The stock market is often considered to be the driver of the economic growth and prosperity of a country. In India, the Securities and Exchange Board of India (SEBI) is the governing body for the stock market.
The Indian stock market primarily operates through two exchanges the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Understanding how stock market investments function in India is essential for beginner traders, and long-term investors.
How the Stock Market Works in India: Market Structure
The Indian stock market structure consists of different components that function together to streamline operations of the Indian stock market. The components are mentioned below
| Component | Role in the Stock Market |
| Regulatory Authority | SEBI monitors and regulates stock market activities to ensure transparency and fairness. |
| Stock Exchanges | BSE & NSE facilitate the buying and selling of stocks. |
| Investors | Retail and institutional investors participate in trading. |
| Stockbrokers | Act as intermediaries between investors and the exchange. |
| Depositories (NDSL/CDSL) | Maintain electronic records of securities. |
| Clearing Corporations | Ensure the settlement of transactions efficiently. |
Besides regular stockbrokers, stock market transactions can also happen through Over-the-Counter (OTC) exchanges. In this case, the buyer and seller deal directly with each other and agree on the terms, like the price and quantity, without using a formal stock exchange.
How the Stock Market Works in India
1. Primary and Secondary markets
Usually, the primary and secondary markets facilitate capital raising and trading. Important functions are listed below.
| Primary Market | Secondary Market |
| Raise capital for companies | Provide liquidity for investors |
| Initial sale of new securities | Resale of existing securities |
| Companies, investors, underwriters | Investors, brokers, traders |
| Fixed by the company (IPO price) | Determined by market forces (demand & supply) |
| IPO by a tech startup | Trading Reliance shares on NSE |
| Regulated by SEBI for IPO process | Regulated by SEBI for trading rules |
2. Stock Market Participants
The Indian stock market has different types of participants as listed in the table below:
| Market Participant Categories | Description |
| Retail Investors | Individual investors trade using their own money to build personal wealth. |
| Institutional Investors | Mutual Fund Companies, Insurance Firms, and Hedge Funds. These deal with client money. |
| Foreign Institutional Investors (FIIs) | These are overseas investors contributing to market liquidity. |
| Market Makers & Traders | They buy and sell stocks to provide liquidity. |
3. Trading Mechanism in India
Stock trading in India follows a structured process:
Open a Demat account: For any kind of stock market-related transactions one needs to have a Demat account with a registered broker.
Placing Orders: Buy and Sell for trading and investing orders are placed using the Demat account.
Order Matching: The exchange matches the corresponding buy and sell orders through electronic trading mechanisms.
Trade Execution & Settlement: Transactions are completed through T+1 settlement cycles (Trade Day + 1 working day).
The stepwise process is mentioned in the table below
| Steps | Description |
| Opening a Demat & Trading Account | Investors require a Demat account (to hold securities) and a trading account (to execute trades). |
| Placing Orders | The orders are placed via stockbrokers like Zerodha, Upstox, etc |
| Order Matching | Orders are matched at the exchange for the corresponding buyer and seller |
| Trade Execution & Settlement | Settlement takes place through T+1 settlement cycles (Trade Day + 1 working day). |
4. Stock Market Indices in India
Indices reflect the overall stock market performance. They can vary according to categorization, such as market capitalization, sector, or industry. The major indices of the Indian Stock market are listed below.
| Major Indian Stock Market Indices | Component |
| Sensex | Top 30 Companies in terms of Market Capitalisation. |
| Nifty50 | Top 50 Companies in terms of Market Capitalisation. |
| Nifty Bank | Most liquid and large-capitalized Indian Banking stocks |
| Nifty Midcap100 | Top 100 Mid-Cap Companies |
How Stock Markets Work in India: Market Segments
The stock market comprises two major segments mainly cash and derivatives. The table below gives a brief overview of their functioning.
| Aspect | Cash Segment | Derivative Segment |
| Definition | Investors buy or sell shares directly | Investors trade contracts based on the future price of stocks or indices |
| Instrument | Equity Shares | Futures and Options (F&O) |
| Ownership | Immediate ownership of shares | No ownership, only contracts are traded |
| Settlement | T+1 Settlement | Settlement on contract expiry date |
| Purpose | Ideal for long-term investing and short-term trading | Used for hedging, speculation, and arbitrage |
| Risk | Relatively lower risk | Higher risk due to market volatility |
How Stock Markets Work in India: SEBI’s Role
Securities and Exchange Board of India (SEBI) is the regulatory authority ensuring the markets in a manner that is fair to everyone, especially the retail investors and traders. SEBI is responsible for tracking and resolving any irregularities like insider trading, market manipulation, etc. The Securities and Exchange Board of India (SEBI) ensures:
- Transparency in transactions
- Protection of investor rights
- Prevention of insider trading and market manipulation
- Efficient functioning of stock exchanges
How Stock Market Works in India: Investment and Trading Methods
Long-Term Investing: Holding quality stocks for a long period to benefit from the price appreciation. The holding period can be up to several years.
Intraday Trading: Buying and selling shares within the same trading session. It aims at gaining the benefit of small price fluctuations.
Swing Trading: It involves holding stocks for a few days or weeks. It tries to take advantage of a short-term price trend.
Types of Analysis Techniques
Fundamental Analysis: It involves the evaluation of the key fundamental aspects of a company like profit and loss statements, cash flows, and financial ratios.
Technical Analysis: This means studying historical price charts, patterns, and indicator signals to predict likely price movements occurring in the future.
Final Thoughts
The Indian stock market works in cooperation with different operational components like brokers, market participants, and the technology used. Stock market working is regulated by the SEBI (Securities and Exchange Board of India). The smooth functioning of the stock market provides the opportunity for investors to create wealth by investing in promising companies.
Working of Stock Market – FAQ
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What are the stock market trading hours in India?
Trading takes place from 9:15 AM to 3:30 PM (IST), Monday to Friday.
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How to start investing in the stock market?
To start investing in the stock market one needs to have a Demat account. It is required to place orders and track investments.
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What is the role of SEBI in the stock market?
SEBI (Securities and Exchange Board of India) is responsible for ensuring fair operation of the Indian stock market. It is the regulatory body for the stock market.
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What is Nifty50 and Sensex?
Nifty50 and Sensex are the benchmark indices of the Indian Stock Market. They represent the top 50 and 30 stocks on the NSE and BSE, respectively.
