An Introduction To The Indian Stock Market

A stock market is a place where buyers and sellers of stocks, bonds, derivatives and more come together, physically and virtually. Participants can vary from individual investors to fund managers to various corporate entities. The Indian Stock Market consists mainly primarily of two major stock exchanges, the BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange).

Before diving into the bits and pieces of how the stock market works, it is essential to understand its participants.

  • Retail Investors - These are people like you and me.
  • Domestic Institutional Investors - These are large corporate entities like banks, mutual fund houses and insurance companies
  • Foreign Institutional Investors - These are non-Indian corporate entities. They could be foreign asset management companies, hedge funds or more.
  • NRIs and OCIs - These are people of Indian origin but are based outside India.

Irrespective of their category, each participant is here to make money. However, India has seen a fair deal of fraud in the stock market and, thus, this carries with it the need for a regulator.

In the Indian Stock Market, the Securities and Exchanges Board of India (SEBI) is the stock market regulator. It ensures that the markets are a level playing field for everyone. SEBI has a prescribed set of rules and regulations for each and every one of these participants and entities.

Now that we have established the who’s who of the stock market, let's get into how it really works.


Trading at both exchanges takes place through an open electronic limit order book, in which order matching is done by the trading computer. With this system, the buyers and sellers remain anonymous. This system also displays all the orders and transactions in the trading system.

Each order is placed through brokers (like Zerodha or bank brokers). Investors, such as you and I, can either place orders through their online facility or resort to calling up specific brokers. However, institutional investors have a DMA (Direct Market Access) alternative, in which the broker provides trading terminals for placing orders directly into the stock market trading system.

Market Indices:
SENSEX and NIFTY are the most popular market indices. SENSEX is the oldest market index for equities; it includes shares of 30 firms listed on the Bombay Stock Exchange, which represent about 45% of the index's free-float market capitalization.
Another index is Standard and Poor's CNX NIFTY; it includes 50 shares listed on the National Stock Exchange, which represents about 60% of its free-float market capitalization.

Financial Products Traded on the Stock Market:

  • Shares: Investors can invest in company shares, gain ownership and enjoy some portion of the gains. These shares form an essential component of stock market basics and are the largest product traded on the stock exchanges.
  • Mutual Funds: These financial products allow investors to indirectly invest in bonds and shares. Fund houses collect deposits created by many individuals and allocate them to different instruments. Those choices are taken by qualified and skilled experts.
  • Derivatives: Prices on the stock exchanges fluctuate endlessly, making it impossible to arrive at a set price. This is where derivatives are beneficial and allow investors to trade on a future date at prices set today.
  • Bonds: Companies require capital to take up large projects. They raise this through the issue of bonds and bondholders are compensated through profits made on the project. Bonds are a kind of financial instrument where numerous investors lend capital to companies.

Investing is dynamic and investors should rely on professional research and skilled analysis to avoid being surprised. Sticking to the fundamentals of the equity market, doing the research with due diligence and regularly monitoring the portfolio will enable investors to make profits through their share market investments.

The bottom line is that India is an emerging market with a GDP growth of 6-7% annually. India also has a financial market with incredible growth potential and we are going to see more and more Indians putting their money into the stock market. It is a prudent time to invest for both foreign investors and people like you and me alike.

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