Stock Market Basics in India: Beginner's Guide to Investing

Stock market basics in India an be confusing as it has its own terminology. Some examples are BSE, NSE, shares, demat accounts, trading accounts, IPOs, market orders, limit orders, and dividends. However, the meaning and concept of a stock market is straight forward. In a stock market, a company is able to raise capital by giving out shares. Investors of the stock market can buy and sell these shares.

This article will cover the working of the stock market of India, the definition of a primary and a secondary market, the function of a demat account, the process of buying and selling shares, the risks involved in investing, and other important information for a new investor.

What Is the Stock Market?

A stock market is a place where shares and other investments are bought and sold. When you purchase a share of a company, you own a small part of that company.

SEBI is the regulating board of the stock markets in India. The two main stock exchanges are the NSE and the BSE. The price of shares is determined by the stock market. The rules of an exchange decide how trading is conducted. The rules determine which stock orders are filled first.

How the Indian Stock Market Works

Transactions on the stock market are complex and involve several participants and systems.

1. A company first issues shares that are traded on the market.

2. The investor opens a banking, trading, and demat account with intermediaries under the regulation of the market.

3. The investor gives a buy or sell order through the trading system.

4. A broker, forwarded by the trading system, transmits the order to the exchange.

5. The exchange’s system, on completion of a trade, cancels the orders.

6. The cleard and settlemnet systems of the exchange, based on the agreement of the participants, effect the transfer of money and securities.

7. The securities are transferred to the investor’s demat account.

NSE also says that a trading account is between the investor’s banking and demat accounts.

What is the difference between NSE and BSE?

NSE and BSE are the two stock exchanges in India. Both of them have their own rules and segments. Based on these rules and segments, they allow electornic trading of securities.

SEBI has recognized BSE as a stock exchange and permits trading in various segments like equity, equity derivatives, currency and other derivatives, and debt.

This means, as an investor, you need not look at the BSE and the NSE as two different markets. It is possible for a company to list and get traded at both.

Primary Market vs Secondary Market

The Indian securities market distinguishes primary market and secondary market activities.

Primary Market

First market transactions involve the sale of securities to investors for the first time. Issuance of shares by a company to the public as a means of raising further equity capital is an example of a primary market transaction. To subscribe to primary-market securities, an investor must adhere to the specific terms of the securities issue.

Secondary Market

The secondary market is a market wherein securities are purchased and sold by investors who trade securities amongst themselves. The stock exchange is a part of the secondary market, wherein shares that are listed are traded.

It is important to note that the secondary market does not involve any issuance of securities, and SEBI explains that in the secondary market, already issued securities are traded.

If you are learning about IPOs, you can also read what an IPO is and how the primary market differs from everyday stock-market trading.

What Is a Share?

Shares define ownership units in a company. Equity shares are examples of shares. Shares carry the rights and obligations associated with them.

Let’s consider an example where a company has 10,00,000 equity shares and one of the shares is owned by you. You have a 0.1% stake of the ownership. The value of the ownership changes as the share price changes.

Just owning a share means the company won’t automatically give you a profit. Several factors can affect the value of the share and your investment experience. These factors can be company actions like declaring a dividend or bonus, or issuing rights or stock shares.

What Is a Demat Account?

A demat account holds securities in electronic form. You open a demat account with a depository participant (DP).

When you buy shares for delivery, the shares are physically delivered and credited to your demat account. For sale of shares, the shares are debited and physically delivered to the buyer as per the sale transaction.

A demat account is completely different from a bank account. Your bank account holds money. Your demat account holds securities.

To understand the concept of a demat account in detail, refer our detailed article on what a demat account.

What Is a Trading Account?

A trading account is an account held with a stockbroker, through which you can transact in the securities market. As per NSE, a trading account is between your bank and demat account.

In simple terms, for a purchase of equity shares, money is transacted through your banking or trading account, an equity purchase order is transacted, the stock exchange matches the order and finally the equity shares are delivered and credited to your demat account.

In the process of investing in equity, SEBI material states that you need a bank account, a trading account with a stockbroker and a demat account.

How to Buy and Sell Shares in India

This process is electronic, but understanding the mechanisms involved will help you make more informed trades.

1. Complete KYC: Open the required accounts and complete the KYC process with a SEBI registered intermediary.

2. Add funds: Complete the required document and banking process to allow you to trade.

3. Identify and verify: Identify the listed share you wish to trade. Verify the share’s exchange symbol.

4. Choose buy or sell: Enter whether you want to purchase or sell the security.

5. Select order type: Decide the order type and consider if you want to trade in the market or at a specified price.

6. Enter quantity and price: If you wish to trade at a specified price, determine the price at which you wish to trade.

7. Review and trade: Review and verify the details of the order.

8. Check execution and settlement: Review the order status, trade confirmation and subsequent securities or funds movement.

