An Introduction to Indian Stock Markets

An Introduction to Indian Stock Markets

Investing in the stock market in India began centuries ago. Trading in loans can be traced to the 18th century. Trading in shares formally began with the establishment of the Bombay Stock Exchange in 1875-- a good 148 years ago. 

However, much has changed since technology created an efficient stock market trading and settlement system. Today, you can buy or sell shares with a tap on your smartphone. It opens up options for you as an investor. You can now actively or passively manage your portfolio like never before. 

So what exactly are shares? Shares are a part-ownership in a company. In proportion to the amount you invest in the company, you get shareholder rights – voting rights and dividends. 

You can also sell shares to other investors, transferring ownership in the secondary market. It is called trading in the secondary market when you buy or sell shares. It is the primary market when you buy shares during a company's initial public offering or IPO. 

In this article, we will look at the different stock market participants to understand how the stock market works. 

What is a Stock Market? 

A stock market is a platform that enables the movement of capital through an efficient trading and settlement system. Companies issue shares to you (investors) in the stock market to raise capital for future growth. It could be in the form of equity shares or debt (debentures). These are called securities that can be traded on a stock exchange. Investors buy such securities as a form of financial investment. A buyer gets shares, and the seller gets the money on the day of the trading settlement. The stock market management's job is to ensure such settlements happen without fail. 

An efficient stock market is pivotal to a country's economic development as it enables the movement of capital from those who have it to those who need it. India's stock market is the fifth largest in the world by market value. The evolution of the Indian stock market from a paper-based trading system to one of the most efficient is a story for another day.  

If you want to buy or sell your shares, you have to approach a broker who is a member of the National Stock Exchange or the Bombay Stock Exchange. You open a Demat account first and then a trading account with a broker. The two stock exchanges enable your seamless stock market trading experience through an efficiently management trading and settlement system. 

The Two Primary Stock Exchanges In India

Stock exchanges are financial markets where stocks and other securities are traded between buyers and sellers. They provide a centralised platform where publicly traded companies can sell their shares to the public, and investors can buy and sell those shares to other investors.

The process of trading on a stock exchange typically involves a broker or a trading platform that connects buyers and sellers, matching their buy and sell orders. Stock exchanges also provide information on the performance of the listed companies, such as their financial statements and other relevant data.

There are two primary stock exchanges in India – the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

The NSE was established in 1992. It offers investments in equities, indices, initial public offerings, mutual funds, exchange-traded funds, and derivatives. Trading on the NSE occurs via electronic limit orders, which are matched through a trading computer. That allows for anonymity and transparency. 

The BSE is India's oldest and first functional stock exchange in Asia. It was established in 1875 and is headquartered in Mumbai. When the stock exchange started, it followed a floor trading system. Since then, it has advanced. Today, financial transactions on the BSE are done through an electronic trading system. 

All major companies in India prefer to list on the NSE or BSE, or both exchanges. 

Regulators and Intermediaries 

The Securities Exchange Board of India (SEBI) regulates the Indian stock markets. It is responsible for overseeing the activities of the Indian stock exchanges. The primary objective of the SEBI is to protect investors, regulate financial intermediaries in the stock market, and promote stock exchange development. 

In addition to the SEBI, the National Security Clearing Corporation Ltd (NSCCL) and Indian Clearing Corporation Ltd (ICCL) are important intermediaries you should know about in the Indian stock markets. They are responsible for settling transactions in the stock exchanges and ensuring no defaults from buyers or sellers. 

Depositories 

A depositary is a financial intermediary that facilities the transfer of ownership of securities. Before electronic trading, share transfers used to happen through physical delivery. Depositories maintained manual records and enabled the transfer of shares. Today, everything happens electronically. Therefore, modern depositories enable the transfer of ownership via Demat accounts. 

India has two depositories that facilitate Demat services - National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). These depositories handle Demat accounts through depository participants. Banks, financial institutions and members of stock exchanges registered with SEBI can become depository participants. 

Stock Market Participants 

Those who trade in the stock market are called market participants. These could be individuals like you, corporates or institutions. Market participants can be categorized as follows: 
•    Domestic Retail Participants: Individuals who are by nationality Indian and live in India, taking part in the stock market. 
•    Non-Resident Indians and Overseas Citizens of India: Individuals who are Indian nationals but live outside the country and participate in the stock market. 
•    Domestic Institutions: Large corporate entities in India trading in the stock market. 
•    Domestic Asset Management Companies: Mutual Funds or other similar large investment entities in the country. 
•    Foreign Portfolio Investors: Non-Indian corporate entities, including foreign Asset Management Companies and Hedge Funds which invest in Indian stock markets. 

Stockbrokers 

Stockbrokers are stock market members who facilitate the trade on stock markets. They could be individuals or companies. They are intermediaries who help execute trade instructions from investors. 

How the Stock Market Works 

1. Listing on the Primary Market 
The primary market is where stocks are listed for the first time. When a company wants to raise money, it issues an Initial Public Offering (IPO) whereby stocks of the company go live for the first time. Investors can then place their bids and will receive the allotment. 

2. Trading 
You buy and sell shares in the secondary market after shares are allotted for the first time. That is where you as traders and investors can transfer ownership of stocks to make a profit. 

3. Order Passing 
When you place a buy order on the stock exchange, the exchange passes it on to a broker. They then match you with a sell order. Once that happens and a price is agreed upon, the order is confirmed. 

4. Settlement 
After the price agreement, the exchange facilities settlement, or the transfer of ownership. Earlier, settlement used to take weeks, but it is now completed in T+2 days. That means the shares will reflect in your Demat account in that time frame, making you the rightful owner. 

As a retail investor, you can invest in the Indian stock market by opening a Trading account and a Demat account. A Trading account is essential for transacting, while a Demat account is where you keep your shares. You can open a Trading and Demat account with a registered stockbroker in the country. 

Using the Trading and Demat account, you can invest in  IPOs or buy shares of an already listed company. All you must do is log in to your account and place a trade. Once a seller accepts it, the exchange will confirm the transaction and transfer ownership. 

Final Word 

The Indian stock markets are an essential part of the country's financial ecosystem. They enable companies to carry out operations and also help investors make money. You should however read up on how the stock market works or connect with experts in the field before investing.  

Using JM Financial’s BlinkTrade platform, you can make stock market investments through your phone and browser. BlinkTrade is extremely easy to use and can help you with your investing journey.