What Is the Stock Market? A Complete Guide for Beginners in India

If you are new to investing, you have probably heard people talking about shares, stocks, the Nifty, the Sensex and other things without really knowing how they relate to one another. To understand this, you will first need to understand what the stock market is. In simple terms the stock market is the place where shares of publicly traded companies are bought and sold.

The stock market can be a good way for companies to raise capital and give the general public a chance to own a share of the business and benefit from its performance. However, the stock market is speculative and there is always a risk that the share price can go down. Share prices can also be affected by things that are beyond a company's control and loss making companies can still be listed on the stock market. The market does not guarantee profits, and learning how it works is essential before you take a risk with your hard earned money.

This easy to understand guide will cover the basics of the Indian stock market including the Stock Exchanges, Listed Companies, Shares, Buyers and Sellers, Price Discovery, Market Indices, Investing versus Trading, Accounts, Risks and more.

If you are interested in stock investing, having access to trustworthy research and market insights can definitely help. A stock advisor can provide insights on investing opportunities in the market, assist investors in company evaluations, and help guide them through a systematic approach to research-based stock investing.

What Is the Stock Market?

The stock market is the section of the financial market where stock and other securities are issued and traded. It is made up of a group of individuals, composed of sellers and buyers, where the rules for trading and clearing of securities are implemented.

When a company decides to go public and issue shares, the ownership of the company is broken into smaller units and sold to the public. With the purchase of a share of the company, an investor becomes a shareholder and is entitled to various benefits that may arise as a result of the growth of the company.

Imagine there is a company where 10 lakh shares are outstanding and 100 of those shares are owned by an individual. That individual owns an equity of the company of only 0.10%. The value of the individual's equity may change if the price of the share changes, but the value of the equity may not always be a true representation of the company's value.

In India, the National Stock Exchange (NSE) and BSE are the prominent stock exchanges where securities can be traded electronically in an online market. They are required to adhere to regulations that govern stock markets.

How Does the Indian Stock Market Work?

Like any other market, the Indian stock market is made up of a combination of different entities (like companies, investors, brokers, exchanges, clearing corporations, depositories and banks). Each participant plays an important role in facilitating trading, ownership, and settlement.

1. Securities are issued /or listed: Companies issue or list their securities to the public either by way of a public offering or by having their shares admitted to trading on an exchange.

2. Accounts are opened: Investors open their account by complying with the applicable KYC and account opening requirements through registered participants.

3. Orders are placed: Investors place their orders (buy/sell) with their broker.

4. Orders are executed: The exchange’s trading system executes orders in accordance with its rules, which may include price and time.

5. Settlement is effected: The clearing and settlement systems calculate final obligations and facilitate the transfer of funds and securities.

6. Holdings are reflected: As part of the settlement process, the purchased shares are held in the investor’s demat account.

The stock exchange provides the market, and investors transact through stockbrokers. The stockbroker transacts on the investor’s behalf, and the clearing and depository systems effect the settlement and transfer of the securities.

For a beginner-friendly overview, the SEBI Investor securities-market guide explains the primary and secondary markets and their roles.

What Are Stock Exchanges?

Stock exchanges are organized markets to bring eligible securities for trading as per established rules, regulations and procedures. They provide an electronic trading platform, access to real time market data and other related systems to facilitate orderly and fair trading.

What Is NSE?

The National Stock Exchange of India Limited, is an important stock exchange of India, having an entirely electronic trading system. It has launched several important market indices including Nifty 50.

What Is BSE?

Bombay Stock Exchange or BSE is another important stock exchange in India. It also has an entirely electronic trading system. It has launched, S & P BSE Sensex, an important benchmark index.

What Is the Difference Between NSE and BSE?

NSE and BSE are separate exchanges with different listed companies, market indices and rules and regulations. A company may choose to get its shares listed on one exchange only, or on both.

Shares of the same company listed on NSE and BSE may be quoted differently, at any given time. Orders and liquidity on the exchanges may differ. This may result in price differences. However, automatic actions may be taken to eliminate price differences. However, this does not mean that prices will always be the same.

For an ordinary investor, it is important to verify the exchange where an order is to be executed and check the security’s symbol, price, quantity and the order type prior to accepting the trade.

What Are Shares and Listed Companies?

A share is a unit of ownership in a company. When you buy equity shares of a company, you own a part of the company, and are allowed to participate in the company’s profit according to the ownership rights given to you.

A listed company is the company whose shares have been listed on a stock exchange, and are therefore traded on that stock exchange. A company that meets the requirements set by a stock exchange is eligible for listing.

