How Stock Market Works ?

In order to understand what stocks are and how stock markets work, we need to dive into history--specifically, the history of what has come to be known as the corporation, or sometimes the limited liability company (LLC). Corporations in one form or another have been around ever since one guy convinced a few others to pool their resources for mutual benefit.
The first corporate charters were created in Britain as early as the sixteenth century, but these were generally what we might think of today as a public corporation owned by the government, like the postal service.

Privately owned corporations came into being gradually during the early 19th century in the United States , United Kingdom and western Europe as the governments of those countries started allowing anyone to create corporations.

In order for a corporation to do business, it needs to get money from somewhere. Typically, one or more people contribute an initial investment to get the company off the ground. These entrepreneurs may commit some of their own money, but if they don't have enough, they will need to persuade other people, such as venture capital investors or banks, to invest in their business.

They can do this in two ways: by issuing bonds, which are basically a way of selling debt (or taking out a loan, depending on your perspective), or by issuing stock, that is, shares in the ownership of the company.

Long ago stock owners realized that it would be convenient if there were a central place they could go to trade stock with one another, and the public stock exchange was born. Eventually, today's stock markets grew out of these public places.

Stocks

A corporation is generally entitled to create as many shares as it pleases. Each share is a small piece of ownership. The more shares you own, the more of the company you own, and the more control you have over the company's operations. Companies sometimes issue different classes of shares, which have different privileges associated with them.

So a corporation creates some shares, and sells them to an investor for an agreed upon price, the corporation now has money. In return, the investor has a degree of ownership in the corporation, and can exercise some control over it. The corporation can continue to issue new shares, as long as it can persuade people to buy them. If the company makes a profit, it may decide to plow the money back into the business or use some of it to pay dividends on the shares.

Public Markets

How each stock market works is dependent on its internal organization and government regulation. The NYSE (New York Stock Exchange) is a non-profit corporation, while the NASDAQ (National Association of Securities Dealers Automated Quotation) and the TSE (Toronto Stock Exchange) are for-profit businesses, earning money by providing trading services.

Most companies that go public have been around for at least a little while. Going public gives the company an opportunity for a potentially huge capital infusion, since millions of investors can now easily purchase shares. It also exposes the corporation to stricter regulatory control by government regulators.

When a corporation decides to go public, after filing the necessary paperwork with the government and with the exchange it has chosen, it makes an initial public offering (IPO). The company will decide how many shares to issue on the public market and the price it wants to sell them for. When all the shares in the IPO are sold, the company can use the proceeds to invest in the business.

i have been reading your all post i find very inttresting and knowlegeble it realy help people who are new in the this field and want good info of the market it good for starting.

I have the following querry
With the introduction of on-line trading facility, why there is necessity of opening trading account with brokers. After observing all KYC Norms, exchanges should allow even small investors / traders to open on-line trading account directly with them. Thereby, those small investors / traders will save huge amount of brokerage charges. Other charges viz STT, D'mat account maintenance charges etc. can be directly recovered by the exchange. Senior members to comment, please.

The reason is Infrastructre and management cost, for opening retail accounts the exchanges need to have huge databases of users and trade details... and other overhead costs.....

So when the cost of managing retail account comes down and the benefits of allowing retail customers outweights the cost ....then they will allow retail users...

Its happening ..... with fully electronic exchanges...like Nasdaq....but not to the extent of each and every retail customers .....

But ....These brokers act as value add services....and have a important role to play...
Consider the situation .. when every user will open a Saving account with RBI...

Dear dhakkan,
As far as your observation i.e. Consider the situation .. when every user will open a Saving account with RBI... is concerned...
comparison is not correct. RBI is not doing any commercial business with individual customers through banks neither Banks are charging for transactions done in their accounts by the customer (like brokerages charged by brokers). I as a customer is not bothered whether account is maintained by A bank [commercial bank] OR B bank[RBI]. I am concerned only about the charges[brokerage]. Its like I am purchasing farm produce directly from the farmer rather than through retail vendor.

Good..point...thanks for correcting...

Please consider this also.. as mentioned....
what you are asking for is happening with new electronic exchanges...this exactly is what they are aiming for....just a matter of time and cost management... and you will get a account at the exchange you want....

a trivia : Nasdaq has higer volume than NYSE ...just because of the reason as you explained...everyone wants .. what you are asking ..me too...

I did not knew that SEBI was listning to you... check the news today (we are a step closer):

In a move that will usher in algorithmic trading and transform the Indian stock market, the country’s capital market regulator on Thursday allowed direct market access (DMA) to institutional investors. Foreign institutional investors (FIIs) and domestic institutions such as mutual funds and insurance firms can now directly execute their buy and sell orders without any manual intervention by their brokers.
However, brokers aren’t entirely out of the picture because the trades will still be executed through their systems.

link : <http:// www.livemint .com/2008/04/03235843/Institutions-now-get-direct-ma.html>