1.5Why does the stock market exist?
The stock market exists to connect companies that need money with people who have savings and want them to grow.
It solves problems on both sides:
- Companies get capital to grow without taking loans.
- Investors get a chance to share in company growth.
- Existing shareholders can sell when they want, because there is always a market (this ease of selling is called liquidity).
- The country benefits, because growing companies create jobs.
Your neighbour has a great idea for a factory but no money. You have savings but no idea. A trusted middleman who introduces you, writes a fair agreement and makes sure both sides honour it is doing what the stock market does, but for lakhs of people at once.
There are two parts:
- Primary market: companies sell new shares directly to investors (IPOs). The money goes to the company.
- Secondary market: investors buy and sell existing shares among themselves on NSE/BSE. The company gets no money from these trades.
Most daily trading is in the secondary market.
Company → Investor. New shares (IPO). Money goes to the company.
Investor ↔ Investor. Existing shares on NSE/BSE. Money goes to the seller.
- The stock market connects savers and companies.
- Primary market = new shares from the company.
- Secondary market = trading existing shares between investors.
- Liquidity lets investors exit when needed.
Q1. When you buy Infosys shares on NSE today, does Infosys receive your money?Show answer
No. It is a secondary market trade; your money goes to the investor who sold the shares.
Q2. What is the primary market?Show answer
Where companies issue new shares directly to investors, such as in an IPO.
Q3. What does liquidity mean?Show answer
How easily you can buy or sell something quickly at a fair price.