Understanding Stock Markets: A Beginner’s Guide to NSE

Have you ever wondered what it would be like to hold a small part of a company you have always liked and have been inspired by? With the stock market, you can buy and sell small parts of the company called stocks (also called equities) in the public marketplace. If these companies make profit, then your share would become more valuable and can be sold for a profitable amount. 

However, if the company performs adversely, the share could lose its value. 

As a beginner investor, NSE (National Stock Exchange) is your gateway to trade stocks through a secure, and transparent platform that is one of the largest and most prominent stock exchanges in India and globally. 

Through this blog, we will first understand the basics of the stock market, its purpose, method of investing and key financial instruments. 

What is a Stock Market?

The stock market is a public marketplace where stocks, also called equities, are issued, bought, and sold. These stocks represent partial ownership in a company, and the stock market provides a platform for investors to trade these ownership shares. Being an important part of the capital market, stock market is where securities are traded systematically. 

Note: The terms “stock market” and “stock exchange” are used interchangeably, but they refer to different concepts. While the stock market is the broader system where shares are bought and sold, a stock exchange is the specific platform or venue where these trades take place.

India’s two main stock markets are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Between these, NSE dominates over 90% of cash trades. In India, all stock market activities, including daily trades, the financial instruments being exchanged, and the platforms that facilitate these transactions, are overseen by the Securities and Exchange Board of India (SEBI).

Purpose of Stock Market

•  Companies can raise money by issuing shares to the public. This capital can then be used for growth, development, or to cover other business requirements.
• The stock market provides a platform for individuals and institutions to invest in companies and earn profitable returns through dividends and capital appreciation.
• Stock market transactions are conducted with transparency and strict rules governing delivery and payment, ensuring a high level of security.
• Provide liquidity that makes the buying and selling of stocks easy and with minimum impacts on prices. It allows investors to quickly convert their assets into cash or other securities. 
• The stock market reflects investor’s confidence in the economy, and acts as a leading economic indicator. A rising market signals optimism, influencing businesses and investors, that also impacts GDP.
• Other purposes of stock market includes price discovery, wealth distribution, facilitating mergers and acquisitions etc. 

How to Invest in the Stock Market?

You can’t buy or sell stocks directly on the stock market yourself. Instead, you need to use a broker or a stock brokerage platform. Follow the given steps:

• Step 1: Set up a trading account with a broker or a brokerage platform. This account is where you’ll buy and sell stocks.  

• Step 2: Open your demat account. This account safely holds the stocks and other securities you own.
• Step 3: Connect both your trading and demat accounts to your bank account for easy transactions.
• Step 4: To open these accounts, you’ll need to provide KYC (Know Your Customer) documents, like a PAN card or Aadhaar card, for verification.
• Step 5: Once your accounts are set up, you can start trading through your broker’s online portal or by phone.

Key Financial Instruments Offered by Stock Market

• Equity Shares: Issued by companies that give you a claim to its profits as dividends.
• Bonds: Also called debt instruments or fixed-income instruments, bonds are like loans investors give to issuer companies or governments. In return, they pay you interest at a fixed rate for a set period. 
• Mutual Funds (MFs): Managed by financial institutions, mutual funds pool money from many investors and invest it in various assets. The profits are shared among investors based on the number of units they own. 
• Exchange-Traded Funds (ETFs): ETFs track a specific index, such as the NIFTY or SENSEX. When you buy an ETF, you own a small part of all the stocks in that index, in the same proportions as the index itself. ETFs are cheaper than mutual funds.
• Derivatives: These are financial contracts whose value depends on the performance of an underlying asset, such as stocks, bonds, or commodities. 

What is NSE?

Incorporated in 1992, NSE or National Stock Exchange of India Limited is the nation’s leading financial exchange that provides trading services to investors throughout the country. To improve financial well-being of people and promote integrity, customer focused culture, trust and respect, NSE aims to bring efficiency and transparency to the nation’s capital markets. 

Established in 1994, NSE was the first exchange in India to introduce electronic, screen-based trading. It is known for pioneering technology, ensuring the reliability and performance of its systems through continuous innovation and investment. NSE provides a cutting-edge technology platform that offers high levels of safety, resilience, and efficiency for trading and investment across all asset classes, catering to all types of investors.

Functions of NSE 

• NSE provides a unified platform for trading a variety of financial instruments, including equities (stocks), debt (bonds), and hybrid instruments (which combine features of both debt and equity).
• It ensures that investors from all parts of India can easily access the market through a strong and reliable communication network.
• NSE uses advanced electronic trading systems, which automate the process of buying and selling securities.
• NSE enables faster settlement cycles. The time it takes to complete a trade (from order placement to the transfer of securities and money) is minimized.

How Does the NSE Stock Market Work?

• Trading through NSE in India is conducted through an electronic system called an electronic limit order book, where orders are matched automatically by a computer. 
• Market orders placed by investors are automatically matched with limit orders which ensures the anonymity of both buyers and sellers.
• The order-driven market offers high transparency. It displays all buy and sell orders in the system.
• Orders are typically placed through stockbrokers, who often provide online trading facilities for customers.
• Some institutional investors can place their orders directly into the trading system using the “direct market access” facility.
• Trading in the equities segment is conducted from Monday to Friday, with the following schedule:

• The flagship index of NSE is Nifty50 that represents about 63% of the total market capitalization of companies. It includes 50 stocks across 12 different sectors of the economy.

Market Segments of NSE

NSE facilitates trading in two main segments: 

Wholesale Debt Market Division: Provides a trading platform for a variety of fixed-income instruments including Certificates of Deposit, bonds, commercial paper, treasury bills, central government securities, and similar securitie

Capital Market Division: Allows trading in a range of securities, such as equity shares, debentures, exchange-traded funds (ETFs), preference shares, and retail government securities.

Benefits of Listing with NSE of India

• NSE’s trading system efficiently provides both trade and post-trade information that ensures transparency and consistency, which benefits the investors.
• Investors can easily see the top buy and sell orders and the total number of securities available for trading, further helping investors quickly assess the market’s depth.
• High trading volumes on NSE help reduce impact costs, which lowers trading expenses for investors.

• NSE is the country’s largest stock exchange by trading volume, with a market capitalization of over $2.25 trillion.
• Orders are processed rapidly, allowing investors to secure the best prices.
• Listed companies receive monthly trade statistics that further helps them track their performance on the exchange.

Thus, NSE is a crucial institution in India’s financial environment that helps in providing a robust, secure, and transparent platform for trading and investment.