What Is Equity Market - Meaning & How It Works

What is an Equity Market?

An equity market is a platform for trading shares or stocks of publicly listed companies. It provides a space where buyers and sellers come together to trade shares in a transparent and regulated manner. Equity markets play a crucial role in the economy as they help companies raise capital and provide investors with an opportunity to invest as well as benefit from the future growth of these companies. The equity market is also commonly known as the stock market or the share market.

Overview of the Equity Market in India

India has two major stock exchanges, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), that facilitate the trading of shares and other securities. Equities are the most traded segment on these exchanges. The NSE was established in 1992 and is the largest stock exchange in India in terms of market capitalisation. The BSE, on the other hand, was established in 1875 and is the oldest stock exchange in Asia. The Indian equity market is regulated by the Securities & Exchange Board of India (SEBI).

Equities are traded in two forms, i.e., spot or cash market and futures market. Trades in the spot market result in the immediate delivery of shares, whereas in the futures market, these transactions take place on a predetermined future date.

A growing economy and the increasing number of companies going public have bolstered the Indian equity market significantly in the last few years. The equity market has also become more accessible to retail investors due to the proliferation of online trading platforms and a greater flow of information. Stockbrokers registered with SEBI are the interface between retail investors and the equity market.

Types of Equity Markets

There are two types of equity markets – primary and secondary:

1. The primary market is where companies raise capital by issuing new shares to the public, which is also known as Initial Public Offering (IPO). In an IPO, the company offers its shares to the public for the first time, and investors can buy those shares at a predetermined price. The primary market is an essential source of capital for companies, and it enables them to finance their growth plans.
2. The secondary market, on the other hand, is where investors buy and sell shares that are already listed on the stock exchange. The secondary market provides liquidity to the shares, which means that investors can easily buy and sell them. The secondary market allows investors to take advantage of the price movements of the shares and make profits in the process.

How Trading Works in Equity Markets

Trading in the equity market can be done through a registered stockbroker or an online trading platform. Investors can not only buy the shares of companies they believe have good growth potential, but they can also sell those shares when the price increases. However, trading in the equity market involves risks, and investors should be well aware of them before pumping in money. One of the biggest risks in the equity market is the volatility of the shares. Share prices can fluctuate rapidly due to various factors such as management actions, macroeconomic developments, policy changes, geopolitical events, etc.

Trading in the equity markets essentially comprises three activities:

1. Trading

This is simply the buying and selling of shares that take place through the exchanges. Here buyers choose a purchase price and sellers determine a selling price, which if matched executes that particular trade. It is facilitated by a screen-based trading terminal that is hosted by the SEBI-registered stockbroker. Stockbroking firms charge a commission known as a brokerage for providing these services to investors.

2. Managing Risk

As is with every investment, the equity markets also have associated risks in the form of volatility and liquidity. Trading terminals and stockbrokers ensure that any lapses or vulnerabilities are communicated to the users in time such that the process of trading does not cause any untoward losses. The rules laid down by the governing bodies are also implemented in the trading terminals to enforce the same level of precaution for every investor.

3. Trade Settlement

Each trade in the stock market has to be settled once the trading session ends. Indian markets now follow the T+1 (Trade + 1) settlement cycle, which means that the trades are settled a day after they are executed.

FAQs on Equity Market

1. What are the timings of a trading session in India?

Indian markets operate in a fixed window, i.e., from 9:15 am to 3:30 pm from Monday to Friday. On weekends, no trading happens and the markets remain closed.

2. Are there any trading holidays?

Yes, apart from weekends there are designated holidays that are made available on the exchange’s website for the entire financial year.

3. What do I need to trade in the equity market?

As an investor or trader, you simply need a demat account, a trading account, a bank account, and some capital to invest.