Every company aims to make gains in the long run and for this, they need money to invest from time to time. To be able to raise money, the company divides its worth into small tradeable units, known as stocks and seeks investment from the public at large. Investors buy these shares, i.e., the part of the ownership of that company, enabling cash inflow into the company.
In India, the trading is massively dependent on two dominant stock exchanges namely, the BSE and NSE. The BSE was established in the year 1875 and NSE in the year 1992. Not only these two but any stock exchange follows certain criteria majorly focused on trading hours, regulations, mechanisms, settlement process and multiple other factors. Let us take a look at what all the trading mechanism entails.
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Trading Mechanism
Earlier investors had to physically visit the stock market to buy and sell stocks. As time has changed, the entire trading happens online. An electronic limit order book acts as a medium to connect buyers and sellers. Once the account has been set up, any investor can place an order, either by themselves or through a broker.
Hours needed for trade and settlement
The stock exchanges function between 9.15 am and 3.30 pm between Monday and Friday throughout the year. If a trade has been initiated by the investor, say today, then the buyer would receive the stocks after two working days from today. This means the seller of the stocks would ensure that shares are physically transferred in the next two working days. Thus, the process is known as the T+2 settlement process.
Market Indices
India has two very important market indices namely Sensex and Nifty. Sensex represents the shares of the top 30 companies in the BSE, whereas Nifty comprises the shares of the top 50 companies in the NSE.
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Market Regulation
The body that is entrusted with the task of regulating the entire Indian capital and securities market is the Securities and Exchange Board of India (SEBI). This body issues guidelines that must be followed by the companies to ensure best market practises. SEBI also has the authority to penalise companies in the case of any malpractice or overstep of SEBI’s rules and regulations.
There are two types of markets for trading — primary and secondary market. If a company is listing its shares for the first time, they put forward an Initial Public Offering (IPO) in the primary market. Following this, the shares are listed on the stock exchange. Moving ahead, the secondary market is where the actual trading of stocks takes place.
Following that, there are certain financial products that are traded in these markets. They are shares, derivatives, mutual funds and bonds.
Shares: They represent ownership of a particular company. Investors buy shares to attain ownership of that company and this allows capital building and growth of that company. Moreover, shares are considered to be the highly traded products in the stock markets.
Mutual funds: They facilitate indirect investment by the investors in different shares and bonds. They also encourage investors to pool their investments and then go ahead with investing in a wide range of instruments.
Derivatives: They are a way to aid the investors in trading at a future date for today’s prices. This financial product is extremely helpful, given the volatile nature of the stock markets.
Bonds: They are a type of loan given to the companies for which the investors are given interest at regular time intervals.
It is vital to know these basic constituent elements before taking a plunge into the stock market as an investor.
