Top 06 Things to Know About Indian Stock Market
There are two major exchanges in the Indian stock market- the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE was established first in 1875, making it the oldest exchange. However, the NSE was founded more recently in 1992 and began operating in 1994. Both stock markets now actively follow the same trading mechanisms, timing schedules for sessions, and processes for settling completed trades.
You will find all major Indian companies listing their shares on both exchanges. While the BSE started earlier, the NSE has become the largest in terms of daily trade volumes handled. Virtually every prominent company in India lists on the BSE as well as the NSE to maximize their shareholder base.
This allows ordinary investors and large institutions alike to easily buy and sell the stocks on either exchange. So, as a trader in the Indian Stock Market, you should be well aware of the basic systems, terminologies and few processes so that you can never be stuck trading your money.
1. Trading and Settlement
Investors trade stocks on exchanges through an electronic order book system. They submit buy or sell orders, which are limit orders specifying the price they are willing to pay or accept. The exchange’s trading computer automatically matches incoming orders against the existing orders in the book, filling them at the best available prices.
There are no designated market makers. All orders are placed directly by buyers and sellers, whose identities remain anonymous to each other. Large institutional investors can use direct market access through their brokers to send orders straight into the exchange’s system.
This open, order-driven approach increases transparency, as all current buy and sell orders are visible to participants.
2. Learn Market Indexes
India has two major stock market indexes – the Sensex and the Nifty. The Sensex is the older of the two indexes for stocks traded on the Bombay Stock Exchange (BSE). It tracks the prices of 30 large companies listed on the BSE.
The Sensex started in 1986, but its data goes back to 1979, which is used as the base year for calculating the index value. The Nifty is the other prominent index that follows stocks listed on the National Stock Exchange (NSE). These indexes allow investors to easily monitor the overall performance of the Indian equity markets.
3. Understand Market Regulation
The Securities and Exchange Board of India (SEBI) is responsible for overseeing, regulating, and supervising India’s stock markets. SEBI was established in 1992 as an independent regulatory body. Since its formation, SEBI has worked to put in place rules and guidelines that follow best practices for stock markets around the world.
It has broad authority to penalize market participants like brokers, companies, and investors if they violate any of the prescribed rules and regulations. SEBI’s role is to ensure the stock markets operate in a fair and transparent manner while protecting the interests of investors.
4. Investing in India’s Markets:
India opened its stock markets to foreign investors in the 1990s. There are two main categories of foreign investment – foreign direct investment (FDI) and foreign portfolio investment (FPI). FDI refers to investments where the foreign entity takes an active role in managing and operating the Indian company. FPI refers to passive investments in company stocks without any management control.
For foreigners to invest in Indian stocks as portfolio investors, they must register as a Foreign Institutional Investor (FII) or sub-account with the market regulator SEBI.
FIIs include global mutual funds, pension funds, sovereign wealth funds, insurance firms, banks, and asset managers. They can then buy and sell Indian stocks through registered brokers without getting involved in company operations.
5. Restrictions and Investment Ceilings:
The Indian government sets limits on how much foreign direct investment (FDI) is allowed in different sectors of the economy. These FDI limits also determine the maximum portfolio investment a foreign investor can make in a listed Indian company belonging to that sector. However, there are two additional restrictions specifically for foreign portfolio investors.
First, all foreign portfolio investors combined cannot exceed the FDI limit for that company’s sector. Second, any single foreign portfolio investor cannot hold more than a certain prescribed percentage of a company’s total shares. These ceilings and restrictions aim to regulate the level of foreign ownership across various industries in India.
6. Investments for Foreign Entities:
Foreign investors and individuals who want to invest in Indian company stocks have several options. They can invest through institutional investors like mutual funds or pension funds that have exposure to Indian markets.
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Read moreAnother route is via offshore investment products linked to Indian stocks, such as participatory notes, depositary receipts like American Depositary Receipts (ADRs) and Global Depositary
Receipts (GDRs), exchange-traded funds (ETFs) that track Indian indices or stocks, and exchange-traded notes (ETNs) based on Indian securities.
These products give foreign entities an indirect way to gain exposure and returns from investing in India’s stock markets without directly buying and holding the underlying Indian shares themselves.
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