Stock Market Basics: How Indian Equity Markets Work

A share represents part-ownership of a company. When a company lists on an exchange, those shares can be bought and sold by the public at prices set continuously by supply and demand.

The exchanges

India’s two main equity exchanges are the National Stock Exchange (NSE) and the BSE. They provide the order-matching system, publish prices, and define the rules under which trading takes place. The market regulator, SEBI, sets the framework both exchanges and intermediaries operate within.

The three accounts you need

• A bank account, which funds purchases and receives sale proceeds.
• A trading account, through which you place orders.
• A demat account, where the securities you own are held electronically.

What happens when you place an order

1. 1You place a buy or sell order through your trading account, specifying quantity and either a limit price or a market order.
2. 2The exchange matches your order with a counterparty at the best available price.
3. 3The trade is confirmed, and a contract note is issued showing the price and all charges.
4. 4On settlement, shares are credited to (or debited from) your demat account and funds move correspondingly.

Vocabulary worth knowing early

• Index - a basket of stocks used to represent a market or a segment, such as the NIFTY 50.
• Market capitalisation - share price multiplied by the number of shares outstanding.
• Volume - the number of shares traded in a period.
• Bid and ask - the highest price a buyer will pay and the lowest a seller will accept.
• Circuit limit - a price band beyond which a stock cannot move in a session.

What moves prices

In the short run, prices respond to news, earnings, flows and sentiment, and they can move sharply for reasons unrelated to a company’s operations. Over longer periods, prices tend to track the underlying performance of the business - though this is a tendency, not a rule, and it can take years to assert itself.

Educational content. This article explains general concepts. It is not investment advice, does not recommend any security or scheme, and takes no account of your personal circumstances. Investments in securities are subject to market risks.