Stock market

Also called: share market, Stock exchange · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Class 7, Ch 12 "Understanding Markets"; Class 7, Ch 8 "Banks and the Magic of Finance"; Class 8, Ch 7 "Factors of Production"; Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"

Meaning

The stock market (also called the share market) is the market where people buy and sell shares (small units of ownership in a company) and other securities (tradeable financial claims such as bonds). In India this trading is organised through stock exchanges such as BSE and NSE.

It matters because it moves household savings straight to companies, without a bank loan in between. This is called direct finance. The stock market also sets a price for each share every day, and it lets investors sell their shares and get cash quickly.

Explanation

How the stock market works: primary and secondary market

• Primary market. A company sells new shares to the public, for example in an IPO (Initial Public Offering, the first sale of a company's shares to the public).
• The money goes to the company.

• This is the only stage where the company raises new capital.

• Secondary market. Investors buy and sell existing shares among themselves on BSE or NSE.

• The company gets no new money from these trades.

• Most of what people call "the stock market" is this secondary trading.

• Why the secondary market still matters to firms:

• Investors know they can sell their shares later.
• So they are more willing to buy new shares in an IPO.

• So a busy secondary market helps companies raise money in the primary market.

• Exchange-traded vs OTC (over the counter):

• On an exchange, a clearing corporation stands between the buyer and the seller. If one side fails to pay, the other side is still protected.
• An OTC deal is a private deal between two parties. It carries counterparty risk (the risk that the other side does not pay).

What is traded: the main instruments

• Equity share = a unit of ownership in a company.
• It gives voting rights.
• It gives a residual claim: the shareholder gets what is left after workers, lenders and taxes are paid. So equity holders gain the most in good years and lose first in bad years.
• Shareholders earn in two ways: a dividend (a part of the profit paid out to them) and a rise in the share price.

• Class 7 analogy: a company is like a big chapati, and each share is one piece of it.

• Worked example: how much of the company do you own?

• A company has 1 crore shares. You hold 10,000 shares.
• Your share = 10,000 ÷ 1,00,00,000 = 0.1%.

• So you get 0.1% of any dividend the company pays.

• Preference share = a hybrid (a mix of debt and equity).

• It gets its dividend first, before equity holders.
• It gets its capital back before equity holders if the company closes.

• It usually has no voting rights.

• Bond (debenture) = a debt instrument. The bondholder is a lender, not an owner. The bondholder gets fixed interest (called the coupon) and the principal back on a set date.

• Derivatives = contracts whose value comes from an underlying asset, such as a share. Examples are futures and options. People use them to hedge (reduce risk) and also to speculate.

What the stock market does, and how it is measured

• Price discovery. Buyers and sellers together set the share price. The price shows what the market thinks the company is worth today.
• Liquidity. You can sell shares quickly and get cash. Because they know they can exit, people are more willing to invest for the long term.
• Risk-sharing. One company's risk is spread over lakhs of shareholders, so no single person carries all of it.
• Stock index = an index number that tracks the prices of a chosen group of shares (Class 11, Index Numbers).
• Worked example: reading the Sensex
• The Sensex tracks 30 large companies. Its base year is 1978-79 = 100.
• If the Sensex reads 80,000, then 80,000 ÷ 100 = 800.
• So these shares are worth about 800 times their base-year level.
• When the index rises, most large shares have gained value. When it falls, most have lost value.

In India

• BSE (Bombay Stock Exchange):
• Set up in 1875 as the Native Share and Stock Brokers' Association.
• It is Asia's oldest stock exchange.

• Its index is the Sensex (30 companies, base year 1978-79 = 100).

• NSE (National Stock Exchange):

• Set up in 1992.
• Began screen-based equity trading in 1994. This gave all-India access, faster trades and more open pricing.

• Its main index is the Nifty 50.

• From paper to screen:

• Class 7 notes that deals were once done on paper tickets.
• Paper share certificates and open-outcry trading (brokers shouting bids on the trading floor) have given way to computer screens.