NSE has a wealth of information for first time investors on accounts, trading, fees and taxes and other information pertaining to the capital markets.

Market Order vs Limit Order

Order types are a key element of the basics of the stock market in India.

Market Order

An order to purchase or sell at the current best price is known as a market order. The order is immediately executed at the price that is determined by the market. The price may be better or worse than the price that is shown on the stock quote.

Limit Order

A limit order is an order to purchase or sell at a specified price or better. A limit order to sell is placed at a price that is worse than the current best offer. If the market price is below the limit price, the order to sell is executed. A limit order to purchase is placed at a price that is better than the current best offer. If the market price is at the limit price, the order to purchase is executed.

NSE defines a market price order as an order to purchase or sell at the best price that is available upon the placement of the order.

What Influences Changes in Stock Prices?

Stock prices are determined by the expectations of the market participants. These expectations are influenced by variables that are publically available and can change frequently. Some of these variables include a company’s earnings report, industry and economic conditions, interest rates, company debt, and announcements made by the company.

While a company might release earnings report showing an increase in profits, the stock price might not change or increase because the market participants expected the earnings report to show those results. Other factors that the participants might consider could be the company’s earnings report for future periods, the company’s valuation, and other factors outside of the company’s control.

For example, a company that has historically showed excellent performance can still experience a decrease in stock price. Knowing how to perform a stock valuation can help explain these anomalies.

Important Stock Market Terms for Beginners

What are the Risks of Investing in Stocks?

There are various risks associated with investment in stock markets. The most significant of these is the risk of loss of capital. Investments in stock markets are speculative. Investors can lose all or part of their capital.

• Market risk: Investments are subject to market risk. There is a risk that the investment will lose value due to adverse changes in the markets.

• Company-specific risk: Earnings problems, debt, governance issues or business disruption can affect an individual company.

• Liquidity risk: There is a risk that the investment will not be saleable at the desired price due to low trading activity.

• Market Volatility: Market and investment prices are subject to change without warning.

• Speculation Risk: There is a risk that the investment strategy will not achieve the desired results.

• Behavioural risk: Emotional investments and a failure to consider all relevant information increase the risk of investment losses.

There are numerous risks associated with stock market investments that are removed by holding demat securities. There are additional risks that investors should consider, including the time period for which the capital is invested and the financial health of the investor.

What is the Difference Between Investing and Trading?

Investors usually purchase and hold securities for a long term investment. While making investment decisions, the investors take into account a number of factors including the business of the company, the valuation and other attributes of the business.

Traders purchase and sell securities on a short term basis. Trading decisions are usually based upon a number of factors including supply and demand, current market sentiment, and cyclical trends in the securities market. Short term investments, however, do not necessarily reduce the level of risk.

There is no universal holding period that automatically makes an approach suitable for every investor. The important distinction is the objective, process and risk being taken.

Where do SIPs and Mutual Funds Come In?

Not all beginners need to find and buy stocks on their own. With mutual funds, service providers combine the money given by several customers and buy the securities in the fund as per the objective of the fund. One of the ways of investing in mutual fund schemes is by regular intervals. This is called a systematic investment plan (SIP).

Systematic investment plan is explained by AMFI to mean that an investor can fix a certain amount to be invested in a fund at periodic intervals. It also says that rupee cost averaging does not guarantee returns or protect from losses in a falling market.

This distinction is important: the stock market is a market infrastructure and asset class environment, while a mutual fund is an investment vehicle that may invest in equities, bonds or other permitted assets. You can learn more through our guide to SIP vs lumpsum investing.

How to Study the Stock Market as a Beginner

1. Understand shares, exchanges, demat accounts and trading accounts.

2. Learn how primary and secondary markets work.

3. Understand market and limit orders before placing trades.

4. Learn basic financial statements and valuation concepts.

5. Understand diversification and risk management.

6. Use official exchange and regulator sources for market information.

7. Keep records of transactions and understand applicable charges and taxes.

8. Avoid tips promising guaranteed or unusually high returns.

9. Start with an amount whose potential loss would not disrupt essential financial needs.

NSE advises investors to deal with SEBI-registered intermediaries, understand account documents and charges, protect login credentials, and avoid schemes offering assured or guaranteed stock-market returns.

Learning the Basics of the Stock Market in India

Here are the questions you should be able to answer before making your first stock market order:

• What do share ownership and holding mean?

• What is the difference between NSE and BSE?

• What is the difference between the “Jiyo” and “Biyo” markets?

• What is a demat account?

• What is a trading account?

• What is the difference between a market and a limit order?

• What are the risks that can make your equity investments go down?

• How do you analyze a company?

• What are the taxes and fees that you should know?

For further learning, explore how the Nifty 50 works guide.