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How Does the Stock Market Work in India?

Updated on :  

08 min read.

The stock market is where investors trade and invest in financial instruments such as shares, bonds and derivatives. The stock exchanges facilitate these transactions and help investors buy and sell shares and other securities. 

India has two leading stock exchanges called the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). It is a platform where investors can trade in financial securities. 

The stock market essentially consists of the primary market and the secondary market. The primary market is a capital market segment where companies issue new securities and list them on the stock exchange for the first time through an initial public offering (IPO). 

After the shares are listed on the stock exchange, they are bought and sold by investors in the secondary market. The stock price movements depend on the changes in the demand and supply factors. 

How does the stock market function in India?

The stock market is a platform where buyers and sellers of shares negotiate prices and make trades. It functions through a network of exchanges, stockbrokers and broking houses which serve as intermediaries between companies and the investors. All stock market entities, including stock exchanges, must be registered with SEBI, the capital market regulator in India. 

Companies are listed on the stock exchanges through an IPO, and investors can trade in their shares. Investors can buy and sell shares only through a SEBI-registered stockbroker (Depository Participant). 

The three phases in the secondary market transaction are trading, clearing and settlement. 

Trading

Stock Exchanges use the electronic order matching system to match multiple traders’ buy’ and ‘sell’ orders. Stock buyers and sellers must enter their trades on their broker’s trading terminals. It is transmitted to the entire stock exchange trading network. The system will electronically match ‘buy’ and ‘sell’ orders where buy orders are executed at the specified price or lower. However, the sell orders are executed at the specified price or higher. 

The stock exchange follows a price-time priority when executing orders. The buy orders with a higher price are matched first, and sell orders with lower prices are prioritised for execution in the system. Moreover, orders at the same price are prioritised on the basis of time where orders entered first get executed first. The trading terminal shows all bid (buy) and ask (sell) prices. 

The buyer’s and seller’s identities are masked and not revealed on the trading screen. It encourages broad participation and liquidity in the stock market, ensuring immediate order matching. 

Investors enter the buy and sell orders for the securities in terms of the ISIN or International Security Identification Number. It can be a limit order where investors specify the maximum price they are willing to buy the share or the minimum price they are eager to sell shares. 

Investors can also place market orders which are instructions to buy and sell shares at currently available market prices. These orders have a greater chance of execution as compared to limit orders. 

Clearing and Settlement

The clearing is a process of identifying securities owed to the buyer and money owed to the seller. Stock buyers must provide funds to buy the shares, and stock sellers must deliver the shares they have sold. It is the pay-in process which must be completed within a specified time. 

The pay-out takes place after the pay-in process is completed. It involves buyers receiving shares for which they have paid and sellers receiving funds for shares they have sold. The exchange of shares and funds is called settlement. 

A Clear Corporation functions as a counterparty. It is a buyer to the seller and the seller to the buyer to guarantee the trades. NSE Clearing Ltd, Indian Clearing Corporation Ltd. and Metropolitan Clearing Corporation Ltd. are the clearinghouses. 

The settlement takes T+2 days which is the Trading Day plus two days. For example, if you trade today, the shares get reflected in your Demat Account in two business days. 

The day you place the buy or sell orders for shares is the trading day. The money gets debited from your bank account and is credited to your share broker’s account after including brokerage charges. If you place a sell order, the shares you are selling get blocked immediately to prevent you from selling them multiple times. 

If you have placed a buy order, the stockbroker transfers the amount to the stock exchange on the T+1 day (Trading day plus one day). However, if you have placed a sell order, the stockbroker transfers the shares to the stock exchange on the T+1 day. 

On the final phase of the trading settlement, the T+2 day (Trading day plus two days), if you have placed the buy order, the stockbroker credits shares you have bought into your Demat Account. However, if you have placed a sell order, the stockbroker transfers funds into your bank account after deducting the brokerage charges. 

Conclusion

Stock Market trades are settled after the buyer receives the stocks, and the seller receives payment. SEBI ensures that stock trading, clearing, and settlement take place hassle-free. 

Stock market entities such as depositories, clearinghouses, custodians, clearing banks and depository participants must be registered with SEBI to protect the integrity of the stock markets in India. 

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