Introduction
A stock exchange is the aggregation of buyers and sellers of stock
which represents ownership claims of business these may include securities
listed on a public stock exchange
Stocks
Stocks represent ownership shares in a company. When you buy a
stock, you are purchasing a small portion of that company, making you a
shareholder. Companies issue stocks to raise capital for growth, and
stockholders can earn returns through dividends (payments made from
company profits) and capital appreciation (the stock's price increases over
time).
Stocks are typically traded on stock exchanges, such as the New York Stock
Exchange (NYSE) or NASDAQ. Their prices fluctuate based on various factors
like company performance, market conditions, and investor sentiment.
How does stock market work
A stock exchange is a marketplace where stocks (shares of
ownership in companies) are bought and sold. Here's how it works:
1. Companies List Shares: To raise capital, companies issue shares and list
them on a stock exchange through an Initial Public Offering (IPO). This allows
the public to buy a stake in the company.
2. Buyers and Sellers: Investors (buyers) can purchase stocks from other
investors (sellers) through the exchange. The exchange matches buy and sell
orders using an electronic system.
3. Brokers: Most investors trade through brokers, who act as intermediaries
between the buyers and sellers. These brokers can be individuals or online
platforms.
4. Order Matching: When you place an order to buy or sell a stock, the
exchange matches your order with an opposing order. If you're buying, they
find a seller at your desired price; if you're selling, they find a buyer.
5. Stock Price Fluctuation: Stock prices fluctuate due to supply and demand.
If more people want to buy a stock (demand is high), its price rises. If more
people want to sell (supply is high), its price falls. Prices are influenced by
factors like company performance, news, economic data, and investor
sentiment.
6. Settlement: After a trade is executed, there's a settlement period (usually
two business days) during which the buyer pays for the stock, and the seller
transfers ownership of the shares.
7. Stock Exchanges: There are major stock exchanges like the New York
Stock Exchange (NYSE) and NASDAQ in the U.S., and each exchange has its
own listing requirements. Stocks listed on these exchanges are publicly
traded.
A stock exchange is a regulated marketplace that facilitates the buying and
selling of stocks, helping companies raise capital and investors to potentially
earn returns on their investments.
Important terms in stock exchange
1. Broker: A person or platform that facilitates the buying and selling of
stocks on behalf of investors.
2. Bid and Ask Price:
Bid Price: The highest price a buyer is willing to pay for a stock.
Ask Price: The lowest price a seller is willing to accept for a stock.
5. Market Order: An order to buy or sell a stock immediately at the current
market price.
6. Limit Order: An order to buy or sell a stock at a specific price or better. For
example, a buy limit order executes only at or below the limit price.
7. Bull Market: A market condition where prices are rising, and investor
confidence is high.
8. Bear Market: A market condition where prices are falling, and investor
confidence is low.
9. Dividend: A portion of a company’s earnings distributed to shareholders,
usually in the form of cash or additional stock.
10. Volatility: The degree to which a stock’s price fluctuates. High volatility
means the stock price changes rapidly and significantly.
11. IPO (Initial Public Offering): The first time a company offers its shares to
the public through a stock exchange.
12.Demat account: It is a digital account that’s used to store securities like
shares bonds and mutual funds unit electronically
13.Portfolio: A portfolio is a collection of assets that an investor has invested
in. It can either be composed of multiple types of the same asset class or
different classes altogether.
14. Index: An index is a collection of stocks listed on the stock exchange. It
used to measure the performance of a stock market as a whole or just a
certain section of it
15.Sensex: It a broad market index created by the BSE. It comprises 30 of
top companies in the terms of market capitalisation listed in BSE. The index
constitutes stock from major sectors and industries of the economy.
16.Nifty: It is a broad market index created by the NSE it made up of 50 of
the top companies in terms of market capitalisation listed in NSE. Similar to
sensex, nifty also constitutes from major sectors and industries of the
economy
Types of share market
1. Primary Market:
The primary market is where new securities are issued for the first time. This
is the market for Initial Public Offerings (IPOs), where companies sell their
shares directly to the public to raise capital.
Example: When a company goes public by listing its shares for the first time,
it sells them in the primary market.
2. Secondary Market:
The secondary market is where existing shares are traded among investors.
Once a company's shares are issued in the primary market, they are bought
and sold on the stock exchanges in the secondary market.
