In a share market, shares are bought and sold. The stock market is a share market, however besides shares of companies, other instruments like bonds, mutual funds and derivative contracts too are traded in the stock market. There are two kinds of share markets: Primary share market A company enters the primary market to raise funds. It is in the primary market that a company gets registered to issue shares to the public and raise money. Companies generally get listed on the stock exchange through the primary market route. In case a company is selling shares for the first time, it is called an Initial Public Offering or IPO, after which the company becomes public. While going for an IPO, the company has to provide details about itself, its financials, it promoters, its businesses, stocks being issued, price band and so on. Secondary share market In the secondary market, investors trade already listed securities by buying and selling them. Secondary market transactions are transactions where one investor buys shares from another at the prevailing price. Normally, these transactions are conducted through a broker. Secondary market offers investors a chance to sell all its shares and exit the financial market. For example: Shares of Tata Steel are trading in the market at Rs 230 a share. An investor can buy these shares at current market price and will get part-ownership of the company and become a shareholder. The share market is a source for companies to raise funds and for investors to buy part-ownership in growing businesses and grow their wealth. On becoming a shareholder, an investor earns a part of the profits earned by the company by way of dividend. At the same time, the investor also undertakes the risk to bear loses, should the business fail to perform well. Market participants need to get registered with the stock exchange and market regulator Sebi to be able to trade in the stock market. HOW SHARE MARKET WORKS: Stock market investing is often called a gamble. It would cease to be a gamble if you understood the basics of the share market. Let’s try to stitch these narratives together and understand how the stock market works. A stock exchange in the platform where financial instruments like stocks and derivatives are traded. Market participants have to be registered with the stock exchange and SEBI to conduct trades. This includes companies issuing shares, brokers conducting the trades, as well as traders and investors. All of this is regulated by the Securities and Exchange Board of India (SEBI), which makes the rules of conduct. Once listed, the stocks issued can be traded by the investors in the secondary market. This is where most of the trading happens. In this market, buyers and sellers gather to conduct transactions to make profits or cut losses. Stock brokers and brokerage firms are entities registered with the stock exchange. They act as an intermediary between you, as an investor, and the stock exchange. Your broker passes on your buy order to the exchange, which searches for a sell order for the same share. Once a seller and a buyer are fixed, a price is agreed finalized, upon which the exchange communicates to your broker that your order has been confirmed. Your broker passes on your buy order to the exchange, which searches for a sell order for the same share. Once a seller and a buyer are fixed, a price is agreed finalized, upon which the exchange communicates to your broker that your order has been confirmed. This message is then passed on to you. Even at the broker and exchange levels, there are multiple parties involved in the communication chain like brokerage order department, exchange floor traders, and so on. However, the trading process has become electronic today. This process of matching buyers and sellers is done through computers. As a result, the process can be finished within minutes. HOW YOUR ORDER IS PROCESSED: First, a company gets listed in the primary market through an Initial Public Offering (IPO). In its offer document, it lists details about the company, the stocks being issued, and so on. During the listing, the stocks issued in the primary market are allotted to investors who have bid for the same. However, there are tens and thousands of investors. It is impossible for all to converge in one location and conduct their trades. This is where stock brokers and brokerage firms play role. Once you place an order to buy a particular share at a said price, it is processed through your broker at the exchange. There are multiple parties involved in the process behind the scenes. Meanwhile, the exchange also confirms the details of the buyers and the sellers to ensure the parties don’t default. It then facilitates the actual transfer of ownership of shares. This process is called settlement. Earlier, it used to take weeks to settle trades. Now, this has been brought down to T+2 days. For example, if you conducted a trade today, you will get your shares deposited in your demat account by the day after tomorrow ( i.e. two working day). The exchange ensures that the trade is honoured during the settlement#. Whether the seller has the required stock to sell or not, the buyer will receive his shares. If a settlement is not upheld, the sanctity of the stock market is lost, because it means trades may not be upheld. As and when trades are conducted, share prices change. This is because prices of shares – like any other goods – are dependent on the perceived value. This is reflected in the rise or fall of demand for the stock. As demand for the stock increases, there are more buy orders. This leads to an increase in the price of the stock. So when you see the price of a stock rise, even if it is marginal, it means that someone or many placed buy order(s) for the stock. Larger the volume of trade, greater the fluctuation in the stock’s