An Overview of Stock Market in India: Working, How to Invest and Different Stock Exchanges

The Indian stock market, which crossed $3.4 trillion in valuation in 2021, started from a humble beginning during the colonial period. A small group of brokers came together on Dalal Street in downtown Mumbai and established the Bombay Stock Exchange (BSE) in 1875. 

After the independence, the National Stock Exchange was set up to bring greater transparency and cater to the needs of growing demand. It also heralded the start of electronic trading in India. Since then, these two are serving as the major stock exchanges of India with more than 6,800 listed companies. 

Currently, India's stock exchanges offer several types of financial instruments like derivatives, shares, bonds, etc Read on to know more about India’s stock markets. 

Types of stock exchanges in India

India has several functioning stock exchanges with each one specialising in different types of product offerings. Here are the two primary stock exchanges operating in India: 

• Bombay stock exchange (BSE)

One of the biggest stock exchanges in Asia, BSE started its journey when a handful of brokers came together and set up India's first and only trading exchange in 1875. It also has the distinction of being the fastest stock exchange in the world with a trading speed of 6 microseconds. 

BSE operates in various segments like equity, equity derivatives, commodity derivatives, currency derivatives and debt instruments. SENSEX is the benchmark index of BSE. 

A total of 5309 companies are listed on BSE, and the total market capitalisation of these companies, as of Jan 11 2023, stands at ₹28,164,222 crore. The total market capitalisation of the top ten companies on BSE is ₹7,543,731 crore.

• National stock exchange (NSE)

NSE is the other flagship stock exchange of India apart from BSE. It started its journey in 1994 as India’s first electronic dematerialised exchange. Nifty 50 is the benchmark index of this stock exchange. 

Nifty 50 represents the weighted average of the top 50 companies spread across 17 sectors. The market capitalisation of NSE stands at ₹23,355,719 crore as on July 2022. 

Apart from these two, there are multiple other small stock exchanges that still operate in India to this day. 

• Calcutta stock exchange

Known as the oldest stock exchange in Asia, Calcutta Stock Exchange formally started functioning in 1863. It received formal recognition from the Government of India in 1980. This exchange is headquartered in Kolkata. In 1997, this exchange shifted from a manual trading system to a completely digital system referred to as C-STAR. 

• Metropolitan stock exchange of India

Headquartered in West Mumbai, it deals in a range of products ranging from equities, equity derivatives, debt and currency derivatives. This exchange received formal recognition from the Government of India in 2012. It offers transparent and hi-tech trading opportunities in equities, futures, commodities etc.

The flagship index of this stock exchange is SX40 which started functioning in 2013. It is a free-floating index having 40 liquid and large-cap stocks from different sectors of the economy. 

• Multi commodity exchange of India

Multi commodity exchange commenced its operations in 2003. It is India’s first listed exchange which allows online trading in commodity derivatives.

The different product segments in which it offers its services include energy, industrial metals, bullion, agricultural commodities, etc. As of September 2022, it boasts an extensive reach with 587 members, more than 51000 authorised personnel and a presence in 837 cities. 

• National commodity and derivatives exchange

Also headquartered in West Mumbai, the flagship product of this exchange is also commodity derivatives. It functions as a digital multi commodity exchange specialising in agricultural products. As of March 2021, it covers around 75% of the total agricultural derivatives of India. 

NCDEX commenced its operations in 2003 but it received formal recognition as a stock exchange in 2015 under the Securities Contracts Regulations Act 1956. 

• India commodity exchange   

As the name suggests, it is also a commodity derivative exchange regulated by the Securities and Exchange Board of India having its headquarters in Mumbai. ICEX has the distinction of starting the first ever diamond derivative contract. 

ICEX provides suitable price hedging risk solutions in the trade. It aims to leverage the huge potential of untapped commodities market. Moreover, investors and concerned entities benefit from risk management, supply chain management, as well as hedging opportunities in the commodity segment. 

How do share markets work?

Let’s consider the different aspects and working of the stock market in India. 

• Listing of companies in stock exchanges

To get listed on the stock exchanges, companies need to either opt for an initial public offering (IPO) or new listing. 

IPO is the process by which a private company opens itself up for public investment. This lets a private company issues new shares to its investors for the first time in the primary market. Offering new shares to investors leads to a dilution in stakes but at the same time, companies receive the necessary funds for undertaking different projects and expansion. 

In order to get listed on stock exchanges through IPO, a company must fulfil all the eligibility criteria as prescribed by concerned stock exchanges. 

You can also apply for purchasing shares in the IPO. In this process, the company determines a price range on which you can place your bids for subscription of shares. However, the final allocation of shares depends on whether the IPO is oversubscribed or undersubscribed. 

On the other hand, a new listing means a company already listed on a particular stock exchange approaches a different stock exchange for listing its shares. Again, for a company to be eligible for new listing, it should conform to criteria set by respective stock exchanges. 

• Trading stocks in secondary markets 

Stock trading in the secondary markets will commence just after listing on the respective stock exchanges. The trading takes place at the mutually agreed price between a buyer and a seller. 

Let’s say a seller puts his/her stock up for sale at a specific quoted price. If a buyer quotes the same price, the trade will get executed and the shares will get transferred from seller to the buyer. 

 The stock price is determined in the secondary market as per the market forces of demand and supply. One of the striking features of trading is that traders do not deal with the issuing entities. Investors and traders can buy stocks among themselves through an intermediary which is the brokerage house. 

• Role of a stock broker

A stockbroker has the authority to trade securities in different financial markets on behalf of the investor. 

