A Complete Overview of the Indian Stock Market

Last week we took a quick look at the major indexes in the Indian Stock Market and an interesting event called Mahurat Trading associated with trading during the festive season in the Share Market.

For those of you who read that post and thought, “So, what would be the trading mechanisms associated with the Indian Stock Market?” ,“Where do I begin?”, here is a brief overview of information that you must have as a retail investor and someone who is hoping to make it big as a retail investor in India.


If you were a regular reader of Economic Times or a regular news viewer, then you would have heard these terms several times in the headlines and the main news.

What makes them such a happening proposition?

Here is your answer – stock trading in India majorly takes place in its two stock exchanges namely the Bombay Stock Exchange or BSE and National Stock Exchange or NSE.

The BSE is as old as 1875 and is the oldest stock exchange in the country.

On the other hand, the NSE was established in the year 1992.

However, trading started in NSE in the year 1994.

With that said, it is important to mention that the trading hours, mechanism and settlement process for these two exchanges is the same.

Besides this, both these exchanges have companies listed on them and this number is over 5000 for BSE and over 1500 for NSE.

Two major stock exchanges of India – NSE (1500 companies listed) and BSE (5000 companies listed)

Close to 90% of the total market capitalization of the BSE is carried out by around 500 of its constituent companies.

The rest of the companies contribute highly illiquid shares.

Almost all the major companies in India are listed on these two exchanges.

However, NSE is a dominant exchange in spot trading and derivatives trading.

There is con tenuous competition between these two exchanges for innovation, efficiency and reduction in costs.

Arbitrageurs keep the prices limited to a tight range of values.

Trading Mechanism

Both the exchanges follow a similar trading methodology where they have an electronic limit order.

Order matching is performed by the trading system.

In simple words, both these exchanges are order-driven markets.

Therefore, investors place orders, which are then matched with the best limit orders in the system.

You may also say that there are no experts or market makers in this mechanism.

Moreover, the identity of the buyer or investor and seller is not revealed.

The advantage of having such a system is that it allows the market to function more transparently.

All the orders available for selling and buying are displayed.

The absence of market makers indicates that all orders may or may not be executed.

The entity that places orders in the market is called a broker.

You will find a lot of online brokers that offer to give online trading facilities to investors.

This system is scalable and institutional investors can also participate by using the direct market access or DMA scheme.

They are provided with terminals by the brokers, which they can use for placing orders directly in the stock trading system.

Trading Hours And Settlement Market

The trading hours of both these stock exchanges are 9:55 A.M. (IST) to 3:30 P.M. (IST).

The working days are Monday to Friday.

As far as the settlement market is concerned, the equity spot markets follow T+2 rolling settlement.

Therefore, if a trading took place on Monday, it must be settled by Wednesday.

Market Indexes

Nifty and Sensex are the two most prominent market indexes that are used in India.

Sensex includes more than 30 firms in the BSE and was created in the year 1986.

Besides this, it is also the oldest equities market index and time series data from April 1979 can be found.

The other index that is commonly used in India is S&P CNX Nifty.

This market index includes close to 50 companies shares from the NSE and was created in the year 1996.

Time series data from July 1990 are provided by this market index.

Market Regulation

SEBI is responsible for developing, supervising and regulating the stock markets

This organization was created in the year 1992 and since then, it has attempted to incorporate best market practices in the market by laying down rules and guidelines for the same.

In case of a breach of the rules, SEBI is capable of penalizing any of the participants.

Who Can Invest In India?

Anyone who belongs to India is free to participate and invest in the Indian Stock markets.

However, foreign investments were also given a nod by the authorities in the 1990s.

Foreigners can invest in the Indian market in two proportions – foreign portfolio investment of FPI and foreign direct investment or FDI.

If the individual, a foreigner is this case, has full or partial control over the management and operations of the company, then the investor is known to be making FDI.

On the other hand, if the investor has no control over the operations and management of the company, the investor is known to be making a FPI.

A foreigner can make FPI in India only if he or she is a registered foreign institutional investor or FII in her or her own capacity or a sub-account of an existing FII.

SEBI has the right to grant registrations to individuals and institutions in this capacity.

FII can trade in mutual funds, endowments, wealth funds, assets management and banks or insurance establishment, in addition to several others.

Presently, FDI is not allowed in India.

However, a sub-account of FII is allowed.

FIIs and sub-accounts of FIIs are free to invest in the Indian stock markets, directly or indirectly.

It has been observed that portfolio investments are usually made in securities like shares, warrants and debentures, in primary and secondary markets.

FIIs can also invest in securities that are not listed in the stock exchange upon the approval of the Reserve Bank of India or RBI.

Lastly, they may also invest in derivatives and mutual funds that are being traded in any of the stock exchanges.

There are limits set on the investment proportions of FII.

If a FII is a debt-only FII, he or she may make investments into debt instruments that amount to 100% of its value.

However, for FIIs other than the debt-only FII, this limit is reduced to 30%.

The rest 70% can be invested in equities. For money transactions, the investors are required to make use of Indian Rupee NRI bank account.

Restrictions/Investment Ceilings

Ceilings and restrictions are made for foreign investors by Indian Government in order to protect the interest of the country

Ceilings and limits on FDI for different businesses and fields are fall in the 26-100% range.

In addition, the limit for FPI is also determined by the FDI limit.

However, the FPI limit is driven by two other factors as well.

In any firm, all the FIIs and sub-accounts can invest to a maximum share of 24% of the paid-up capitals.

This limit can be raised if the company’s top-management approves of it.

Secondly, a single FII cannot invest more than 10% of the company’s paid-up capital.

An additional 10% ceiling is applied to the FII’s sub-accounts.

A single sub-account cannot invest for more than 5% of the company’s paid-up capitals.

Similar limits exist for the equity markets as well.

Next week, we’ll look at the Investment Options associated with the Indian Stock Market.

So, stay tuned and read on!