The Basics Of Stock Market

Lesson -> What Basically is Stock Market?

2.1 What basically is Stock Market?

To generate inflation-beating returns, it is important to invest in equities. This is the conclusion that we reached in the previous chapter. How do we invest in equities? It is important to understand how equities work before we get into the details.

Similar to how we shop at the supermarket or Kirana in our neighborhood to buy groceries, so we also go to the stock market to transact (or shop) for equity investments. Everybody who wishes to trade shares in the stock market goes there. Simply put, to transact is to buy and sell. Transacting through stock markets is the only way to buy or sell shares in a public company such as Infosys.

The stock market's main purpose is to facilitate your transactions. If you're a buyer, the stock exchange helps you meet the seller.

The stock market is not like a supermarket. It is electronic. It is accessible electronically via your computer. You can then conduct your transactions (buying or selling shares).

Important to remember that the stockbroker is a registered intermediary which allows you to access the stock exchange. The stockbrokers will be discussed in more detail at a later date.

India's stock markets are made up of two major stock exchanges. These are the Bombay Stock Exchange & National Stock Exchange (BSE & NSE respectively). These two exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). There are many other regional stock markets like Bangalore Stock Exchange or Madras Stock Exchange which are gradually being phased out and no longer play any significant role.

2.2 Stock market participants and regulation

Stock market investors come from many backgrounds. Market participants are anyone who trades on the stock exchange. There are many ways to classify a market participant. These are some of the market participant categories:

  1. Participating Retailers in Domestic- These people are just like you and me who transact in markets
  2. NRI's & OCIThese are Indian-born people who live outside India.
  3. Institutions at HomeThese large corporate entities are based in India. The LIC of India is a classic example.
  4. Domestic Asset Management Companies (AMC) Mutual fund companies such as DSP Black Rock or Fidelity Investments are the most common participants in this category.
  5. Foreign Institutional Investors - Non-Indian corporate entities. These can be foreign asset management firms, hedge funds, or other investors.

No matter what market participant they are, the goal of everyone is to make profitable transactions. Simply put, to make money.

Human emotions such as fear and greed can rise when money is involved. These emotions can lead to unjust practices and one can easily fall for them. India is home to many such evil practices thanks to Harshad Metta's operations and others.

This is why the stock market needs someone to set the rules and make sure that everyone follows them.

2.3 The Regulator

The Indian stock market regulator is known as the Securities and Exchange Board of India commonly referred to by SEBI. SEBI's mission is to encourage the development of stock markets, protect retail investors' interests, and regulate market participants as well as financial intermediaries. In general, SEBI ensures:

  1. Stock exchanges (NSE and BSE) operate fairly
  2. Stockbrokers and their sub-brokers do their business in a fair manner
  3. Participating in unfair practices is not something that participants should do
  4. Companies don't use markets to unduly profit themselves (Example: Satyam Computers).
  5. Protecting the interests of small retail investors
  6. Market manipulation should not be done by large investors who have a lot of cash.
  7. Market development in general

SEBI must regulate the following entities in order to achieve the above goals. These entities are all directly involved in stock markets. Any of these entities could disrupt an otherwise harmonious Indian market.

Each entity must follow the SEBI's set of regulations and rules. SEBI has set the legal framework for each entity. SEBI makes available the specific rules that apply to a particular entity on their website. These rules are available under the "Legal Framework" section of their website.

EntityExample of companiesWhat are they doing?Simply put:
Credit Rating Agency (CRA).CRISIL, ICRA, and CAREThey assess the creditworthiness and ability to repay corporate debts as well as government debtsIf a Govt or corporate entity wishes to borrow the loan, CRA verifies that the entity is eligible.
Stock brokers and sub-brokersZerodha, Sharekhan ICICI DirectAs an intermediary between investors and stock exchangesRegistered stock brokers are required to help you buy and sell shares on the stock exchange. Sub-brokers are similar to stockbrokers in that they act as agents.
Debenture TrusteesNearly all Indian banks are representedAs a trustee for corporate debentureCompanies can issue debentures to raise funds. They promise to pay interest. These debentures can be subscribed to by the public. The Debenture Trustee makes sure that the debentures are protected.
debenture obligation is honoured
DepositoriesNSDL/CDSLClient securities: Safekeeping, reporting, and settlementIt acts as a vault for your shares. Your securities are held in depositories which facilitate exchange. These shares are held in your Depositary account, also known as the DEMAT account. Only two Indian companies can maintain this electronically.
Depository Participant (DP).Few stockbrokers and most banksAs an agent for the two depositoriesYou can't interact directly with CDSL or NSDL. To open or maintain your DEMAT account, you will need to contact a DP
Foreign Institutional InvestorsIndividuals, corporations and funds from abroadMake investments in IndiaThese foreign entities have an interest in India and are interested in investing. These entities often transact large sums of money and their activities in the markets can have an impact on market sentiment.
Merchant BankersKarvy, Axis Bank, Edelweiss CapitalCompanies can raise capital in the primary marketsMerchant bankers can help companies raise capital by helping them with an IPO.
Asset Management Companies
HDFC AMC Reliance Capital, SBI CapitalOffer Mutual Fund SchemesAn AMC takes money from the public and puts it in one account. The money is then invested in markets that will grow the investments and create wealth.
Portfolio Managers/
Portfolio Management System
Parag Parikh PMS, Religare Wealth ManagementOffer PMS schemes
They function in the same way as mutual funds, except that you must invest at least Rs.25,000. Mutual funds have no cap on investments.

This chapter contains key takeaways

  1. If you are looking to trade-in equity, the stock market is where to be.
  2. Stock markets can be accessed electronically through a stockbroker.
  3. Stock market participants come in many forms.
  4. Each entity that operates in the market must be regulated. They can only operate within the regulatory framework.
  5. SEBI, the Indian Securities Market Regulator, is responsible for regulating the securities market. They provide the legal framework for the market and oversee all entities that wish to operate in it.
  6. Remember that SEBI has your back and can alert you if there is anything suspicious in the markets.