Updated: Apr 10, 2021
In the previous chapter, we had talked about the various important terms related to the stock market for the beginner. In this segment, let’s dig into the structure of the stock market. How does the stock market work? Who is regulating and monitoring the stock market? You must have so many questions in your mind. So let’s explore it one by one.
There is a hierarchy that follows by the stock market. It includes SEBI, stock exchange, Depositories, stockbroker, and people like you and me whose we call the investors.
So let’s talk about these in details: -
Securities and Exchange Board of India (SEBI) is the regulator of the securities and commodity market in India. It is owned by the Government of India. It is a statutory body. It was founded in 1992, under the SEBI act, 1992 headquartered in Mumbai. It regulates and monitors the market. The objective of SEBI is to ensure that the Indian capital market works systematically and also provide a transparency system to its investor. If certain happen in the system of market, it enforces certain rules and regulations and gives penalties.
If company A has issued the IPO of his company, first they have to register with SEBI. There are 2 stock exchanges in India – BSE, and NSE. When a company wants funds to grow its business, it can’t go to the public and ask for money. For the exchange of shares, the company will register itself on the Stock Exchange. Now, to buy or sell the shares, one should have a dematerialized format.
So a person has to open a Demat Account so that his shares will be stored in that account. But these Demat accounts will be open at Depositories. A depository is an entity that helps the investor to buy or sell securities such as stocks and bonds in a paperless manner. These securities in a depository account are much similar to funds in a bank account.
There are two depositories in India – NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). Our shares will be stored in these depositories. They hold our shares, mutual funds, debentures, etc. These depositories are regulated by the Government of India.
Now brokers came into the picture. What brokers do? They are the intermediaries between investors and the exchange. A stockbroker is a professional trader who buys and sells shares on the behalf of clients. For the buying and selling of the stocks, one should have a trading account. This trading account will be opened by the broker.
There are two types of brokers in India. One is a full-service broker (Sharekhan, Motilal Oswal) and another is a discount broker (Zerodha, Upstox). These days, the stockbroker world is dominated by discount brokers. They are more popular because of their low brokerage charge (Zerodha provides Zero brokerage).
And finally, investors came. What are these investors do? They buy or sell the shares, bonds through these brokers. Anyone can buy stocks on the stock exchange. Broadly these investors are many categories like FII (Foreign Institutional Investor), DII (Domestic Institutional Investor), and Retail Investor (Like normal people).
So in conclusion, we can say that the stock market runs systematically. From buying to selling, many steps are followed to the final settlements. Each one has their rights and everyone should follow the system.
I hope that this chapter has given you a good idea of what is stock market and how it works.