Equity Markets in India: A Detailed Guide for Investors Trading on Equity

Equity Markets in India: A Detailed Guide for Investors Trading on Equity

Red book for investing in Indian equity markets

If you are already an informed and enlightened trader you are probably into equity trading. However, for most people it is about understanding what are equity markets and how do the equity markets in India really function. The irony is that the equity market meaning is that of a place where equities are traded and the platform like any other market brings buyers and sellers together and helps in price discovery.

Equity in share markets is that investing that is high risk and also has the potential for high returns. You can invest through the NSE or the BSE, both of which are stock exchanges. However, before you embark on equity trading in India, you must know about the types of equities and the types of equity markets in India. Equity market is too wide a term to be covered in a chapter but that is what we shall attempt here.

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Table of Content

  1. Red book for investing in Indian equity markets
  2. is the Equity market a place or A marketplace? 
  3. Understanding the business of share markets
  4. Stock exchanges, delivery trading and volumes
  5. Indices and the power of digital trading 

is the Equity market a place or A marketplace? 

Think of a stock market like any other bustling retail or wholesale market and you are probably bang on target. Today, the stock market is far from being a bustling place although the volumes have grown geometrically. That is because, with the advent of electronic trading, the markets have become a quiet and geographically distributed market. Of course, still the most dominating picture is the imposing BSE building, but that is more representative. Even the BSE does not see any trading happening inside as most of it is distributed. It is about understanding what is share market and how it works, including the detailed modus operandi of buying, selling, transferring, clearing and settling shares.    
Understand a share market as the coming together of buyers and sellers in one platform. A share market is therefore likely any other market which brings buyers and sellers together. Share market is a place to buy and sell stocks of listed companies and like any market, the share market also gets created when there are people who are willing to buy a stock and people who are willing to sell the stock. The trade eventually happens when they can agree on a price. Stock markets are not just about profitable trading but also about wealth creation by investors in the long run. However, equity market trading and investing is complex as it needs a lot of share market information to be absorbed and understood. Here is a quick rundown of the nuances of the share market or stock market as it is known.

Understanding the business of share markets

What is the business of a stock market? It is to facilitate the trading in stocks and also ensure that the backend process for clearing and settlement is smooth and seamless. The entire gamut of activities comes under the purview of share markets. Incidentally, one fact that Indians can be proud of is that the Bombay Stock Exchange is the oldest stock exchange in Asia with a pedigree of more than 140 years. But, what does the share market do? It is a place for allocation of capital. What does that really mean? Companies wanting to raise funds for their business expansion or diversification can do so through the IPO segment of share market. At the same time, investors who want to take the risk and invest in such new and untested companies can invest their money in such stocks after due diligence.    
But, buying and selling is just one part of the story. The real question is what happens when you buy a share. Even if you buy one share of Reliance Industries, you become part owner of the company. You can now get dividends on the stock and also vote at the AGM as a legitimate shareholder in the company. But, how are stock prices determined? It is by the forces of demand and supply in the share market. However, it is not just any casual and random market where prices move at random. Instead, these prices  are continuously fine-tuned by research analysts trying to find out the exact value of a stock as an iterative process. Every buyer and seller wants to make profits by buying low and selling high.

FORMAL STOCK MARKETS AND INFORMAL STOCK MARKETS  Most people dealing in the stock market must be familiar or, at least,  must have heard of these terms. Two of the formal markets are the cash market and derivatives market. But there is also an informal market called the grey market and where the IPOs are traded between the time they announce the IPO price and the time they actually list on the stock exchanges. Let us look at more of that.   
a) The cash market or the spot market is the market for immediate settlement of transactions. In the Indian context immediate actually means T+2 rolling settlement and by year 2023 we are fully moving to T+1 form of settlement of shares. Shares you buy today, get credited to your demat account on T+2 date. Shares you sell today; the funds get credited to your bank account also on T+2 day. Now all that will happen on the next day once T+1 is fully operational.

b) Let us now look at the F&O market or the derivatives market for equity futures and options as well as index futures and options. Unlike the cash market, the futures market is the exchange of securities at a specified future date. Futures are contracts not assets. On the other hand, options are also derivative contracts but they are asymmetric in nature in that buyers and sellers of options have different set of rights and obligations. In an options contracts, the buyer has unlimited rights and the seller has limited rights. India’s futures and options market is more than 90% of the daily trading value on any average day.

c) Grey market is not a formal market but an informal market where the IPO stocks are traded informally before their actual listing. Here IPO premiums are traded informally and give an approximate indication of listing price. Grey market is not relevant once the stock gets listed but is a useful parameter till then.

Stock exchanges, delivery trading and volumes

In India, markets are dominated by 2 principal stock exchanges viz. NSE and BSE. The NSE is much newer and came into existence in 1994. However, it has picked up volumes due to being a pioneer in electronic trading. NSE also became a natural choice for futures and options trading, when introduced in 2001. BSE has the advantage of offering more than 4,500 stocks listed.   
What is delivery in stock markets. Delivery based trading entails buying shares and holding them for certain period of time. The shares you bought for delivery will be executed in your trading account but held in the Demat account. Once you take delivery of shares you have to make the full payment and can hold these shares as long as you want. This is the preferred mode for long term investors. In contrast, intraday trading has no delivery or demat account involved but only the profits or losses are adjusted.    
What about volumes in the stock market. Volumes are an important measure of how reliable it is to trade in the stock. It shows the number of stocks traded (executed trades) in any average trading day. Higher the volumes, the higher is the liquidity and lower is the spread risk in stocks. You get best pricing for buying and selling only in stocks with higher volumes. Other than volumes, the traders also closely track parameters like increase in volumes, fall in volumes, multiple volumes, drying up of volumes etc. Volumes also reinforce the strength of a rally or the intensity of a fall in markets.

Indices and the power of digital trading 

Indices are benchmarks against which stocks and portfolios are compared. The most popular general indices in India are the Sensex 30 on the BSE and Nifty-50 on the NSE. There are other sectoral and thematic indices on the stock exchanges and these are monitored by an expert committee. Index performance over a longer period of time is a proxy for wealth creation. Sensex has given returns of over 16.5% over the last 40 years since inception.   
The big shift in the last few years in India has been towards online trading and mobile trading. Online trading entails buying and selling of shares through a broker's internet-based trading platform. Once you activate your online internet trading account, you can just open the website on your PC or laptop, go through the security checks and then start trading. In online trading or mobile based trading, execution and confirmation is in front of you.