Equity Market in India: Definition, Types, Benefits & Working
Public company’s shares are listed on exchanges and traded between company and investors. The platform on which such trades are processed is known as the equity market. It provides equal access to companies, institutions, government bodies, brokerages, institutional investors and retail investors.
Read on to learn the types of the equity market, its benefits and the procedures involved.
What Are Equity Markets?
An equity market is a platform to trade equities to raise funds for company operations. The platform can also be used by traders and investors to buy and sell equities/stocks to generate income through capital appreciation.
Companies trade private and public stocks in exchange for funds through stock exchanges or Over–the–Counter (OTC) platforms. Individuals purchase the stocks via a registered stockbroker platform.
Companies have to be listed as public companies to trade public shares on the stock exchanges. At the same time, an individual must have a DEMAT account associated with a stockbroker to invest in equity markets.
Also Read: A Beginner’s Guide to Equity Investment
What Are the Types of Equity Markets in India?
There are 2 types of equity markets in India. These markets are differentiated based on their characteristics and limitations.
- Primary market
Primary market is that part of the equity market that deals with the issuance of Initial Public Offerings (IPO). It is where entities go to obtain financing by offering shares to the investors in return.
A percentage of a company’s total equity is sold for an amount of capital raised during the IPO round in the primary market. The investors have to hold these shares for a certain period of time. Investors participating in the primary market are thus buying stock directly from the issuing company.
- Secondary market
After launching the IPO, a company’s stocks get listed on the secondary market. All public and retail investors can buy and sell stocks in the live market, and the price for a stock is set based on the buy-and-sell ratio on a particular day.
Primary investors can sell their stocks here and exit the IPO holdings. Investors can trade stocks instantly or daily in the secondary market. Unlike the primary market, the issuing company has no active role in the secondary market.
Also Read: Top Performing Equity Funds in India 2022
Stock Exchanges of India
The equity market in India operates majorly through two stock exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), which list all companies that are available for public equity trading.
Investors and fund houses analyse and invest in stocks, based on indices maintained by the two exchanges – NIFTY for NSE and SENSEX for BSE. Stock market indices are meant to capture the overall behaviour of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value.
Which is the Regulatory Authority for Equity Market in India?
The statutory regulatory body which oversees all equity-related trades and exchanges in India is called the Securities and Exchange Board of India (SEBI). Its primary focus is to safeguard the interests of the investors and ensure ethical trade practices in Indian markets.
The Securities and Exchange Board of India was constituted as a non-statutory body on April 12, 1988 through a resolution of the Government of India. The Securities and Exchange Board of India was established as a statutory body in the year 1992. Working members of SEBI are different individuals from the Finance Ministry, Reserve Bank of India (RBI) and the Union Ministry.
The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are two exchanges under SEBI that are involved with equity trading. All brokers, companies, lenders, fund houses, etc., must get approval from SEBI to operate in the equity market.
What Are the Benefits of the Equity Market?
Equity markets have several benefits that make them a popular investment option.
- Investment diversity
Diversifying your portfolio allows you to profit from multiple options and balance your risk simultaneously. Equity investments offer an investor the benefit of parking their capital into assets independent of other investment options. Diversified stock investments can fetch good profits and reduce overall risk.
- Tax reduction benefits
Returns of up to ₹1,00,000 from stocks that are sold after a holding period of 1 year or more are exempted from tax. Taxes imposed on returns above ₹1,00,000 are comparatively lesser than what is imposed on other income sources. This is a crucial benefit of investing in the equity market. According to the changes that took place in 2018, the LTCG above Rs.1 lakh will be taxed at 10% without indexation. The STCG will be taxed at 15% with the benefit of indexation.
- Dividend Income
Some companies offer dividend payouts to their investors in addition to the returns generated from increasing share prices. It is a unique feature of equity market investments.
- Right to ownership
Shareholders of a particular stock are technically part of company owners and get rights to vote and participate in other management functions based on their shareholding pattern.
- Liquidity advantage
Investors can easily sell equity shares in the market with a minimum waiting period. This offers easy liquidity to investors, which is a significant benefit.
- Tackling inflation
Revenue generation through the equity market helps you beat inflation and grow wealth. Usually, returns from stock investments over longer tenure tend to be higher than the inflation rate.
- Authoritative protection
All investments in the equity market are protected and supervised by the Securities and Exchange Board of India (SEBI). It protects investors and companies against financial malpractices.
What Are the Procedures Involved in Equity Markets in India?
The equity market processes a bulk number of transactions daily, involving various stocks and several investors. Hence, to efficiently incorporate all proceedings on a day-to-day basis, the equity market has 3 primary procedures.
The procedures involved in equity markets in India are:
Equity markets offer open trading to investors via a fully computerised and automatic system to carry out stock transactions without any difficulty.
- Processing settlements
Numerous transactions during a particular day are settled in batches at once at the end of the day or a few days post the trade. In India, stock exchanges have adopted the T+2 settlement cycle. This helps to avoid mistakes and settle all accounts uniformly.
- Managing risk
As SEBI regulates the stock markets, it is mandatory to put forward the interest of the investors. Therefore, equity markets focus on risk management to avoid false trades, malpractices, etc. this helps to avoid manageable risks for investors. In addition, the stock market continuously updates itself on the latest trends and news as a part of risk management.
Equity markets are investment platforms for individuals and institutional investors, where they can buy and sell equity instruments. These markets involve several risks and rewards.. Hence, it is ideal to understand how equity markets work before going ahead with any investment decision.
Frequently Asked Questions
What are the types of equities?
The primary types of equities in the equity market are common shares, treasury shares and preferred shares, retained earnings.
What is the minimum age to invest in the equity market in India?
Technically there is no age limit to invest in the stock market in India. Any individual with a DEMAT account can invest in the equity market. However, to open a DEMAT account, one should be more than 18 years old.
Is equity trading safe?
All investments possess a certain degree of risk for an investor. However, proper research and investment decisions can maximise profits and lower risks significantly. Therefore, it is important to understand the risks and rewards of investing in the equity market and choose the most appropriate stock for you.
Which was the first equity market?
Amsterdam Stock Exchange is considered to be the first modern stock market that was established in 1611. It was created after the Dutch East India Company raised funds from the public in exchange for equity and dividends.
Which are the popular stock brokers in the Indian equity market?
Some of the most popular stock brokers in the Indian equity market are Zerodha, Upstox, Groww, Angel One, Motilal Oswal, Sharekhan and Edelweiss.