Beginner's Guide: Introduction to the Stock MarketBusiness

Beginner’s Guide: Introduction to the Stock Market

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Every day I come across a lot of beginners who know a little or nothing about investment or Stock market. Explaining everyone becomes sometimes impossible; hence I decided to cover each topic as a beginner’s Guide.

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 In this article, we will understand the basic concepts of a stock market, stockbrokers, different market participants, and the regulatory body that regulates the stock market.

Stock Market

 A stock market is a place where people trade (buy/sell) shares of publicly listed companies. It offers a platform to facilitate the timely exchange of shares. In simple terms, if ‘Shreyas’ wants to sell shares of XYZ Company, the stock market will help him to meet a buyer who is willing to buy XYZ Company. The buying and selling of shares take place through an electronic medium.

Also Read: Investment: A guide on how to become RICH!!

Now it is impossible to complete paperwork and other stuff manually, so we most probably need a broker for the same. In market terms, we call them Stockbrokers. We will discuss more the stockbrokers at a later point.

Stock Exchanges in India

There are two leading stock exchanges in India where the majority of the trades take place –

 Bombay Stock Exchange (BSE)

 National Stock Exchange (NSE)

 There are some more (regional) stock exchanges like Bangalore Stock Exchange, Madras stock market, etc. but these exchanges do not play a meaningful role anymore. Even the volumes traded on BSE are not that notable.

National Stock Exchange (NSE)

investment stock market

NSE is the widely known 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 capitalization.

Bombay Stock Exchange (BSE)

investment stock market

 BSE is the oldest stock exchange in Asia. It was established in 1875 and is located in Mumbai. It has listed a total of 5,295 companies out of which 3,972 are available for trading as on August 21, 2017. BSE SENSEX is the flagship index of BSE. It comprises of the 30 most significant, most liquid, and financially stable companies across critical sectors listed on BSE. 

Different Market Participants:

Share Market is filled with Individual investors as well as corporate houses. Anyone who buys/sells shares during a stock exchange is termed as a market participant.

Let’s understand the market participants:

  •  Domestic Retail Participants-These are individual investors like you and me.
  • NRI’s and Overseas Citizen of India (OCI)-These are people of Indian origin who reside outside India.
  • Domestic Institutions-These is large corporate entities based in India (for example, LIC of India).
  • Domestic Asset Management Companies (AMC)-The market participants during this category would be open-end fund companies like HDFC AMC, SBI open-end fund, DSP Black Rock, and lots of more similar entities.
  • Foreign Institutional Investors-FIIs are Non-Indian corporate entities like foreign asset management companies, hedge funds, and other investors.
Regulator of the Indian Stock Market:

Securities Exchange Board of India (SEBI)

investment stock market

The 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 event of stock exchanges, and regulate the activities of monetary intermediaries and investors within the market.

SEBI ensures the following:

  • The stock exchanges (BSE and NSE), brokers and sub-brokers conduct their business fairly.
  • Corporate houses shouldn’t use markets as a means to benefit themselves unfairly. Small retail investors’ interest is protected.
  • Large investors with colossal cash shouldn’t manipulate markets.
  • Types of Financial Intermediaries in the Stock Market

From the time an investor places his order to shop for shares till the time it’s transferred to his Demat account, many corporate entities are involved in making sure a smooth transaction. These entities are referred to as financial intermediaries and that they work consistent with the principles and regulations prescribed by SEBI. Some of the financial intermediaries are discussed below:

Stock Broker

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

Depository and Depository Participants

 A Depository is a financial intermediary that offers the service of the DEMAT account. A DEMAT account will have all the shares that an investor owns in an electronic format. In India, there are only two depositaries which offer DEMAT account services –

National Securities Depository Limited (NSDL)

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 stockbroker 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 the National Stock Exchange and Bombay Stock Exchange, respectively. They ensure guaranteed settlement of transactions carried in stock exchanges. The clearing corporation provides there are no defaults either from the buyer’s or seller’s side.

DEMAT Account and Trading Account

To trade inequities, 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 stocks. DEMAT account contains all the investments an individual makes in shares, exchange-traded funds, bonds, government securities, and mutual funds in one place.

Also Read: Investment plans that can take you on a world tour without worrying about money.

How to open a 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 (online). The list of DPs is available on the website of repositories 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 or User ID. All the purchase/sale of shares will be through a 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 stockbroker who is registered with SEBI. An order can be placed either through an online or offline mode. In an online way, 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.

Open a Demat cum trading account HERE

Key points to remember:

  • 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.
  • SEBI governs the Indian stock market.
  • There are different financial intermediaries like stockbrokers, banks, depository participants, etc.
  • DEMAT account or dematerialized account allows holding shares in electronic form instead of taking physical possession of certificates.

Disclaimer:
The Content is for informational purposes only; you should not construe any such information or other material as legal, tax, investment, financial, or other advice. The Author is not a registered Advisor or a legal entity.

There are risks associated with investing in securities. Investing in stocks, bonds, exchange-traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible. Some high-risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves unique risks, including higher volatility and political, economic, and currency risks and differences in accounting methods. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.

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