and bear markets explains these cycles.

The share price multiplied by the number of shares gives a company market capitalisation, its total value in the market. This decides whether it is called large, mid or small cap.

Our page on market capitalisation explains this.

To buy shares directly, you need a demat account to hold them and a trading account with a broker to place orders. Mutual fund units, on the other hand, can be held without a demat account.

Our page on demat accounts and mutual funds explains the difference.

Picking individual shares needs time, research and nerves. A mutual fund does this for you, holding dozens of companies and spreading risk. A SIP lets you invest a fixed amount every month without timing the market.

Our pages on what a mutual fund is and mutual funds versus stocks explain the choice.

SEBI sets rules for companies, exchanges, brokers and mutual funds, to keep markets fair and protect investors. Companies must disclose results and important news. This does not stop prices from falling, but it reduces fraud and unfair practices.

Our page on who regulates mutual funds explains SEBI role.

• Buying shares on tips from friends or social media.
• Selling in panic during a fall.
• Putting all money into one or two companies.
• Expecting quick profits.
• Using money needed soon.

Our page on common mistakes lists more.

For most beginners, the easiest way into the stock market is a SIP in a diversified equity or index fund, alongside an emergency fund. You get exposure to many companies without needing to pick them.

Our page on how to start investing explains the steps.

Imagine a company announces strong yearly results. Many investors now think it is worth more, so they want to buy, and few want to sell. The price rises until enough holders are happy to sell at the new level. If the company later reports a loss, the opposite happens. That constant tug of war between buyers and sellers is what you see as prices moving on a screen.

• Shares are pieces of company ownership.
• Prices move with demand, news and profits.
• Long term, profits matter more than mood.
• Mutual funds make it easy to take part.

We are distributors rather than investment advisers and we recommend no schemes. If you want help getting started, get in touch.