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Journey of Nifty from 11,000 to 22,000

2 mins 15 Feb 2024 0 COMMENT

Nifty's journey from 11,000 to 22,000 covered several interesting data points. This video discusses the days Nifty took to cover each increment of 1,000 points. Watch the video to learn more

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29 Dec 2022 2 mins 3 k views

Videos - Stocks

Basics of working of the Indian stock market

We have all heard this term, "Stock Exchange." If I have to explain it to a layman, I would say a stock exchange is simply a platform where stocks are exchanged, that is, bought and sold. By this statement, a person can easily make out that if he wishes to buy a stock or sell an already held stock, he can do it on a stock exchange. In India, whenever this term is used, it reminds us of two popular stock exchanges: BSE and NSE. BSE stands for Bombay Stock Exchange, and NSE stands for National Stock Exchange. Also, BSE is the first stock exchange of India, but mostly all major securities are traded on both the stock exchanges. So, you can either buy and sell stocks on either of them. Besides these two primary stock exchanges, there are a few more exchanges, namely: Calcutta Stock Exchange, Metropolitan Stock Exchange of India, India International Exchange, NSE International Exchange, National Commodity and Derivatives Exchange, Multi-Commodity Exchange of India, and Indian Commodity Exchange.

Now comes the question of how to trade on a stock exchange. Earlier, there was an outcry system for trading on these exchanges wherein floor hand signals were used to trade at the stock exchanges. But now, both exchanges have switched to a fully automated computerized mode of trading known as BOLT (BSE Online Trading) and NEAT (National Exchange Automated Trading System), respectively. They aim to facilitate efficient processing, automatic order matching, faster execution of trades, and transparency.  

So now, you must be wondering who can invest in the stock market. The stock market is not limited to just individuals. Even institutions can invest in the stock market on behalf of individuals. So now, you can say there are broadly two types of investors in the stock market: retail investors and institutional investors. Individual investors who invest their own money for their professional benefit through brokerage firms or other mediums are retail investors. An investor who invests less than rupees 2 lakh in an IPO is considered a retail investor in an IPO. However, an institutional investor constitutes financial institutions, both domestic and foreign, like banks, insurance companies, asset management companies, etc., that invest in large quantities for individual investors. These investments have the potential to impact the market.  

Now, the question arises: if a person plans to settle abroad or is already settled there from a long period of time, can he still invest in the Indian stock market? Yes, he can invest as an NRI. He just needs to get a Portfolio Investment Scheme (PIS) license from the Reserve Bank of India designated banks. He will have to open an NRO (Non-Resident Ordinary) or NRE (Non-Resident External) account with a broker registered in India. NRIs can also invest in securities through an NRO account.

Now, what if that person already has a Demat account before moving abroad? In this case, you can turn his Demat account into an NRO account, and this broker will transfer the shares from the old Demat account to the new NRO account. Now, you must be wondering whether a foreigner can invest in the Indian stock market or not. Yes, they can, but they will have to invest as a Foreign Portfolio Investor (FPI). FPIs can invest in Indian securities after registering with designated depository participants.

By now, you already know it is mandatory to have a Demat account to invest or trade shares. Long back, when someone bought shares of a company, he would be provided with a paper certificate that he had to preserve until he actually sells those shares. And then, he would transfer those certificates to the new buyer. This process was lengthy, inconvenient, time-consuming, and there stood certain risks of errors. But thanks to digitalization, after the year 1996, paper share certificates were replaced by electronic certificates and Demat accounts. Dematerialization is the process by which physical certificates are converted into electronic form, and for this, we have depositories. Now, you can only buy shares in a Demat account. They are stored there in electronic form, and there is no need of preserving physical share certificates. Also, you can easily sell shares from here. Isn't it convenient? And opening a Demat account is as simple as opening a bank account.

Here is the procedure of opening a Demat account- You can open a Demat account online with any depository participant by following these steps: fill up the account opening form digitally, sign and submit the DP client agreement, fulfil the KYC norms, and receive your client account number, and we are ready with a Demat account now. Then, open a trading account with a broker because a broker will provide you with a trading platform for buying and selling the shares in the stock market. Most brokers allow you to open both Demat and trading accounts in one go. Some brokers even allow you to open a bank account along with Demat and trading, and such an account is called a three-in-one account.

So, let's learn how you can invest in the stock market. First and foremost, arm yourself with good knowledge of the company you wish to invest in. If you wish to buy a stock, your broker then passes on the request to the stock exchange to look for the sell order. Once the stock exchange matches the sell order at a price agreed upon, the transaction is finalized. A broker receives confirmation from the stock exchange, who then informs you about the successful transaction. And it takes a fraction of a second to complete these activities. Now, the clearinghouse or the depositories initiates the transfer of funds and shares. This is known as the settlement process. The settlement cycle takes two working days. The DP then credits your Demat account with the purchase shares, and the amount will be debited from your linked bank account. And in case of a sell, you will receive your money, and shares will be debited from your Demat account. This process is very quick and convenient.  

But how do you understand the trend in the stock market? Here, let's try and understand these two terms: bull and bear. Bull means the stock price is rising or is expected to rise, whereas bear means the stock price is falling or is expected to fall. But why bull and bear? Do you know how a bull attacks its opponent by thrusting its horns up into the air? That's right. This upward motion of the bull's attack is compared to the upward movement of stock market prices. Whereas, how does a bear strike its opponent? By swiping its paws towards the ground. Here, the downward motion of the bear's attack is compared to the downward movement of stock market prices.

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