price. HOW TO INVEST IN SHARES: Now that you have understood exactly how the stock market works, you may be wondering how to invest in the market. Step 1 First, understand your investment requirements and limitations. Your requirements should take into account the present as well as the future. The same applies to your limitations. For example, you just got a job and earn Rs. 20,000 a month. Your limitation could be that you need to set aside at least Rs. 10,000 for instalment payments for your car, and another Rs. 5,000 for your monthly expenses. This leaves aside only Rs. 5,000 for investment purposes. Now, if you are a risk-averse investor, you may prefer to invest a larger portion of this amount in low-risk options like bonds and fixed deposits. This means, you have only a small portion left for stock market investing – Rs. 1,000. Further, take into consideration your tax liabilities. Remember, making profits on short-term buying and selling of shares incurs capital gains tax. This is not applicable if you sell your shares after a year. So, ensure that your cash needs don’t force you to sell your shares on short-term unnecessarily. Better to take a wise well-thought decision, than attract unnecessary costs in the future. Step 2 Once you understand your investment profile, analyse the stock market and decide your investment strategy. Find out which stocks suit your profile. If we continue the above example, with a budget of Rs 1,000, you can either choose to buy one large-cap stock or multiple small-cap stocks. If you need an additional source of income, opt for high-dividend stocks. If not, opt for growth stocks which are likely to appreciate the most in the future. Deciding the kind of stocks you wish to collect is part of your investment strategy. Step 3 Wait for the right time. Have you ever seen a cheetah or tiger hunt? They lie low for a while waiting for their prey, and then they pounce. Exactly the same way, time is of utmost importance in the stock market. Merely getting the stock right is not enough. Your profits will be maximised only if you buy at the lowest level possible. The same applies if you are selling your shares. This needs time. Do not be impulsive. Step 4 Conduct your trade either online or on the phone through your broker. Ensure that your broker confirms the trade and gets all the details right. Recheck the trade confirmation to avoid errors. Step 5 Monitor your portfolio regularly. The stock market is dynamic. Companies may seem profitable one moment, and not-so profitable the next due to some unforeseen factor. Ensure you regularly read about the companies you have invested in. In the case of some unfortunate situation, this will help you minimize your losses before it is too late. However, this does not mean you panic every time the stock falls. A stock’s price will fall at some point in time, because there will be some investor in the market with a shorter investment horizon than you. So, he will sell his stock and pocket whatever profits possible in that shorter time. HOW TO COMPANY LISTING: Listing means admission of securities to dealings on a recognised stock exchange. The securities may be of any public limited company, Central or State Government, quasi governmental and other financial institutions/corporations, municipalities, etc. The objectives of listing are mainly to : provide liquidity to securities; mobilize savings for economic development; protect interest of investors by ensuring full disclosures. The BSE Limited has a dedicated Listing Department to grant approval for listing of securities of companies in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued by SEBI and Rules, Bye-laws and Regulations of BSE. BSE has set various guidelines and forms that need to be adhered to and submitted by the companies. These guidelines will help companies to expedite the fulfillment of the various formalities and disclosure requirements that are required at various stages of Public Issues Initial Public Offering Further Public Offering Preferential Issues Indian Depository Receipts Amalgamation Qualified Institutions Placements A company intending to have its securities listed on BSE has to comply with the listing requirements prescribed by it. Some of the requirements are as under : Minimum Listing Requirements for New Companies Minimum Requirements for Companies Delisted by BSE seeking relisting on BSE Permission to Use the Name of BSE in an Issuer Company's Prospectus Submission of Letter of Application Allotment of Securities Trading Permission Requirement of 1% Security Payment of Listing Fees Compliance with the Listing Agreement Cash Management Services (CMS) - Collection of Listing Fees 1. Minimum Listing Requirements for New Companies The following eligibility criteria have been prescribed for listing of companies on BSE, through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs): The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 10 crore for IPOs & Rs.3 crore for FPOs; and The minimum issue size shall be Rs. 10 crore; and The minimum market capitalization of the Company shall be Rs. 25 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price). Further : In respect of the requirement of paid-up capital and market capitalization, the issuers shall be required to include in the disclaimer clause forming a part of the offer document that in the event of the market capitalization (product of issue price and the post issue number of shares) requirement of BSE not being met, the securities of the issuer would not be listed on BSE. The applicant, promoters and/or group companies, shall not be in default in compliance of the listing agreement. The above eligibility criteria would be in addition to the conditions prescribed under SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009. The Issuer shall comply to the guidance/ regulations applicable to listing as bidding inter alia from Securities Contracts (Regulations) Act 1956 Securities Contracts (Regulation) Rules 1957 Securities and Exchange Board of India Act 1992 And any other circular, clarifications, guidelines issued by the appropriate authority. Companies Act 1956 2. Minimum Requirements for Companies Delisted by BSE seeking Relisting on BSE Companies delisted by BSE and seeking relisting at BSE are required to make a fresh public offer and comply with the existing guidelines of SEBI and BSE regarding initial public offerings. 