There are several reasons for a company to raise funds. Companies can raise funds by issuing shares to the public. The funds raised can be used to implement the company’s growth plans, funding working capital, funding research, acquisitions or other reasons.

Shares that are issued and allotted to a company’s shareholders are listed on a stock exchange. These shares can be purchased and sold by shareholders on the stock exchange. Shares can also be transferred by physical delivery. The company does not receive the purchase price from every ordinary secondary-market transaction.

Shares and bonds are different financial instruments. Shares represent equity and bonds represent debt. Bond investments carry credit, market and interest-rate risks, and equity returns are uncertain and may include price appreciation and dividends.

Primary Market vs Secondary Market

The stock market is commonly discussed in terms of two connected parts: the primary market and the secondary market.

Understanding this distinction helps investors recognise why an IPO and buying an already-listed share are different transactions, even though both involve securities.

Who Participates in the Stock Market?

Several types of participants are involved in the functioning of the Indian stock market.

• Retail investors: Consist of individuals who invest or trade using their own funds.

• Institutional investors: Consist of eligible institutions, i.e. mutual funds, insurance companies, and other investment companies.

• Foreign portfolio investors: Consist of investors who are registered with the applicable Indian regulations and are based outside India.

• Companies and issuers: Consist of companies and other entities that issue securities to the public and satisfy the criteria for listing.

• Stockbrokers: Consist of regulated and licensed entities that provide trading services to eligible clients through the Exchange’s trading system.

• Market makers and liquidity providers: Participants who may quote buy and sell prices in eligible securities or market segments.

• Exchanges, clearing corporations and depositories: Entities that provide the securities trading, clearing and settlement infrastructure.

• Regulators: Authorities such as SEBI establish and oversee rules within their respective areas of responsibility.

Although all participants have a common interest in capital markets, their objectives, resources and approaches are usually different. So, a retail investor should not presume that every participant has the same time horizon, access to information or tolerance to risk as him/her.

How Are Stock Prices Determined?

The price of a stock gets determined by how the buyers and sellers of that stock interact. At an exchange, there is an order book, which has all the buy and sell orders. Buy orders show what price the buyer is willing to pay, and sell orders show the price the seller is willing to accept.

When a buy order gets matched with a sell order according to the exchange's matching rules, then a trade gets executed, and the price of the trade gets set. The price of the trade helps to set the price of the market.

Factors that can move the demand and supply of a company's stock are:

• Company performance: Investors evaluate a company's performance and outlook based on profitability, cash flow, debt, business model, management, and the macro-economic outlook, to name a few.

• Economic conditions: Inflation, interest rates, economic growth and currency movements can influence business performance and market sentiment.

• Industry developments: Competition, regulation, commodity prices and technological changes can affect particular sectors.

• News and announcements: Results, acquisitions, management changes, regulatory actions and other disclosures can influence expectations.

• Market sentiment: Investor confidence, uncertainty and changing expectations can influence buying and selling activity.

• Liquidity: The number and size of available buy and sell orders can affect how easily shares trade at a particular price.

Stock prices can also change, for example, because of news on other unrelated companies. Stock prices can also shift, even if there are no new company announcements.

What Are Sensex and Nifty?

Sensex and Nifty are names of stock market indices. Indices allow investors to see how various parts of the stock market are performing. As such, they are useful as broad benchmarks to analyze market movements.

S&P BSE Sensex

Sensex is an index that was created by the Bombay Stock Exchange (BSE) and is benchmarked against a selected group of major listed companies. The value of Sensex changes based on the performance of the companies in the index.

Nifty 50

Nifty 50 is an index created by the National Stock Exchange (NSE) that tracks 50 of the largest companies based on the NSE eligibility and methodology rules.

When the value of Nifty or Sensex rises, it means that the measured value of the index has increased. It doesn't mean that the value of all listed stocks has increased. Some stocks can decline while an index advances, and some stocks can increase while an index declines.

Individual investors should not confuse their portfolio performance with benchmark performance. Refer to our how Nifty 50 works guide to learn more about the role of indices and their methodology.

What Is the Difference Between Investing and Trading?

Investing and trading both involve buying and selling securities, but they often differ in purpose, holding period and decision-making approach. Neither guarantees a profit.

The terms are not mutually exclusive, and actual holding periods vary. A long-term investor can sell a holding when circumstances change, while a trader may keep a position for weeks or months. The important point is to understand your strategy, the risks involved and the reasons for each decision.

