Stock Market Basics
Stock Market Overview
Investing ensures financial security, and the Stock market plays a pivotal role in this domain, it is a place where people buy/sell shares of publicly listed companies. The stock market facilitates capital formation by enabling companies to raise funds from public investors while providing investors opportunities to participate in business growth.
Stock Market Participants
- Domestic Retail Participants - These are people like you and me transacting in markets
- NRI's and OCI - These are people of Indian origin but based outside India
- Domestic Institutions - These are large corporate entities based in India. A classic example would be the LIC of India.
- Domestic Asset Management Companies (AMC) - Typical participants in this category would be the mutual fund companies such as SBI Mutual Fund, DSP Black Rock, Fidelity Investments, HDFC AMC, etc.
- Foreign Institutional Investors (FIIs) - Non-Indian corporate entities. These could be foreign asset management companies, hedge funds, and other investors
SEBI (The Securities and Exchange Board of India)
SEBI is the regulatory body that oversees and governs the securities market in India. Its key responsibilities include:
- The stock exchanges (BSE and NSE) conduct their business fairly
- Stockbrokers and sub-brokers conduct their business fairly
- Participants don't get involved in unfair practices
- Corporates don't use the markets to unduly benefit themselves (Example -- Satyam Computers)
- Small retail investors' interests are protected
- Large investors with huge cash piles should not manipulate the markets
- Overall development of markets
Market Infrastructure Entities
| Entity | Example Companies | What They Do | In Simpler Words |
|---|---|---|---|
| Credit Rating Agency (CRA) | CRISIL, ICRA, CARE | They rate the credit worthiness of corporates and governments | If a corporate or Govt entity wants to avail loan, CRA checks if the entity is worthy of giving a loan |
| Debenture Trustees | Almost all banks in India | Act as a trustee to corporate debenture | When companies want to raise a loan they can issue debentures against which they promise to pay interest. A Debenture Trustee ensures that the debenture obligation is honored |
| Depositories | NSDL and CDSL | Safekeeping, reporting and settlement of client securities | Acts like a vault for shares you buy. Holds your shares and facilitates exchange. When you buy shares they sit in your Depositary account (DEMAT account). Only two companies in India |
| Depositary Participant (DP) | Most banks and few stock brokers | Act as an agent to the two depositories | You cannot directly interact with NSDL or CDSL. You need a DP to open and maintain your DEMAT account |
| Foreign Institutional Investors | Foreign corporates, funds and individuals | Make investments in India | Foreign entities with interest to invest in India. Usually transact in large amounts, hence their activity impacts market sentiment |
| Merchant Bankers | Karvy, Axis Bank, Edelweiss Capital | Help companies raise money in primary markets | If a company plans to raise money by floating an IPO, merchant bankers help with the IPO process |
| Asset Management Companies (AMC) | HDFC AMC, Reliance Capital, SBI Capital | Offer Mutual Fund Schemes | Collects money from public, puts it in single account and invests in markets to generate wealth for investors |
| Portfolio Managers / PMS | Religare Wealth Management, Parag Parikh PMS | Offer PMS schemes | Similar to mutual fund except PMS requires minimum Rs.25,00,000 investment; no cap in mutual funds |
| Stock Brokers and Sub Brokers | Zerodha, Sharekhan, ICICI Direct | Act as intermediary between investor and stock exchange | When you want to buy/sell shares from exchange you do so through registered stock brokers. Sub broker is like an agent to a stock broker |
DEMAT - Dematerialization
Before 1996 the share certificate was in paper format. Post 1996, share certificates were converted to digital format. The process of converting paper format share certificates into digital format is called "Dematerialization" often abbreviated as DEMAT.
Currently, there are only two depositaries offering DEMAT account services:
- NSDL - National Securities Depository Limited
- CDSL - Central Depository Services (India) Limited
There is virtually no difference between the two and both operate under strict SEBI regulations.
Just like you cannot walk into NSE's office to open a trading account, you cannot walk into a Depository to open a DEMAT account. You need to liaison with a Depository Participant (DP). A DP helps you set up your DEMAT account with a Depository and acts as an agent to the Depository. DPs are also governed by SEBI regulations.
NSCCL and ICCL - Clearing Corporations
- NSCCL - National Security Clearing Corporation Ltd (wholly owned subsidiary of NSE)
- ICCL - Indian Clearing Corporation (wholly owned subsidiary of BSE)
The clearing corporation ensures guaranteed settlement of your trades/transactions. For example, if you buy 1 share of Biocon at Rs.446 per share, there must be someone who sold that 1 share to you at Rs.446.
Clearing corporation's role:
a) Identify buyer and seller and match the debit and credit process
b) Ensure no defaults - The clearing corporation ensures there are no defaults by either party. For instance, the seller after selling shares should not be in a position to back out thereby defaulting on their transaction.
Market Segments
The exchange operates in three main segments:
1. Capital Market
Capital market segments offer a wide range of tradable securities such as equity, preference shares, warrants, and exchange-traded funds. Capital Market has sub-segments under which instruments are further classified.
Example: Common shares of companies are traded under the equity segment abbreviated as EQ. If you buy or sell shares of a company, you are operating in the capital market segment.
2. Futures and Options (F&O)
Futures and Options, generally referred to as the equity derivative segment, is where leveraged products are traded. This segment is explored in detail in the derivatives module.
3. Wholesale Debt Market
The wholesale debt market deals with fixed income securities. Debt instruments include:
- Government securities
- Treasury bills
- Bonds issued by public sector undertakings
- Corporate bonds
- Corporate debentures
Stock Series Classification
Different series denote different trading characteristics:
- EQ - Equity. Intraday trading possible in addition to delivery.
- BE - Book Entry. Shares in Trade-to-Trade or T-segment. No intraday allowed. Only delivery settlement.
- BL - Block Deals. For trades with minimum 5 lakh shares or Rs.5 crore value, executed through Block Deal window (9:15-9:50 AM).
- BT - Exit route for small investors with shares in physical form, capped at maximum 500 shares.
- BZ - Blacklisted stocks for violation of exchange rules. Trade-to-Trade category, BTST and intraday not allowed.
- GC - Government Securities and Treasury Bills trading.
- IL - Allows only FIIs to trade among themselves in securities where FII limit is not breached.