Equity market in India: A Detailed Guide for Investors

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Equity market in India: An Overview

Equity market in India works on the same principle as an auction house where buyers and sellers negotiate and make their best bids on securities. Fundamentally, an equity market is a place where companies list their securities and investors can buy/sell these shares at the available market price. The equity market is also interchangeably called by the terms stock market or share market where share/stock implies the true meaning of equity. 

Investments in equity shares brings with itself a sense of ownership and is no doubt one of the most viable options for the real time investors. Investing in the equity market bestows an individual with a right to vote in the company matters and also yields benefits like dividends and right options. 

Equity market is equally rewarding and risky. Therefore it is important for an investor, especially the beginners, to apply their due diligence and have a brief understanding of the market before plugging in their money.

Understanding the Fundamentals of Stock Market

The equity market in India is supervised, regulated and developed by the Securities and Exchange Board of India (SEBI), an independent body formed in 1992. It is responsible for protecting the interests of the investors, and promoting and regulating the equity markets. The SEBI is empowered with power to impose penalties in case of a violation of the rules laid out by it.

The equity market functions through an open electronic limit order book, this means that the system continuously executes trades by matching orders from buyers and sellers. This ensures that the buyers and sellers involved are anonymous. The trading process is order-driven, and it automatically matches the sell order to the best buy limit order. A limit order ensures the execution of an order at a specified price or better. 

Details of the Indian Stock Exchanges

Bombay Stock Exchange

The Bombay Stock Exchange or BSE was launched in 1875 and is Asia's first stock exchange. Founded by the cotton merchant Premchand Roychand, under the name “The Native Shares and Stock Broker's Association”, BSE has metamorphosed itself into one of world's most followed stock exchanges. In its span of operations, BSE has achieved several milestones. The Bombay Stock Exchange is the world's fastest stock exchange with a median speed of 6 microseconds to settle a trade. Also, in February of 2017, the BSE became India's first listed stock exchange.  Apart from this, India's first international exchange, the India International Exchange Ltd. (INX) at GIFT CITY in Ahemdabad, was launched by the BSE. The S&P BSE Sensex is one of India's most popular benchmark indices.

National Stock Exchange

The National Stock Exchange or NSE commenced in the year 1994. Fitted with the latest equipment for screen-based trading and the country's first dematerialized electronic exchange, NSE is a force to reckon with among India's stock exchanges. NSE was the world's largest derivatives exchange in 2021 due to the sheer number of contracts traded. Its principal index, the Nifty 50 is one of the most followed barometers of the Indian economy.

Calcutta Stock Exchange

The Calcutta Stock Exchange is lesser known in comparison to the above two exchanges. Trades in this exchange date way back to 1836. The stock exchange has adopted several changes in order to reflect the modern trading practices and looks optimistic to tackle future challenges head-on. 

Apart from the ones we have listed, there are several other exchanges with regard to commodities trading. The Indian Commodity Exchange, the Multi Commodity Exchange of India Ltd, and the National Commodity and Derivatives Exchange Ltd.  

What is the T+2 rolling settlement system?

Once a trade is finalized the settlement of the trade is completed based on the T+2 rolling settlement system. In this system, the trades made on a particular date are cleared after the specified time period of two days from the date of the trade. This means that a trade made on Tuesday would be cleared on Thursday. This allows the trades to be continuously cleared from time to time, instead of waiting for a specific day of the month to clear all trades. The trades are made through verified brokers only, and many of whom provide online trading platforms to facilitate swift flow of trades in India.

What are the timings of Indian Stock Markets?

The equity markets function five days a week from Monday to Friday. Trading begins from 9:15 AM on each day till 3:30 PM, this is known as the normal trading hours of the equity markets. 

The equity market also allows for a pre-opening session and a post-closing session of trading. The pre and post trading sessions provide for a fraction of volume of trades as compared to the normal trading hours. Some brokers provide their investors with the option to trade during the pre or post trading sessions, but with limited volumes or orders. The pre-opening session begins at 9:00 AM and continues till 9:15 AM, when the normal trading period starts and the post-closing session starts at 3:30 PM and ends at 4:00 PM. These trading sessions help stabilize the market before and after trading to prevent steep changes in the stock prices.

The shares, unlike previously used physical share certificates, are stored in an electronic format in a demat account. The use of the electronic mode helps in preventing loss, forgery, theft or damages to the shares and ensures security and transferability of the shares.

Types of Equity Markets

There are two types of equity markets: primary market and secondary market. When new shares; i.e, shares that have previously not been traded in the market, are issued for subscription in the market, it is done through the primary market. The company in this market enters in order to raise money in exchange for a share of ownership of the company. 

When a company issues shares into this market for the first time, it is  known as the Initial Public Offering (IPO). Once these securities are sold in the primary market they are exchanged among the investors. These exchanges take place in the secondary market. The investors buy and sell among themselves without involving the company in the transaction under the secondary market.

What are the benefits of Investing in Stock Markets?

It is not tough to gauge by now that equity investments are popular by reason and provides with 

indelible opportunities. If an investor strategically plans his investment, it has a high potential of becoming his rags to riches story. Also traditional investments like fixed deposits, debt instruments, government securities are certainly safer options but for investors with high risk appetite, the real fanatic experience comes from investing in the equity market in India  because of the opportunity to financial freedom that it brings with itself.

  • Investing in equity provides you with a solid tax benefit. When you sell your shares for profit, generally after holding it for more than 1 year, the profit attracts about 10% tax. This is below the tax rate in case of fixed deposits as per the individual's tax rate i.e up to 30%.
  • An equity market provides an investor with free entry and exit opportunities and the cost of capital is fairly low then entering in other schemes of investments.
  • The most attractive pro of investing in the equity market is huge profits and capital appreciation within a very short period of time.
  • Investing in equity markets replicates a hedge against inflation. The purchasing power is likely to be wearing high than the inflation due to the high rate of return.
  • Investing in the equity market is simple once an investor gets a hang of it. You can invest within minutes through the demat account and easily via any recognized stock exchange.
  • If you are looking for a diversified portfolio, equity investments are one of the best of its kind, one with lucrative return on capital. 

What to know before investing in Stocks?

Investments in the equity market sure have its fair-deal of advantages however, it is important for an investor to remember that the risk quotient of the market is as high as its returns. The market is explicitly not holier than thou and if you do not have your fundamentals correct, you can end up at huge losses or even a heart-attack. Therefore experts have suggested some of the following tips.

  • It is vital for an investor to do a thorough research on the market trends before investing in a share.
  • One must take note of the upstrings and downstrings of the stock market as it tends to fluctuate frequently.
  • Do  not make an investment based on what others are investing in, it eventually shall bring the value of the stocks down, as surviving in the equity market without your own conscience can be deadly.
  • Equity market has a risk of capital erosion, therefore try maintaining your capital, as without capital there is a very slim possibility of recovering your losses.
  • Equity market is driven by techniques such as charts, financial trends, use of Stop loss etc.
  • Do not invest in a company without studying its financial position, their market cap, P/E ratio, ROE etc. 
  • What is the main function of the equity market?

  • What is the difference between equity and stock?

  • Is it important to open a demat account to buy equity?

  • What are the two primary stock exchanges in India?