The Indian Stock Markets: A Beginner’s Guide to How It Works
To many who don’t have any experience in dealing with or investing in stock, this term can seem extremely intimidating. However, the stock market is no mystery. The simplest way to describe any stock market is a place where you can buy and sell shares. A ‘share’ is an ownership certificate of a specific company, whereas stock refers to ownership certificates of any company. A stock exchange brings governments and private companies to investors under the same umbrella for trading purposes.
The fundamental reason why companies are listed on any stock market is to raise capital for their business at a cheaper rate. Raising capital helps to scale the growth of a company. And from an investment point of view, they have the potential to offer high returns, one of the highest compared to other investment opportunities. How Indian Stock Markets work: Most trading in India occurs on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). BSE is situated in Mumbai and NSE in Delhi. They’re both regulated by the Securities and Exchange Board of India (SEBI). Many high-ranking companies are listed on both stock exchanges. To get on either stock markets, companies need to get listed through Initial Public Offering (IPO). This is done by way of offering securities to a ‘primary market’, i.e. the initial public shareholders. These securities can then be bought and sold in the ‘secondary market’. Certain criteria need to be met and a process needs to be followed here. Various factors affecting the Indian Stock Market No stock market is steady and risk-free. They can be volatile as they are affected by both internal as well as external factors. Internal factors are related to the company’s performance, company’s announcements, or even price fixing/rigging where certain parties conspire to inflate prices of a particular stock (this is illegal). External factors refer to regulatory actions, RBI’s (Reserve Bank of India) monetary policies, the global economy, political situations, and so on. There are certain indicators that tell us about stock prices going up or down. Every stock exchange has such indicators. The indicator for BSE is called Sensex and the for NSE it is called NIFTY. How the two indices work: The stock prices of major companies listed in the stock market are taken into consideration for calculation. Sensex is calculated taking 30 companies into consideration, whereas NIFTY is calculated using 50 companies. Under BSE, the 30 companies are changed periodically to maintain accuracy. An index committee comprising mutual fund managers, academicians, independent board members, etc. Under NSE, companies are changed every 6 months. How to start investing in Stock Markets Investing in stocks and shares is quite simple. All you need to do is to open a demat account and a trading account and link your bank account to them. You can then start investing in the stock market. It is important to define your investment goals before choosing the financial assets for investments, as different assets offer returns in different ways. You cannot invest in a stock market directly; you need a stockbroker. A stockbroker can be an individual or a financial institution authorized by SEBI for trading in stock markets. They also charge a brokerage fee for their services. However, as a beginner, you can ask them for investment advice and options suitable for your goals.
Nationality Indian residents, Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), Foreign Institutional Investors (FIIs), and Qualified Foreign Investors (FQIs) can invest in the Indian stock markets. However, there are certain restrictions and limitations for non-Indians investing in the stock markets. -- NRIs, PIOs, FQI's, and FIIs can invest in the Indian stock market only through the Portfolio Investment Scheme (PIS). -- They can invest in stocks and convertible debentures. -- FQIs must belong to one of 45 countries under the SEBI guidelines. These countries include USA, Canada, China, Singapore, Italy, the Netherlands, Greece, and Denmark, to name a few. Age There is no age criterion to invest in the Indian stock market. However, to open a demat account, you need to be at least 18 years old. You also need a PAN card to open demat and trading accounts. PAN cards are only given to 18-year olds and above. Those below this age can still trade in the stock market through a guardian. Trading Hours and Settlement Trading is open on all weekdays, except public holidays listed on BSE’s and NSE’s websites. No trading takes place on weekends. Trading Hours:
The settlement is when you receive the order for stocks placed. In the Indian stock market settlement occurs through the abbreviation T+2 which means the Trade Date + 2 days. In simple terms, you will receive your order 2 working days after placing it.
Investments & Returns Limitations
There is no minimum amount to invest in the stock market. You can buy a stock priced below Rs.10 or above Rs.50,000. There is also a maximum amount for Indian residents on investing. However, there are caps for FIIs, NRIs, and PIOs investing in Indian companies.
Investing in any stock market is risky. The Indian stock market is no exception to this rule. There are many risks of investing, such as:
-- Market risk – When the value of a stock that you have invested in goes down.
-- Credit risk – When the performance of the company, you have invested in goes down, or the company goes bankrupt.
-- Inflation risk – When inflation lowers the value of your investment.
-- Liquidity risk – When you’re unable to convert your investment into cash without incurring a loss.
Stock markets carry huge risks, but they also carry high returns, usually over 10% depending on the type of investment. However, it is important to note that returns are never guaranteed when it comes to investing in stocks. Tax implications on stock market earnings Realized gains from equities that exceed Rs.1 lakh in a financial year will be taxed at a flat rate of 10%.
Once you break down the nitty-gritties of how the Indian stock market works, the process of investing becomes less intimidating. Yes, it carries a lot of risks, but as previously mentioned, if you’re just starting out, seek advice from your stockbroker based on your investment goals since you’re already paying them a fee for each trade and start investing!