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Chapter 1 Introduction to Stock Market

Learning Objective

This chapter will help you understand the basic concepts of a stock market, stock brokers, different market participants and the regulatory body that regulates the stock market.

Stock Market

Stock market is a place where people buy/sell shares of publicly listed companies. It offers a platform to facilitate seamless exchange of shares. In simple terms, if A wants to sell shares of Reliance Industries, the stock market will help him to meet the seller who is willing to buy Reliance Industries. However, it is important to note that a person can trade in the stock market only through a registered intermediary known as a stock broker. The buying and selling of shares take place through electronic medium. We will discuss more about the stock brokers at a later point.

Major Stock Exchanges in India

There are two main stock exchanges in India where majority of the trades take place - Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Apart from these two exchanges, there are some other regional stock exchanges like Bangalore Stock Exchange, Madras Stock Exchange etc but these exchanges do not play a meaningful role anymore.

National Stock Exchange (NSE)

NSE is the leading stock exchange in India where one can buy/sell shares of publicly listed companies. It was established in the year 1992 and is located in Mumbai. NSE has a flagship index named as NIFTY50. The index comprises of the top 50 companies based on its trading volume and market capitalisation.  This index is widely used by investors in India as well as globally as the barometer of 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 a total of ~5,295 companies listed out of which ~3,972 are available for trading as on August 21, 2017. 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 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 who transact in the markets.

  • NRI’s and Overseas Citizen of India (OCI)-These are people of Indian origin who reside outside India.

  • Domestic Institutions-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 many more 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

Securities Exchange Board of India

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 Demat account, a number of corporate entities are involved to ensure 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:

Stock Broker

A stock broker also known as a dealer is a professional individual who buys/sells shares on behalf of its clients. A stock broker is registered as a trading member with the stock exchange and holds a stock broking license. They operate under the guidelines prescribed by SEBI. An individual needs to open trading/DEMAT account to transact in the financial market.

Depository and Depository Participants

A Depository is a financial intermediary that offers the service of DEMAT account. A DEMAT account will have all the shares that an investor owns in electronic format. In India, there are only two depositaries which offers DEMAT account services - National Securities Depository Limited (NSDL) and 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

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 stock broker 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 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 buyers or sellers side.

DEMAT Account and Trading Account

In order to trade in equities, it is mandatory to have a DEMAT account as well as the Trading account.

DEMAT 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.

How to open DEMAT Account?

Below mentioned are the steps to open DEMAT account in India:

  • To open a DEMAT account; an individual has to approach a depository participant (DP), an agent of depository, and fill up an account opening form. The list of DPs is available on the website of depository’s i.e. CDSL and NSDL.

  • An individual must attach photocopies of KYC documents like identity proof, proof of address along with the account opening form.

  • The DP will provide the depository participant ID or client ID. All the purchase / sale of shares will be through DEMAT Account

Trading Account

A trading account is used to place buy/sell orders in the stock market. One can open their trading account with a stock broker 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 its broker to place an order on his/her behalf.

Key takeaways

  • 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

  • Indian stock market is governed by SEBI.

  • There are different financial intermediaries like stock broker, banks, depository participants etc.

  • DEMAT account or dematerialized account allows holding shares in electronic form instead of taking physical possession of certificates.

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