How Can Beginners Start Investing in Stocks?

Before placing orders, beginners should learn the basics of the structure of the market. A prudent approach involves evaluating requirements, understanding costs, loss potential and order process.

1. Learn the basics: Get a broad understanding of the world of stocks, shares, markets, orders, indices and the risks associated with investing.

2. Define your goal: Decide on your approach to investing. Are you interested in the world of long term investing or are you fascinated by the short term world of trading? Each poses a different set of risks.

3. Understand your finances: Analyze your current financial situation and determine your appetite for risk. Are you able to take a loss on your investment? The losses should not impact your regular financial commitments.

4. Complete account requirements: Investors generally need a bank account, a Demat account to hold securities electronically, and a trading account with an eligible broker to place exchange orders.

5. Complete KYC: Investors are required to submit proof of identity during the account opening process.

6. Research before choosing a company: Research the company’s model, financials, risks, debt, valuation, relevant disclosures and other public material.

7. Understand your order: Understand the meaning of the stock’s symbol, price, quantity, order type and the exchange.

8. Monitor responsibly: Review your holdings and decisions periodically rather than reacting impulsively to every market movement.

If you are looking for professional support in stock investing, explore our stock investment services mentioned above to get expert guidance and research-based insights.

To understand the account needed for placing orders, review the requirements for an equity trading account. Account access does not remove the need to research securities and manage risk.

For a more structured approach to evaluating individual companies, see our guide to fundamental analysis of stocks.

What Is a Demat Account and Why Is It Needed?

A Demat account is an account that holds securities in an electronic format. It is different from a trading account, which is used for placing buy and sell orders through a broker.

When a client wishes to purchase any listed equity, he/she uses his/her trading account to place an order and the securities are credited to his/her Demat account after the settlement process. A bank account is used to transfer the funds to make the investment and to receive the funds upon selling the securities.

SEBI's investor education materials detail the roles of these accounts and the need to use regulated intermediaries. Account opening conditions and products supported can vary intermediaries. Investors are advised to verify terms and conditions as well as charges before opening the accounts.

What Are the Main Risks of Stock Market Investing?

Stock-market investing involves uncertainty. Even investors who research a company carefully can experience losses when the business, industry or wider market develops differently than expected.

• Market risk: A broad market decline can lead to losses in many stocks held.

• Company-specific risk: Results can be negatively impacted by a variety of issues such as debt, poor management or governance and competition.

• Valuation risk: Even a great business can be a poor investment if purchased at too high of a price.

• Liquidity risk: Shares with limited trading activity may be difficult to sell quickly at a desired price.

• Volatility risk: Prices can fluctuate sharply, sometimes in response to unexpected events.

• Behavioural risk: The market is often driven by investor emotion and fear that can lead to bad investment decisions.

• Leverage risk: Borrowing or using leveraged products can magnify losses and may create obligations beyond the initial amount invested, depending on the product.

There are a number of risks that can be mitigated including diversification, researching the investment, avoiding concentration, using leverage judiciously and making sure investments are in line with financial goals.

Common Stock Market Terms Beginners Should Know

• Share: The unit of ownership in a company.

• Stock exchange: A regulated entity where securities are traded.

• Broker: An intermediary that gives access to trading on the stock exchange.

• Demat account: An account used for holding securities in a dematerialized form.

• Trading account: An account used to give buy and sell instructions to a broker.

• Market capitalisation: Market value of a company's outstanding equity shares which is calculated by multiplying the stock price by the number of outstanding equity shares.

• Dividend: A distribution by a company to shareholders, if any, as decided by the company.

• IPO: The first sale of a company's equity shares to the public.

• Portfolio: The total equity shares, debt instruments, and other securities held by an investor.

• Benchmark: A yardstick against which investment performance is measured.

• Liquidity: The state of being able to trade a security without a large price impact.

• Volatility: The degree to which a security's or market's price fluctuates over time.

Conclusion: Understanding the Stock Market Before You Participate

The stock market enables trading of shares and other eligible securities via recognized and regulated exchanges. Important infrastructure in India includes NSE and BSE. Support Services are rendered by brokers, clearing corporations and depositories.

It is always better to take baby steps while learning to ride a bike. The basics (for beginners) are understanding shares, listed companies, price discovery, market indices and difference between investing and trading.

Moving on, learning to assess companies, understanding risks associated with securities and making informed decisions keeping in view financial goals are important.

There is not enough evidence to suggest that any particular investment or market strategy or market index is going to give best returns. So be prepared to incur losses if any.