March 8, 2022 05:28 PM
Indian Stock Market: The stock market broadly refers to the collection of exchanges and other venues where the buying, selling, and issuance of shares of publicly held companies take place. Such financial activities are conducted through institutionalized formal exchanges (whether physical or electronic) or via over-the-counter (OTC) marketplaces that operate under a defined set of regulations.
The key factor is the stock exchange
The basic platform that provides the facilities used to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India’s premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange.
The share market is a platform where buyers and sellers come together to trade on publicly listed shares during specific hours of the day. People often use the terms ‘share market’ and ‘stock market’ interchangeably. However, the key difference between the two lies in the fact that while the former is used to trade only shares, the latter allows you to trade various financial securities such as bonds, derivatives, forex etc.
TYPES OF SHARE MARKET
Primary Market: This where a company gets registered to issue a certain amount of shares and raise money. This is also called getting listed in a stock exchange.
A company enters primary markets to raise capital. If the company is selling shares for the first time, it is called IPO.
Secondary Market: Once new securities have been sold in the primary market, these shares are traded in the secondary market. This is to offer a chance for investors to exit an investment and sell the shares. Secondary market transactions are referred to trades where one investor buys shares from another investor at the prevailing market price or at whatever price the two parties agree upon.
Normally, investors conduct such transactions using an intermediary such as a broker, who facilitates the process.
BSE and NSE
Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
The BSE has been in existence since 1875.3.
The NSE, on the other hand, was founded in 1992 and started trading in 1994.4.
However, both exchanges follow the same trading mechanism, trading hours, and settlement process.
As of November 2021, the BSE had 5,565 listed firms,5 whereas the rival NSE had 1,920 as of Mar. 31, 2021.6
Almost all the significant firms of India are listed on both the exchanges. The BSE is the older stock market but the NSE is the largest stock market, in terms of volume. Both exchanges compete for the order flow that leads to reduced costs, market efficiency, and innovation. The presence of arbitrageurs keeps the prices on the two stock exchanges within a very tight range.
Trading at both the exchanges takes place through an open electronic limit order book in which order matching is done by the trading computer.7 There are no market makers and the entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous.
The advantage of an order-driven market is that it brings more transparency by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed.
All orders in the trading system need to be placed through brokers, many of which provide an online trading facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA) option in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system.
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE.10 It was created in 1986 and provides time series data from April 1979, onward.
Another index is the Nifty, it includes 50 shares listed on the NSE.11 It was created in 1996 and provides time series data from July 1990, onward.
share market timing:
Time is more valuable than money, so goes the old saying. After all, what’s the point of investment if you miss the most opportune moment! So, it’s absolutely necessary to know the share market timings to make informed decisions. There are some simple and easy steps to remember every detail of such timing. The two major stock exchanges in India—the Bombay stock exchange (BSE) and the National stock exchange (NSE)—follow the similar timing.
All other minor stock exchanges in different cities usually follow suit. The share market stays closed on Saturdays and Sundays. It, however, stays open from 9.15 am to 3.30 pm for the rest of the days without any breaks for lunch or tea.
Share market sessions in India
Normal session: It runs from 9.15 am to 3.30 pm. Trading activities are mostly performed during this part of the day. This session adheres to the bilateral matching system. It means that a transaction concludes when the buying and the selling prices are equal.
Pre-opening session: This session starts at 9.00 am and ends at 9.15 am. Though it may not look it, this brief window plays a vital role in controlling the volatility of the market. This session can further be divided into three sub-sessions:
Order entry session: This session takes place between 9 am and 9.08 am. It’s the time for placing orders to buy or sell stocks. The investor can also modify any previously placed order during this period.
Order-matching session: The four minutes between 9.08 and 9.12 is the time for matching the orders. When the orders are considered compatible? It’s the point when the maximum price of the buy order is equal to or more than the minimum price of the sell order.
Buffer: The remaining three minutes from 9.12 to 9.15 are kept as a buffer so that the transition from the pre-opening session to the normal session is smooth.
However, these 15 minutes are often not utilised by the traders. This makes the market more volatile.
After the normal session, the market closes at 3:3 0pm. In the following 10 minutes, the closing prices of stocks are determined. The weighted average of the prices between 3:00 pm and 3:30 pm is declared as the closing price.
The post-closing session: The duration of this session is from 3.40pm to 4.00 pm. Traders can place buy or sell orders at the closing price throughout this session.
It should be noted that the pre-opening and the post-closing sessions work only for cash trading.
Other notable share market timings
The timing for commodity trading (MCX) is between 10 am and 11.30 am. For the agri-community (NCDEX), normal trading takes place from 10am to 5pm. In these cases, the weekends—Saturdays and Sundays—are off.
You can place trade orders even after the closing time, but the orders stay pending. These orders fall under AMO—i.e. after the market order.
Apart from these regular share market timings, the Indian stock market runs a special trading session around Diwali. It’s known as Mahurat trading. The exact timing for this session is declared a few days before the festival. It usually takes place in the evening.
In a recent declaration, the Securities and Exchange Board of India (SEBI) has declared that stock exchanges can extend the session for the trading of equity derivatives till 11.55 pm.
Who Can Invest in India?
India started permitting outside investments only in the 1990s. Foreign investments are classified into two categories: foreign direct investment (FDI) and foreign portfolio investment (FPI). All investments in which an investor takes part in the day-to-day management and operations of the company are treated as FDI, whereas investments in shares without any control over management and operations are treated as FPI.
For making portfolio investments in India, one should be registered either as a foreign institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator, SEBI.
Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, and asset management companies. At present, India does not allow foreign individuals to invest directly in its stock market. However, high-net-worth individuals (those with a net worth of at least $50 million) can be registered as sub-accounts of an FII.
Foreign institutional investors and their sub-accounts can invest directly into any of the stocks listed on any of the stock exchanges. Most portfolio investments consist of investment in securities in the primary and secondary markets, including shares, debentures, and warrants of companies listed or to be listed on a recognized stock exchange in India.
FIIs can also invest in unlisted securities outside stock exchanges, subject to the approval of the price by the Reserve Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any stock exchange.
An FII registered as a debt-only FII can invest 100% of its investment into debt instruments. Other FIIs must invest a minimum of 70% of their investments in equity. The balance of 30% can be invested in debt. FIIs must use special non-resident rupee bank accounts in order to move money in and out of India. The balances held in such an account can be fully repatriated.
Restrictions and Investment Ceilings
The government of India prescribes the FDI limit, and different ceilings have been prescribed for different sectors. Over a period of time, the government has been progressively increasing the ceilings. FDI ceilings mostly fall in the range of 26% to 100%.
By default, the maximum limit for portfolio investment in a particular listed firm is decided by the FDI limit prescribed for the sector to which the firm belongs. However, there are two additional restrictions on portfolio investment. First, the aggregate limit of investment by all FIIs, inclusive of their sub-accounts in any particular firm, has been fixed at 24% of the paid-up capital.12 However, the same can be raised up to the sector cap, with the approval of the company’s boards and shareholders.
Secondly, investment by any single FII in any particular firm should not exceed 10% of the paid-up capital of the company. Regulations permit a separate 10% ceiling on investment for each of the sub-accounts of an FII, in any particular firm. However, in the case of foreign corporations or individuals investing as a sub-account, the same ceiling is only 5%. Regulations also impose limits for investment in equity-based derivatives trading on stock exchanges.
Investments for Foreign Entities
Foreign entities and individuals can gain exposure to Indian stocks through institutional investors. Many India-focused mutual funds are becoming popular among retail investors. Investments could also be made through some of the offshore instruments, like participatory notes (PNs), depositary receipts, such as American depositary receipts (ADRs) and global depositary receipts (GDRs), exchange traded funds (ETFs), and exchange traded notes (ETNs).
As per Indian regulations, participatory notes representing underlying Indian stocks can be issued offshore by FIIs, only to regulated entities. However, even small investors can invest in American depositary receipts representing the underlying stocks of some of the well-known Indian firms, listed on the New York Stock Exchange and Nasdaq. ADRs are denominated in dollars and subject to the regulations of the U.S. Securities and Exchange Commission (SEC). Likewise, global depositary receipts are listed on European stock exchanges. However, many promising Indian firms are not yet using ADRs or GDRs to access offshore investors.
Retail investors also have the option of investing in ETFs and ETNs, based on Indian stocks. India-focused ETFs mostly make investments in indexes made up of Indian stocks. Most of the stocks included in the index are the ones already listed on the NYSE and Nasdaq.
As of 2020, two of the most prominent ETFs based on Indian stocks are the iShares MSCI India ETF (INDA) and the Wisdom-Tree India Earnings Fund (EPI). The most prominent ETN is the iPath MSCI India Index Exchange Traded Note (INPTF). Both ETFs and ETNs provide a good investment opportunity for outside investors.
HOW TO INVEST IN SHARE MARKET
First, you need to open a trading account and a demat account to invest in share market. This trading and demat account will be linked to your savings account to facilitate smooth transfer of money and shares.
Financial Instruments Traded in a stock market
Below are the main four key financial instruments that are traded in Stock market:
Bonds: Companies need money to undertake projects. They then pay back using the money earned through the project. One way of raising funds is through bonds. When a company borrows from the bank in exchange for regular interest payments, it is called a loan. Similarly, when a company borrows from multiple investors in exchange for timely payments of interest, it is called a bond.
Secondary Market: Investing in share market is another place for raising money. In exchange for the money, companies issue shares. Owning a share is akin to holding a portion of the company. These shares are then traded in the Indian share market. Consider the previous example; your project is successful and so, you want to expand it.
Mutual Funds: These are investment vehicles that allow you to indirectly investing in share market market or bonds. It pools money from a collection of investors, and then invests that sum in financial instruments. This is handled by a professional fund manager.
Every mutual fund scheme issue unit, which have a certain value just like a share. When you invest, you thus become a unit-holder. When the instruments that the MF scheme invests in make money, as a unit-holder, you get money.
This is either through a rise in the value of the units or through the distribution of dividends – money to all unit-holders.
Derivatives: The value of financial instruments like shares keeps fluctuating. So, it is difficult to fix a particular price. Derivatives instruments come handy here.
These are instruments that help you trade in the future at a price that you fix today. Simply put, you enter into an agreement to either buy or sell a share or other instrument at a certain fixed price.
Security and Exchange Board of India (SEBI)
Investing in the share market is risky. Hence, they need to be regulated to protect investors. The Security and Exchange Board of India (SEBI) is mandated to oversee the secondary and primary markets in India since 1988 when the Government of India established it as the regulatory body of stock markets. Within a short period of time, SEBI became an autonomous body through the SEBI Act of 1992.
SEBI has the responsibility of both development and regulation of the market. It regularly comes out with comprehensive regulatory measures aimed at ensuring that end investors benefit from safe and transparent dealings in securities.
Also Read : List of Penny Stocks in India 2022
The basic objectives of SEBI are:
Protecting the interests of investors in stocks
Promoting the development of the stock market
Regulating the stock market