How the Stock Market Works (Step-by-Step)?

-

 


The stock market may look complex, but its working is based on a simple idea: connecting companies that need money with investors who want to grow wealth. Let’s understand this step by step, in a clear and practical way.

Step 1: A Company Decides to Raise Money

Companies need funds for:

  • Business expansion

  • New projects or technology

  • Paying off debt

  • Growth and acquisitions

Instead of borrowing only from banks, a company can raise money from the public by selling ownership shares.


Step 2: Company Launches an IPO (Initial Public Offering)

  • The company offers its shares to the public for the first time

  • This happens in the Primary Market

  • Investors apply and buy shares at a fixed or price-band rate

👉 Money goes directly to the company, not to another investor.

Step 3: Shares Get Listed on Stock Exchange

After the IPO:

  • Shares are listed on a stock exchange

  • Now the shares can be freely bought and sold

From this stage onward, trading happens in the Secondary Market.

Step 4: Investors Open Trading & Demat Accounts

To participate in the stock market, an investor needs:

  • Demat Account – stores shares digitally

  • Trading Account – used to place buy/sell orders

  • Bank Account – for money transfer

These accounts are opened through registered brokers.


Step 5: Placing Buy or Sell Orders

Investors place orders such as:

  • Buy Order – want to purchase shares

  • Sell Order – want to sell shares already owned

Order types include:

  • Market Order (instant execution)

  • Limit Order (specific price)

Orders are sent electronically to the stock exchange.

Step 6: Matching of Buyers and Sellers

  • The stock exchange automatically matches buy and sell orders

  • Matching happens based on price and time priority

Once matched:

  • Trade is confirmed

  • Price becomes the current market price

📌 Share price moves due to demand and supply.

Step 7: Trade Execution

After order matching:

  • Buyer agrees to buy

  • Seller agrees to sell

  • Trade is executed instantly

But ownership transfer doesn’t happen immediately.

Step 8: Clearing and Settlement (T+1 Cycle)

  • Clearing: Exchange confirms buyer, seller, and obligations

  • Settlement:

    • Buyer receives shares in Demat account

    • Seller receives money in bank account

⏱️ In India, settlement happens on T+1 day (Trade day + 1).

Step 9: Stock Price Movement After Trading

Stock prices change continuously based on:

  • Company performance & earnings

  • Economic news & interest rates

  • Global markets

  • Investor sentiment

  • Demand and supply

📊 This is why prices go up and down daily.

Step 10: Investor Makes Profit or Loss

Investors earn in two ways:

  1. Capital Gain – selling shares at higher price

  2. Dividend – company shares profit with shareholders

Loss occurs if shares are sold below the purchase price.

Simple Flow Summary

Company → IPO → Stock Exchange  
Investor → Broker → Buy/Sell Order  
Exchange → Order Matching → Settlement


Why Understanding This Process Matters

  • Helps avoid emotional trading

  • Builds confidence for long-term investing

  • Essential for traders, investors, and finance students

Comments

Post a Comment

Popular posts from this blog

How to Recover Losses from Intraday Trading

-
The beauty of share market is that it gives you opportunity to earn irrespective of your previous losing streak. But very few people realize that and end up feeling frustrated and move away from markets. In face of losses, what you really need is to rein in your emotions, think practically and have a trading plan which will help you in securing profits and recovering your losses. • Accept Responsibility of Your Losses Accepting responsibility of your own losses is the first step of the path of loss recovery. While trading in stock markets, always remember that the losses you incur are yours and yours alone. No one will be taking responsibility for your losses in the stock market and you have to accept defeat gracefully, no matter how big it is. You may blame the stock broker or your advisor for your losses. But the truth is, while taking services of any third party, you have agreed to the fact that investments are subject to market risks and no one but only you are responsible for the ...
Read more

🧮 How CPI Inflation Is Calculated — And Why Your Costs Can Rise Even When CPI Is Low

-
Image
  ✅ 1. What Is CPI (Consumer Price Index)? CPI measures the average price change of a fixed “basket” of goods and services consumed by households. This basket contains: Food & beverages Housing Fuel & light Transport Clothing Health, education, etc. Each category has a weight based on how much the average Indian household spends. Example (approx. India CPI weights): Food & Beverages – 45% Housing – 10% Fuel & Light – 7% Transport & Communication – 8% Clothing & Footwear – 6% Misc Services – 25% So CPI = weighted average of all these price changes. 📌 2. How CPI Inflation Is Calculated Step 1 – Fix a base year price Example (Base Year 2012 = 100 index) Step 2 – Track price changes for each item every month Step 3 – Multiply each item’s price change with its weight Step 4 – Add all weighted changes = CPI value **Step 5 – Inflation = % change of CPI from last year** Inflation = CPI current − CPI last...
Read more

Common Stocks and Uncommon Profits – Summary

-
Image
  Chapter 1: Clues from the Past Fisher begins by examining historical market cycles, especially the 1929 crash, to highlight that governments often respond to downturns by stimulating the economy through deficit spending and tax cuts. These policies create inflationary pressures. In such an environment, Fisher argues that high-quality equities are superior to bonds as a store of value. For example, government bonds issued after World War II offered low nominal yields that resulted in negative real returns after inflation. Fisher concludes that top-tier stocks , not bonds, preserve long-term purchasing power. He also emphasizes the importance of research and development (R&D) : companies that continually innovate tend to grow faster and maintain competitive advantages. The key takeaway is to seek firms with long-term growth opportunities, strong innovation pipelines, and large, expanding markets. Chapter 2: What “Scuttlebutt” Can Do This chapter focuses on Fisher’s famous ...
Read more