Over the last two decades, the game of stock trading in India has made a sea change, thus giving even the smallest retail and institutional investor an opportunity to invest in India’s ever-increasing economy. Stock trading in India is no more a class event; any person having a demat account and brokerage account can get into a stock trade. However, to know everything, one needs to know how stock trading works.
This blog post attempts to unravel some of the most basic aspects of stock trading in India-how the system works, how trades are executed, and even what influences stock prices.
1. Indian Stock Exchanges
Trading in India is predominantly carried out on two leading stock exchanges:
Bombay Stock Exchange (BSE):
This is one of the oldest stock exchanges in Asia. BSE performs a very important task in making trading in securities commercially viable in India. Thousands of companies are listed on BSE across various sectors, throwing open a wide range of investment opportunities before the investors.
National Stock Exchange (NSE ) :
This is the biggest in the country of India pertaining to trading volume. Incepted in the year 1992, this exchange has changed the Indian stock market with the integration of high end technology and smooth trading process. A few prominent indexes traded on the NSE include the Nifty 50 , tracking index that tracks 50 of the major companies listed in the market.
As far as trade is concerned, BSE and NSE are completely electronic. That means people no longer trade the way it used to be through the floor. Meaning, instead of floor trade, people trade through computers. This migration of the platform made trading clearer, efficient, and faster.
2. How Stock Trading Goes On in India
Indian stock trading is a step-by-step process where from the selection of the broker to ordering and then its execution, much of everything is involved in this process. Here are some step-by-step procedures under which this whole activity functions:
Step 1: Open a Demat and Trading Account
Once you have decided to invest in the Indian stock market, an investor must first create his Demat and his/her trading account.
DEMAT Account: There, the purchased shares will be held in the form of DEMAT. Instead of getting physical share certificates, such shares will be kept electronically in demat accounts maintained by depositories like NSDL or CDSL.
Trading Account: You can view all your buy and sell orders in the market. That is, this trading account is a bridge that connects your DEMAT account-in which all your securities are held-and the stock exchange, where all your transactions would be executed. Simple enough? FIRST STEP Open a trading account through a registered stockbroker or brokerage firm.
Step 2: Selecting a Stock Broker
The Indian retail investor cannot directly access the stock exchanges. They can access markets only by approaching a stockbroker, which acts as an intermediary between them and the exchange. There are two types of stockbrokers:
Full-Service Brokers
A full-service broker takes the responsibility for all their services like personalized advice, research reports, portfolio management, and wealth management services. Examples are ICICI Direct, HDFC Securities, and Kotak Securities.
Discount Brokers They offer the most rudimentary platforms in terms of buying and selling equities. They get the customer for free. They do not deliver advisory services but are offered as a low-cost trader. Some of which include: Zerodha, Upstox, and Groww.
You will then be prompted to open an account with a brokerage firm you had chosen. You will also liable to complete all the KYC formalities so that you could link the bank account you are opening for easy transactions.
Step 3: Order Execution
Once you have an account, you can submit a buy or sell order. You may do so either through the online trading platforms or apps of your brokerage firm. There are quite a few types of orders.
Market Order: A market order is either a buy or sell order of stocks wherein one commits to purchasing or selling a security at the very best available price in the market. Once a market order is placed, it would be executed immediately, provided that it can be completed at the prevailing current market price.
1. Limit Order Limit order is that case where buy or sell a stock at a certain specified price or better. I may want to buy a stock which trades at ₹100 to me that particular stock should be bought at a price of ₹95. It can be set up by an order at ₹95. Such an order would be executed if the trade price for the stock reached ₹95.
Stop Loss Order: It is an order placed in order to avoid losing money by selling a stock at the time when it touches a certain level. It is therefore applied for risk management.
Step 4: Execution of Orders
When you place an order, it gets automatically sent to the stock exchange from the account of brokerage firm trading platform. Your order is then matched by the exchange with a counterparty who would want to take the opposite position. Meaning that if you have entered a buy order for instance, your order will be matched against a sell order for the same stock entered by another. The system uses automation so that you will always expect the transaction to come through quite quickly and properly.
The order book at the stock exchange is an electronic, whereby all the buy and sell orders are placed, matches the orders with the highest price at which a person wants to buy and by the lowest price at which a person wants to sell. Once the order gets matched then trade becomes confirmed with the execution of the order.
Settlement of Trades
The settlement cycle actually begins after settling the trade. For equity shares in India, the settlement cycle is T+2; that is, the buyer will settle the account for the share, and the seller will deliver in the intervening two working days after the date of the trade.
For settlement, the seller’s account is being credited, and shares of the buyer’s Demat account are being debited. Similarly, money in the buyer’s bank account is being credited to the seller’s account.
3. Determinants of Stock Price
There are many factors, be it domestic as well as international, that cause the stock prices of India. But relevant amongst these are:
Company Performance:
the health of the company or prospects for growth, reports on earnings and much more, form a lot of its price. Good performances of a quarter put in by the company, unveiling of new products, or other good news raise the stock price of the company sharply. Poor performance or damaging reports sack the stock in the opposite direction.
One big factor driving short-run movements in the stock prices is investor sentiment. The stock prices can rise due to some news in the market caused by positive economic reform, good news, or an optimistic atmosphere. Alternatively, the bad news would include political instability in a country or a global recession, which would drive down the stock prices.
Macroeconomic Factors These factors include gross domestic product growth rates, inflation rates, interest rates, and fiscal policy as adopted by governments in effect. These indeed affect the stocks. For example, when interest rates become high and sufficiently high enough to make borrowing expensive and unfavorable to the profits of corporations then this would worsen the stock price.
International events, like overseas markets’ performance, geopolitical events, and the state of world economy, are also known to impact the Indian market. For example, the global financial crisis and increased price of oil will be felt to have an impact upon the downfall of Indian stock prices.
4. Risks and Harvests in Stock Trading
The implication, of course is that most of the volatile fluctuations do constitute highly rewarding moments but with such an enormous risk. Markets are cyclical; therefore, share prices are quite susceptible to change due to several influencing factors and adequate research about the stock along with a suitable risk management plan – stop-loss orders or diversifying the portfolio – might help the investor.
Company Performance:
the health of the company or prospects for growth, reports on earnings and much more, form a lot of its price. Good performances of a quarter put in by the company, unveiling of new products, or other good news raise the stock price of the company sharply. Poor performance or damaging reports sack the stock in the opposite direction.
One big factor driving short-run movements in stock prices is investor sentiment. The prices of the stocks will rise for some news in the market that may be the result of positive economic reform, good news, or a hopeful atmosphere. On the other hand, the bad news would include political instability in a country or even a worldwide recession, which will drive down the stock prices.
Macroeconomic Factors These include growth rates for gross domestic products, inflation rates, and interest rates, as well as fiscal policy, adopted by governments in effect. These indeed affect the stocks. For instance, when interest rates become high and sufficiently high enough to make borrowing expensive and unfavorable to the profits of corporations then this would worsen the stock price.
International events, such as performance of overseas markets, geopolitical events, and the state of the world economy, are also said to affect the Indian market. For instance, global financial crisis and higher oil price will be expected to have affected the Indian stock prices’ downfall.
4. Risks and Harvests in Stock Trading
The implication, of course is that most of the volatile fluctuations do tend to consist of richly rewarding moments but with such a humongous risk. Markets are cyclical; thus share prices are pretty prone to alterations because of multiple causational influencers as well as proper research on the stock as well as an appropriate risk management strategy – stop-loss orders or diversifying the portfolio might make things better for the investor.