• Shares are now held in demat accounts (dematerialised accounts, which store shares electronically, like money in a bank account).

• Regulator: SEBI (Securities and Exchange Board of India):

• Set up in 1988 as a non-statutory body, which means it had no legal power to punish.
• The Harshad Mehta scam (1992) showed how weak market supervision was.
• SEBI got statutory powers in January 1992 through the SEBI Act, 1992 [3].
• Under the Act, SEBI must protect investors' interests, promote the development of the securities market, and regulate it [3].

• SEBI took over commodity derivatives from the Forward Markets Commission (FMC) on 28 September 2015 [2][4].

• Latest data (Economic Survey 2025-26):

• Equity and mutual funds made up 2% (FY12) of yearly household financial savings. This rose to over 15.2% (FY25) [5].
• Individual investors' share in equity ownership reached 18.8% (September 2025) [5].
• Household equity wealth rose by about ₹53 lakh crore between April 2020 and September 2025 [5].
• 235 lakh demat accounts were added in FY26 (till December 2025). This took the total beyond 21.6 crore [5].
• Unique investors crossed 12 crore in September 2025, and nearly one-fourth are women [5].

Don't confuse with

• Stock market vs money market: the stock market is part of the capital market, which deals in long-term funds of more than 1 year. The money market deals in short-term funds of up to 1 year, through instruments such as T-bills, call money and commercial paper.
• Primary vs secondary market: a company gets money only in the primary market (for example, an IPO). Everyday trading on BSE and NSE is secondary market activity, and the company gets nothing from it.
• Shareholder vs bondholder: a shareholder is an owner, with voting rights and a residual claim. A bondholder is a lender who gets a fixed coupon and gets the principal back.
• Equity share vs preference share: preference shareholders are paid dividend and capital first but usually have no voting rights. Equity holders vote and take whatever is left.

Prelims Hooks

• BSE (1875) started as the Native Share and Stock Brokers' Association and is Asia's oldest stock exchange. NSE was set up in 1992 and began screen-based trading in 1994.
• The Sensex tracks 30 companies and has a base of 1978-79 = 100. Its NSE counterpart is the Nifty 50.
• A company raises new capital only in the primary market. Trading on BSE and NSE is the secondary market.
• SEBI was non-statutory from 1988 and became statutory under the SEBI Act 1992 [3]. It took over commodity derivatives from FMC on 28 September 2015 [2][4].
• Trap: SEBI regulates the stock market, but G-secs (government securities), forex and interest-rate or currency derivatives are regulated by the RBI.
• Trap: T-bills and commercial paper are money-market instruments. They are not traded as stock-market (capital-market) instruments.

Mains Points

• Financialisation of household savings: gains and risks.
• Gain: equity and MF share in household financial savings rose from 2% (FY12) to over 15.2% (FY25), and demat accounts crossed 21.6 crore [5].
  • Savings leave idle gold and property → they flow to firms through shares → firms invest and create jobs.
  • India also depends less on bank loans and foreign money.

• Risk: many new retail investors, often from small towns, may take on risks they do not understand, especially in derivatives. So investor education and SEBI's safeguards must grow as fast as participation does.

• Post-1991 market reforms (GS-III). Several reforms changed how the market works:

• SEBI got statutory powers (1992) [3].
• NSE started screen trading (1994).
• Demat holding and clearing corporations came in.

• Together they reduced fraud and settlement risk. Trading moved from paper tickets and open outcry to open, electronic markets. This shows how liberalisation strengthened the capital market as a source of funds for industry.

• Stock market vs bank finance. The stock market gives firms direct finance and spreads risk across lakhs of shareholders, which eases the burden on banks. But share prices can swing sharply, and scams like Harshad Mehta (1992) show that a deep market needs a strong regulator to keep investors' trust.

Related concepts

• Capital market
• Equity share
• Preference share
• International Financial Services Centre

Read more

• Financial markets: functions, structure and the regulatory map