Table of Contents
Listen to this article
2.1 What is the stock market?
We read in the first chapter that equity is one such investment option that has the potential to give returns much higher than the rate of inflation. Now the question comes of how to invest in it. Before knowing the answer, it is essential to know who invests in equity and how this whole system works.
Just like we go to the grocery store next to us to buy essential things, similarly we invest in equity or buy and sell in the stock market or share market. One word you will hear time and again while investing in equity is Transact. Transact means buying and selling. And you cannot do this buying and selling of equity without the stock market.
The stock market connects buyers and sellers of equity. But this stock market doesn’t look like a shop or a building like your grocery store. The stock market takes place in electronic form. You go to it through the computer and do the work of buying and selling there. Keep one thing in mind here you cannot do this work of buying and selling shares without a stockbroker. We will elaborate further on whether a stock broker is a registered intermediary.
There are two main stock exchanges in India – the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Apart from this, there are some regional stock exchanges like Bangalore Stock Exchange, Madras Stock Exchange. Very few people now participate in the regional stock exchanges.
2.2 Who participates in the stock market and why do they need to be regulated?
Individuals to companies investing in the stock market. Those who buy and sell shares in the stock market are called Market Participants. These market participants are divided into several categories. Some category information is given below.
- Domestic Retail Participants – Citizens of Indian Origin who reside in India, like us and you.
- NRIs and OCIs – Citizens of Indian origin who are settled abroad.
- Domestic Institutions – Under this, big Indian companies come, such as the Life Insurance Company of India (LIC).
- Domestic Asset Management Companies – This category usually consists of domestic mutual fund companies like SBI Mutual Fund, DSP Black Rock, Fidelity Investments, HDFC AMC, etc.
- Foreign Institutional Investors – This includes foreign companies, foreign asset management companies, hedge funds, etc.
Irrespective of the category of investors, every entity participating in the stock market wants to earn profits. And when it comes to money, both greed and fear run rampant in humans. Any person can easily do wrong things by falling into the trap of greed and fear. Such scams have also happened in India, like the Harshad Mehta scam, etc. That’s why it is necessary that there should be a body that makes rules and regulations and makes sure that no wrongdoing is done in the market, and everyone gets the right opportunity to earn money. That’s why a regulator is needed.
2.3 Regulator
The Securities and Exchange Board of India ( SEBI) is the regulator of the stock market in India, which we know as SEBI. The objectives of SEBI are to protect the interests of investors investing in securities, to promote the development and regulation of the securities market, and to provide for matters connected therewith or incidental thereto. SEBI ensures that
- Both the stock exchanges – NSE and BSE, do their job properly
- Stockbrokers and sub-brokers should work according to the rules
- No wrongdoing by any entity participating in the stock market
- Companies should not use the stock market only for their own benefit – as Satyam Computers did
- protect the interests of small investors
- Large investors, who have a lot of capital, should not manipulate the market according to their own
- development of the entire stock market
Keeping these objectives in view it is necessary that SEBI regulates all the entities. All the entities listed below are directly linked to the stock market. The wrong action of anyone can create a ruckus in the stock market.
SEBI has made different rules and regulations for these entities. Everyone has to work within the ambit of these rules and laws. You will find detailed information about these rules and regulations on the SEBI website in the “Legal Framework” section.
| entity | examples of companies | what do these companies do | understand in simple words |
|---|---|---|---|
| Credit Rating Agency (CRA) | CRISIL, ICRA, CARE | Rates the borrowing worthiness of corporates and the government | If the government or any company wants to take a loan, then these companies check whether the government or company has the ability to repay the loan or not. |
| Debenture Trustees | almost all banks | act as trustee of corporate debentures | When a company needs money, it can issue debentures, on which they talk about paying fixed interest. Investors can buy these debentures. The debenture trustee makes sure that the company pays the promised interest on time. |
| Depositories | NSDL, CDSL | Depositories hold the securities of investors and carry out reporting and settlement | When you buy shares, they come into your depository account, also known as the Demat account. These two companies do the work of managing these Demat accounts. |
| Foreign Institutional Investors (FII) | Foreign companies, funds, and foreign nationals | investing in India | These are foreign entities that want to invest in India. They support a huge amount of investment and the effect of their investment is clearly visible in the movement of the Indian stock market. |
| merchant bankers | Karvy, Axis Bank, Edelweiss Capital | Helping companies raise money from the primary market | If the company wants to raise money through IPO IPO, then merchant bankers help companies in this entire process. |
| Asset Management companies -AMC | HDFC AMC, Reliance Capital, SBI Capital | sell mutual fund schemes | AMC takes money from people, puts it in an account, and invests that money in the stock market. The objective is to benefit the investors by making maximum profit. |
| Portfolio Managers, Portfolio Management System (PMS) | Religare Wealth Management, Parag Parikh PMS | sell PMS schemes | This is like a mutual fund but here you have to invest at least Rs 25 lakh. There is no such condition in mutual funds. |
| Stock Brokers and Sub-brokers | Zerodha, Sharekhan, ICICI Direct | Intermediary between the investor and the stock exchange | You can buy and sell shares only through a registered broker. The sub-broker acts as an agent for the broker. |
Important points of this chapter
- If you want to buy and sell shares, you must do it through the share market or stock market.
- Buying and selling shares in the stock market are done electronically, and you can do this through a stock broker.
- There are many participants/players or participants in the stock market.
- All the entities participating or operating in the stock market must be regulated and all have to follow the rules framed by the regulator.
- SEBI – SEBI is the regulator of the securities market. It regulates all the entities participating in the stock market by making rules and regulations.
- Most importantly- SEBI knows what you are doing in the stock market, if you do anything illegal then action will be taken against you.
