There is hardly anything about the stock market that is unwritten or unsaid.
If we search thoroughly enough, we will find volumes of content including books, articles, blogs, videos, etc. which would cover every aspect of stock markets and stock trading — from how to get your trading strategies and techniques right to how to get your trading mindset right.
However today, we are going to start with the very basics of stock markets and answer the basic question which comes into the mind of a person who would like to enter the stock market — What is a stock market, and how does it work?
In this post, we will understand some basic concepts of stock markets, how stock market works, and also about other market participants like stockbrokers and SEBI – the regulatory body that regulates the stock market.
What is Stock Market?
A stock market as the name suggests is a marketplace for stocks, ie. a place where people can buy and sell shares of publicly listed companies.
Let us understand this with the help of a simple example –
Suppose you want to invest Rs 10,000 and decide to buy shares of ICICI Bank, which at the time of writing this article is trading at a price of around 380 per share. At this price you will be able to buy ~25 shares of ICICI Bank.
But from where and how will you buy these shares? Can you approach ICICI Bank in order to buy 25 shares? No, you cannot. Just like you, there would be thousands of other individuals who would want to buy or sell shares of the bank on a daily basis, and approaching the bank for such purpose would make the process very cumbersome for the bank and for you.
So to overcome this problem, we have a common platform known as a stock market, where shares of various companies are made available (listed) where buyers and sellers can meet and execute transactions and this facilitates a smooth exchange of shares between parties.
However, a buyer or seller themselves cannot buy or sell a share in the market. They can only do it through a registered intermediary, called a stockbroker who has access to the stock market platform. The stockbroker charges a commission (brokerage) from the buyer and seller, and executes the transaction on their behalf.
This buying and selling of shares takes place through an electronic medium.
Stock Exchanges in India
There are two main stock exchanges in India where most of the transactions take place –
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
National Stock Exchange (NSE)
NSE is the leading stock exchange in India where one can buy and sell shares of publicly listed companies. It was established in the year 1992 and is located in Mumbai. The flagship index of NSE is called as NIFTY50. Nifty lists out top 50 companies comprising of various sectors which trade on the NSE stock exchange. This index is widely used by domestic and global investors to track the Indian capital markets.
Bombay Stock Exchange (BSE)
BSE is Asia’s first as well as the oldest stock exchange in India. It was established in 1875 and is located in Mumbai. It has more than 5,000 companies listed on its exchange. BSE SENSEX is the flagship index of BSE. It measures the performance of the 30 largest, most liquid, and financially stable companies across key sectors.
Different Stock Market Participants
There are a lot of individuals and corporate houses who trade in a stock market. Anyone who buys/sells shares in a stock market is termed as a market participant. Some of the categories of market participants are as follows:
Domestic Retail Participants
These are individuals in India who transact in the markets.
NRI’s and Overseas Citizen of India (OCI)
These are people of Indian origin who reside outside India and transact in Indian markets.
These are large corporate entities based in India (for example LIC of India).
Domestic Asset Management Companies (AMC)
The market participants in this category would be mutual fund companies like HDFC AMC, SBI Mutual Fund, DSP Black Rock, and other similar entities.
Foreign Institutional Investors
FIIs are Non-Indian corporate entities such as foreign asset management companies, hedge funds, and other investors.
Regulator of the Indian Stock Market
The Securities Exchange Board of India (SEBI) is the regulatory body of the Indian Stock Markets. The main objective of SEBI is to safeguard the interest of retail investors, promote the development of stock exchanges, and regulate the activities of financial intermediaries and investors in the market. SEBI ensures the following:
- The stock exchanges (BSE and NSE), brokers and sub-brokers conduct their business fairly.
- Corporate houses should not use markets as a mean to unfairly benefit themselves
- Small retail investors’ interest is protected.
- Large investors with huge cash should not manipulate markets.
- Types of Financial Intermediaries in the Stock Market
From the time an investor places his order to buy shares till the time it is transferred to his Dematerialisation account (DEMAT account), many participants are involved in the process to ensure a smooth transaction. These entities are known as financial intermediaries and they work according to the rules and regulations prescribed by SEBI. Some of the financial intermediaries are discussed below:
A stockbroker also known as a dealer is a professional individual who buys/sells shares on behalf of its clients. A stockbroker is registered as a trading member with the stock exchange and holds a stockbroking license. They operate under the guidelines prescribed by SEBI. An individual needs to open a trading and DEMAT account to transact in the financial market.
Depository and Depository Participants
A Depository is a financial intermediary that offers the service of the DEMAT account. A DEMAT account will have all the shares that an investor owns in an electronic format. In India, there are mainly two depositaries which offer DEMAT account services –
- National Securities Depository Limited (NSDL)
- Central Depository Services (India) Limited (CDSL)
An investor cannot directly go to the depositary to open the DEMAT account. He needs to appoint a Depository Participant (DP). According to SEBI guidelines, banks, financial institutions and members of stock exchanges registered with SEBI can become DPs.
Banks help to transfer funds from a bank account to a trading account. The client needs to categorically mention which bank account has to be linked to the trading account to the stockbroker at the time of opening the trading account.
National Security Clearing Corporation Ltd (NSCCL) and Indian Clearing Corporation Ltd (ICCL)
NSCCL and ICCL are 100% subsidiaries of the National Stock Exchange and Bombay Stock Exchange respectively. They ensure guaranteed settlement of transactions carried in stock exchanges. The clearing corporation ensures there are no defaults either from the buyer’s or seller’s side.
DEMAT Account and Trading Account
To trade in equities, it is mandatory to have a DEMAT account as well as the Trading account.
DEMAT account or dematerialized account allows holding shares in electronic form instead of taking physical possession of certificates. It is mandatory to have a DEMAT account to trade in shares. DEMAT account holds all the investments an individual makes in shares, exchange-traded funds, bonds, government securities, and mutual funds in one place.
A trading account is used to place buy and sell orders in the stock market. One can open their trading account with a stockbroker who is registered with SEBI. An order can be placed either through an online or offline mode. In the online mode, one can buy/sell stocks through the trading terminal provided by the broker whereas; in the offline mode, an individual can ask the broker to place an order on his/her behalf.
Summary of key points:
- A stock market is a place where people buy/sell shares or stocks of publicly listed companies.
- NSE and BSE are the two major stock exchanges in India.
- An individual has to mandatorily open a trading account to trade in the stock market.
- There are different market participants like retail investors, domestic institutions and foreign institutional investors
- The Indian stock market is governed by SEBI.
- There are different financial intermediaries like stockbrokers, banks, depository participants, etc.
- DEMAT account or dematerialized account allows holding shares in electronic form instead of taking physical possession of certificates.