Example: Stock exchanges like the New York Stock Exchange (NYSE) or the
National Stock Exchange (NSE) where investors trade shares with one
another.
3. Equity Market:
The equity market refers specifically to the trading of company shares. It can
be divided into both the primary and secondary markets, where investors
buy and sell ownership stakes in companies.
Example: Buying or selling common or preferred stock of a company.
4. Over-the-Counter (OTC) Market:
In the OTC market, shares are traded directly between parties without going
through a formal exchange. These markets are typically less regulated and
involve smaller or less established companies whose shares may not meet
the requirements for listing on major exchanges.
Example: Pink Sheets, where smaller companies' shares may be traded.
5. Derivatives Market:
Although not a share market in the traditional sense, the derivatives market
deals with securities that derive their value from underlying assets like
stocks. This includes futures and options contracts based on shares.
Example: Stock options and stock futures, which are contracts that allow or
obligate the buyer to purchase or sell shares at a future date.
6. Global Markets:
Global share markets involve trading shares across international boundaries.
Companies listed on one country’s stock exchange may have their shares
traded in other countries through global exchanges or ADRs (American
Depositary Receipts).
Example: A U.S. investor buying shares in a foreign company listed on a
European or Asian exchange.
7. Third and Fourth Markets:
Third Market: Refers to the trading of listed stocks in the over-the-counter
market by institutional investors like mutual funds and insurance companies.
Fourth Market: Consists of direct trades between institutional investors
without using broker-dealers or stock exchanges. This market is typically
used for very large block trades.
Stock exchange in India
India has several stock exchanges, but the two most prominent ones are:
1. Bombay Stock Exchange (BSE):
Founded: 1875
Location: Mumbai, Maharashtra
Overview: The Bombay Stock Exchange is the oldest stock exchange in Asia
and one of the largest in the world. It lists over 5,000 companies and is
known for its benchmark index, the S&P BSE Sensex, which tracks the
performance of 30 of the largest and most actively traded companies on the
exchange.
Key Features:
The Sensex is one of the most widely followed indicators of the Indian stock
market's performance.
Known for its electronic trading platform and various indices for different
sectors.
2. National Stock Exchange (NSE):
Founded: 1992
Location: Mumbai, Maharashtra
Overview: The National Stock Exchange is the largest stock exchange in India
by trading volume and market capitalization. It is known for its innovative
electronic trading system and real-time settlement. The Nifty 50 is its
primary index, comprising the top 50 companies across various sectors.
Key Features:
The Nifty 50 index is one of the most important benchmarks for Indian equity
markets.
NSE was a pioneer in bringing electronic trading to India, which
revolutionized stock trading.
Other Stock Exchanges in India:
While BSE and NSE dominate the Indian stock market, there are a few
smaller or regional exchanges, though they have become less significant
over time:
Metropolitan Stock Exchange of India (MSEI): A smaller stock exchange that
focuses on various asset classes, including equities, bonds, and currencies.
Calcutta Stock Exchange (CSE): One of the oldest regional stock exchanges
in India, but has seen a decline in activity since most trading has moved to
the BSE and NSE.
Regulatory Body:
Securities and Exchange Board of India (SEBI): SEBI is the regulator for the
securities market in India. It ensures that stock exchanges operate fairly and
transparently while protecting the interests of investors.
The BSE and NSE together account for the vast majority of trading in India's
capital markets, offering a wide range of investment opportunities in equity,
derivatives, debt, and mutual funds.
History of stock exchange in India
The history of stock exchanges in India is rich and dates back over a century,
with significant developments that shaped the country’s financial markets.
Here’s an overview of the key milestones in the history of stock exchanges in
India:
1. Early Beginnings (1830s–1875)
1830s: The roots of stock trading in India can be traced back to the early
1830s when shares of East India Company began to be traded informally by
brokers in Bombay (now Mumbai).
1850s: The growth of trade and industry in the 1850s, particularly during the
cotton boom after the American Civil War, increased demand for organized
stock trading.
2. Formation of the Bombay Stock Exchange (BSE) (1875)
1875: The Bombay Stock Exchange (BSE) was officially established on July 9,
1875, as The Native Share and Stock Brokers' Association in Bombay. It is
Asia's oldest stock exchange.
A group of 22 brokers started meeting under a banyan tree near Horniman
Circle in Mumbai, and this informal arrangement later evolved into the formal
BSE.
