What You Should be Aware of About The Equity Market in India

The equity market in India, also known as the Indian stock market, has become the third largest in the Asian region, after the markets of China and Hong Kong.

The Securities Contract (Regulation) Act, 1956, has defined a stock exchange as a body of individuals, association or organization, established for controlling and regulating of securities.

Three major factors influence the equity market in India:

• Monsoon rains
• Performance of corporate houses
• Equity funding from around the world

Business in the Indian equity market is done with both venture capital funds and private equity funds. The two major Indian stock markets are the National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange (BSE).

NSE and BSE

Most of the trading in the equity market in India is done through these two exchanges. The BSE was established in 1875. On the other hand, NSE came into existence in 1992 and trading began in 1994. However, the settlement process, trading hours and trading mechanism are the same for both exchanges. On the BSE, nearly 500 companies account for more than 90% of market capitalization.

Nearly all significant companies in India are listed on both exchanges. NSE has the leading share in spot trading and derivatives trading. Innovation, market efficiency and reduced costs result from the competition for order flow between the two exchanges. The prices on the exchanges remain within a tight range because of arbitrageurs.

Mechanism for trading

There is an open order book with electronic limits for trading on both exchanges. The trading computer does the order matching through the order book. The market orders that investors place are matched automatically with the best limit orders. The entire process is driven by orders and there are no specialists or market makers. The anonymity of buyers and sellers is thus ensured. There also is more transparency in an order driven market, since the trading system displays all buy and sell orders. However, the execution of orders is not guaranteed, since there are no market makers.

You have to place orders in the trading system through brokers, many of whom offer a facility for online trading to retail customers. An option for direct market access may be availed by institutional investors, who utilize trading terminals offered by brokers to place orders directly into the trading system.

Major indices

The Nifty and Sensex are the two main indices. The Sensex is the oldest index; it covers 30 shares of companies listed on the BSE. On the other hand, Nifty includes 50 shares of companies listed on the NSE.

Regulation of the equity market in India

The Securities and Exchange Board of India (SEBI) is an independent authority responsible for supervision, regulation and development of the stock markets in India. It takes into account the best practices to lay down rules for the market.

Who can invest

Besides investments by Indian residents and non-resident Indians (NRIs), foreign portfolio investment (FPI) and foreign direct investment (FDI) are also allowed. FPI involves investment in equity shares without any control over operations and management, whereas FDI means that investors participate in the routine operations and management of the companies they invest in.