The major functions of a stockbroker are as follows: 

• It is the duty of brokers to execute transactions or orders passed on by their clients. They execute buy or sell orders of stocks as per the wishes of their clients. For this service, they levy a fee which would be computed as a percentage or flat charge. 
• Apart from executing buy or sell orders, a number of stockbrokers also function as financial advisors. They guide or advise their clients about different trends in the market and how they can approach them. 
• Another function of stockbrokers is to provide margin financing. Some stockbrokers also provide margin funds to their clients so that they can take up much bigger positions in trades. 
• Settlement of stock order 

The settlement process of a stock order in secondary markets involves a broker and sub-broker. It happens in the final stage of the transaction. You can say that a trade gets settled when sellers receive payments for their shares and buyers receive corresponding securities. 

Settlement date means the day on which the final transaction is executed. In general trading situations, settlement day is Transaction Day + 2 days. 

Earlier, during times of physical settlement, the total settlement process was 5 days after the transaction date. With the emergence of online mechanisms and delivery of shares in the Demat account, settlement time has come down to 2 days after the transaction date. 

Role of the regulatory authority in the Indian stock market

The Securities and Exchange Board of India (SEBI) is the apex regulatory body of share markets in India; it was established and offered statutory recognition in the year 1992. SEBI’s primary role is to protect the interests of investors, promote transparent financial transactions and ensure stability in the capital markets.  

There are three types of major functions performed by SEBI. It includes regulatory functions, development functions, and protective functions. Let’s consider all these functions separately in detail. 

Developmental functions

• It works towards the overall development of the stock market by keeping a strong watch on its day-to-day activities;
• SEBI conducts regular training sessions for intermediaries. These sessions go a long way in enhancing their skills and keeping pace with the newest developments taking place in the sector;
• It regularly conducts research studies in collaboration with various industry bodies and brokerage houses to understand the problems of this sector and find solutions for the same;
• All activities of market participants like brokers, sub-brokers, portfolio managers, investment advisors, bankers, investment or merchant bankers, registrars, and share transfers are registered on SEBI's platform. 

Regulatory functions

Some of the regulatory functions of SEBI are as follows: 

• SEBI has mandated a code of conduct for brokerage houses, transfer agents, and other intermediaries. This promotes fair and transparent trading;
• Every takeover or acquisition by a company in the secondary or open markets must be carried out in accordance with guidelines or rules framed by SEBI;
• SEBI regulates all mutual funds which are tradable in stock exchanges like Exchange Traded Funds. The fund houses and intermediaries offering this product to investors must carry out all transactions by conforming to rules formulated by SEBI; 
• It is the duty of SEBI to carry out periodic audits of different stock exchanges so as to ensure their stability and financial health;
• Apart from this, SEBI has the power to levy fees or any other charges on market participants and stock exchanges.

Protective functions

And finally, here are some protective functions of SEBI:

• One of the most important functions of SEBI is to prohibit insider trading. It has the power to take punitive actions like penalising and debarring entities involved in this type of trading practice;
• It is the duty of SEBI to check whether the price of securities listed on stock exchanges changes organically as a result of the market forces of demand and supply. It has the power to penalise entities involved in price rigging;
• SEBI undertakes several awareness programmes for investors and traders. Investors get to know about their rights and how to remain alert to any danger arising from share markets. 

It is quite evident that the overall responsibility of SEBI is to make the process of investment in share market in India a hassle-free and investor-friendly exercise. 

How to invest in Indian Stocks?

You can follow these steps to invest in share market in India: 

Step 1: First, you need to open a Demat account with a registered stock broker firm. You can visit their website or physical premises to do this. Nowadays, many brokerage firms have also launched their online broking apps. 

Step 2: Submit the relevant documents and complete the KYC formalities to make your Demat account functional. Make sure to link your bank account to your Demat account. 

Step 3: After you have successfully set up your Demat Account, conduct a thorough market analysis to shortlist stocks of companies that you wish to invest in. 

Step 4: Before placing the buy order for a stock, transfer the required amount from your bank account. 

Step 5: Once you place the buy order via the brokerage platform, your stockbroker will execute your order and the transaction will get completed. 

Step 6: Settlement of stock orders will take T + 2 days. After a settlement is over and shares are transferred to your Demat account, your investment in the stock is complete. 

You can choose the best stocks to invest in by closely analysing market trends, fundamentals of top performing stocks and your risk appetite. 

NSE VS BSE – differences and where to invest?

Before placing a buy or sell order, it is important to decide whether you want to go execute the order via NSE or BSE. Here are the primary differences between the two renowned stock exchanges in India: 

Both NSE and BSE have their own set of unique characteristics and functioning. It is important that you conduct a market analysis, study the future outlook of companies listed on each of them and then decide on your investment strategy. 

3 things to remember while investing in stock market in India

Here are some factors that you should keep in mind before investing in stock markets:

1. Risk Appetite 
   It is a well understood fact that equities and related instruments are high-risk investment options. Stock markets are volatile due to the complexities involved. It is better to consider your risk tolerance limit and decide your investment trajectory accordingly.
2. Company’s Performance 
   It is important to conduct a thorough analysis of the company in which you are planning to invest by purchasing their shares. You should go through their annual or quarterly reports and get an idea about their financial health. Share trading strategies should also vary across companies of different sectors. 
3. Dividend History 
   Dividends are a source of income for shareholders. Companies distribute a part of their profits to their shareholders as dividends depending on their shareholding. You should check the past dividend-related activity of the company. If the said company is not regular with its dividend policy, you can choose to skip them and opt for those that have a consistent dividend outflow. 

4. Final Word

5. The stock market in India is one of the most popular trading ecosystems in the world which can provide significant returns and help in wealth accumulation for both short-term and long-term investors. 
6. However, there are several risks and costs associated with investing in stock markets. Therefore, it becomes imperative that consider your investment goals and current market trend before taking any decision. 

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