1930s-1940s: During British rule, the BSE grew in prominence as companies
and banks in India began to raise capital through the stock exchange.
3. Post-Independence and Growth (1947–1990)
1947: After India gained independence, the stock markets continued to grow,
but the market remained largely underdeveloped, and regulatory measures
were limited.
1956: The Securities Contracts (Regulation) Act was enacted, providing a
legal framework for the regulation of stock exchanges in India.
During this period, the BSE became the central hub for stock trading, and
several regional exchanges like the Calcutta Stock Exchange (CSE), Delhi
Stock Exchange, and Madras Stock Exchange emerged.
4. The Rise of the National Stock Exchange (NSE) (1992)
1991: India liberalized its economy through economic reforms, which led to
rapid growth in financial markets.
1992: The National Stock Exchange (NSE) was established. The government
and financial institutions wanted a more efficient, transparent, and
technology-driven stock exchange.
NSE was the first exchange to introduce electronic or screen-based trading in
India, which revolutionized the Indian stock markets.
It quickly became the largest exchange in terms of trading volume and
liquidity, surpassing the BSE.
5. The 1992 Harshad Mehta Scam
1992: The stock market witnessed its first major financial scandal with the
Harshad Mehta scam, which involved fraudulent trading practices and stock
market manipulation. The scam exposed the need for stronger regulatory
oversight.
1992: In response, the Securities and Exchange Board of India (SEBI) was
strengthened to act as the market regulator to protect investor interests and
ensure transparency.
6. Dematerialization and Growth of Electronic Trading (1996–2000s)
1996: The introduction of dematerialization by the National Securities
Depository Limited (NSDL) allowed shares to be held electronically instead of
in physical certificates, making trading safer and more efficient.
Late 1990s-2000s: Stock trading saw a boom with the advent of the internet,
making it easier for individual investors to participate in the market. Online
brokerage firms became popular.
7. Global Integration and Expansion (2000s–2020s)
2000s: India’s stock markets began integrating more closely with global
markets. Foreign Institutional Investors (FIIs) were allowed to participate,
boosting liquidity and foreign investments.
The rise of derivative markets and the introduction of stock futures and
options further increased market activity.
2017: BSE became a publicly listed company by offering its shares through
an Initial Public Offering (IPO), marking a significant milestone in its long
history.
8. Recent Developments
Introduction of New Products: New products such as commodity derivatives,
currency derivatives, exchange-traded funds (ETFs), and real estate
investment trusts (REITs) were introduced, offering more diverse investment
opportunities.
2019: The BSE Sensex crossed the 40,000-mark, while the NSE Nifty 50 index
crossed 12,000, reflecting the growing strength of the Indian economy.
COVID-19 Pandemic (2020): The Indian stock markets, like global markets,
faced volatility due to the pandemic. However, after initial declines, the
markets showed resilience, and indices like Sensex and Nifty quickly
recovered, reaching new highs in 2021.
9. Role of SEBI
SEBI has played a crucial role in modernizing India’s stock exchanges. It has
introduced reforms such as tighter regulations, improved investor protection
measures, and the introduction of Initial Coin Offerings (ICOs) and blockchain
technology into the markets.
10. Digitalization and Technological Integration
2020s: The increasing digitalization of the stock market, including
algorithmic trading, robo-advisors, and mobile-based trading platforms, has
further broadened the participation in stock markets across India, from urban
centers to smaller towns.
Stock exchange timing in Indai
The stock market in India operates on specific timings during weekdays
(Monday to Friday) for both the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE). Here's a breakdown of the trading hours:
Normal Trading Session (Equity Market)
Pre-Opening Session: 9:00 AM – 9:15 AM
9:00 AM – 9:08 AM: Order entry period.
9:08 AM – 9:12 AM: Order matching and calculation of opening price.
9:12 AM – 9:15 AM: Buffer period before normal trading begins.
Regular Trading Session: 9:15 AM – 3:30 PM
This is the main session during which most of the trading activity takes
place.
Post-Closing Session
3:30 PM – 3:40 PM: Closing price calculation.
The closing price is determined based on the weighted average price of
trades executed during the last 30 minutes of the trading session.
3:40 PM – 4:00 PM: Post-market session.
Investors can place orders at the closing price during this session.
Block Deal Session
Morning Block Deal Window: 8:45 AM – 9:00 AM
Afternoon Block Deal Window: 2:05 PM – 2:20 PM
Block deals involve trading large quantities of shares between two parties.