3. Permission to Use the Name of BSE in an Issuer Company's Prospectus Companies desiring to list their securities offered through a public issue are required to obtain prior permission of BSE to use the name of BSE in their prospectus or offer for sale documents before filing the same with the concerned office of the Registrar of Companies. BSE has a Listing Committee , comprising of market experts, which decides upon the matter of granting permission to companies to use the name of BSE in their prospectus/offer documents. This Committee evaluates the promoters, company, project , financials, risk factors and several other aspects before taking a decision in this regard. Decision with regard to some types/sizes of companies has been delegated to the Internal Committee of BSE 4. Submission of Letter of Application As per Section 73 of the Companies Act, 1956, a company seeking listing of its securities on BSE is required to submit a Letter of Application to all the stock exchanges where it proposes to have its securities listed before filing the prospectus with the Registrar of Companies. 5. Allotment of Securities As per the Listing Agreement, a company is required to complete the allotment of securities offered to the public within 30 days of the date of closure of the subscription list and approach the Designated Stock Exchange for approval of the basis of allotment. In case of Book Building issues, allotment shall be made not later than 15 days from the closure of the issue, failing which interest at the rate of 15% shall be paid to the investors. 6. Trading Permission As per SEBI Guidelines, an issuer company should complete the formalities for trading at all the stock exchanges where the securities are to be listed within 7 working days of finalization of the basis of allotment. A company should scrupulously adhere to the time limit specified in SEBI (Disclosure and Investor Protection) Guidelines 2000 for allotment of all securities and dispatch of allotment letters/share certificates/credit in depository accounts and refund orders and for obtaining the listing permissions of all the exchanges whose names are stated in its prospectus or offer document. In the event of listing permission to a company being denied by any stock exchange where it had applied for listing of its securities, the company cannot proceed with the allotment of shares. However, the company may file an appeal before SEBI under Section 22 of the Securities Contracts (Regulation) Act, 1956. 7. Requirement of 1% Security Companies making public/rights issues are required to deposit 1% of the issue amount with the Designated Stock Exchange before the issue opens. This amount is liable to be forfeited in the event of the company not resolving the complaints of investors regarding delay in sending refund orders/share certificates, non-payment of commission to underwriters, brokers, etc. 8. Payment of Listing Fees All companies listed on BSE are required to pay to BSE the Annual Listing Fees by 30th April of every financial year as per the Schedule of Listing Fees prescribed from time to time. The schedule of Listing Fees for the year 2011-12, is given here under: 9. Compliance with the Listing Agreement Companies desirous of getting their securities listed at BSE are required to enter into an agreement with BSE called the Listing Agreement, under which they are required to make certain disclosures and perform certain acts, failing which the company may face some disciplinary action, including suspension/delisting of securities. As such, the Listing Agreement is of great importance and is executed under the common seal of a company. Under the Listing Agreement, a company undertakes, amongst other things, to provide facilities for prompt transfer, registration, sub-division and consolidation of securities; to give proper notice of closure of transfer books and record dates, to forward 6 copies of unabridged Annual Reports, Balance Sheets and Profit and Loss Accounts to BSE, to file shareholding patterns and financial results on a quarterly basis; to intimate promptly to the Exchange the happenings which are likely to materially affect the financial performance of the Company and its stock prices, to comply with the conditions of Corporate Governance, etc. The Listing Department of BSE monitors the compliance by the companies with the provisions of the Listing Agreement, especially with regard to timely payment of annual listing fees, submission of results, shareholding patterns and corporate governance reports on a quarterly basis . Penal action is taken against the defaulting companies. 10. Cash Management Services (CMS) - Collection of Listing Fees In order to simplify the system of payment of listing fees, BSE has entered into an arrangement with HDFC Bank for collection of listing fees from 141 locations all over the country.Details of the HDFC Bank branches are available on our website site www.bseindia.com as well as on the HDFC Bank website www.hdfcbank.com This facility is being provided free of cost. Companies intending to utilize this facility for payment of listing fee should furnish the information (as mentioned below) in the Cash Management Cash Deposit Slip. These slips are available at all the HDFC Bank branches.