Timings for Other Market Segments
Derivatives Market (Equity, Currency, and Interest Rate Derivatives):
9:15 AM – 3:30 PM (same as the equity market for trading).
Commodity Derivatives Market:
10:00 AM – 11:30 PM (April to October).
10:00 AM – 11:55 PM (November to March).
Currency Derivatives Market:
9:00 AM – 5:00 PM.
Weekend and Holidays
The stock exchanges are closed on Saturdays, Sundays, and on
public/national holidays declared by the exchange in advance.
These timings are set for both the BSE and NSE, and they apply to regular
trading activities. Special sessions, such as Muhurat Trading during Diwali,
may have different timings.
Trading procedure
The stock market trading procedure in India involves a series of steps,
starting from placing an order to settlement. Here's a detailed breakdown of
the trading procedure:
1. Opening a Demat and Trading Account
Demat Account: A Dematerialized (Demat) Account holds shares in electronic
form. Investors need a Demat account to buy or sell shares.
Trading Account: A trading account allows investors to place buy and sell
orders. It is linked to the Demat account.
Broker: To open these accounts, you need to choose a stockbroker or
brokerage firm (such as Zerodha, Upstox, or a traditional broker like ICICI
Direct).
2. Placing an Order
Once you have a Demat and trading account, you can place orders through
your broker's trading platform, which could be online, via a mobile app, or by
calling the broker.
Types of Orders:
Market Order: The order is executed immediately at the current market price.
Limit Order: The order is executed only at a specified price or better.
Stop-Loss Order: An order to sell a security when it reaches a certain price to
limit the investor's loss.
GTC (Good Till Cancelled) Order: An order remains active until it is executed
or cancelled.
3. Order Execution
Once the order is placed, the broker forwards it to the stock exchange (BSE
or NSE) via an electronic trading platform.
Order Matching: The exchange matches your buy or sell order with another
party’s order. For example, if you placed a buy order, it will be matched with
someone looking to sell at the same price.
Transaction Confirmation: If the order is successfully matched, it is executed.
A confirmation is sent to both parties involved in the trade.
4. Trade Settlement
T+1 or T+2 Settlement Cycle: In India, the settlement of stock trades follows
a T+1 or T+2 cycle, which means the transaction is settled within one or two
business days after the trade is executed.
T (Trade Date): The day the transaction occurs.
T+1/T+2: On this day, the actual transfer of shares and money takes place.
Depository Participant (DP): The shares bought are credited to your Demat
account, and the funds for the purchase are debited from your linked bank
account. For a sell transaction, shares are debited, and funds are credited.
5. Settlement Types
Rolling Settlement: In a rolling settlement, transactions are settled
continuously at T+1 or T+2 days. This is the standard method of settlement.
Intraday Trading: In intraday trading, the trader buys and sells shares within
the same trading session, without taking delivery of shares. Profits or losses
are calculated based on price movements during the day.
Delivery Trading: In delivery trading, shares are held in the Demat account
for more than a day, and the buyer takes ownership of the shares.
6. Trade Confirmation and Contract Note
After the trade is executed, the broker sends a trade confirmation via email
or SMS.
Contract Note: The broker will also send a contract note, which is a detailed
document of the trade, including the price, time of execution, and applicable
brokerage and taxes.
7. Brokerage Fees and Charges
The broker charges a brokerage fee for executing the trade, which can either
be a flat fee or a percentage of the trade value.
Other charges may include Securities Transaction Tax (STT), Goods and
Services Tax (GST), stamp duty, and transaction charges levied by the stock
exchange.
8. Settlement via Clearing House
The stock exchange has a clearing house that ensures both parties fulfill
their obligations.
In the case of a buy transaction, the clearing house ensures that the buyer
gets the shares, and in a sell transaction, the seller receives the funds.
9. Portfolio Monitoring
After the trade is settled, the shares appear in your Demat account. You can
monitor your portfolio and the performance of your holdings through your
broker's platform.
10. Taxation
Capital Gains Tax: If you sell shares for a profit, you are liable to pay capital
gains tax.
Short-term Capital Gains (if shares are held for less than one year) are taxed
at 15%.
Long-term Capital Gains (if shares are held for more than one year) are taxed
at 10% if the profit exceeds ₹1 lakh.
Dividends are also subject to taxation if they exceed a certain threshold.
