UNIT 1 SAPM - WHAT IS THE STOCK MARKET ? & PARTICIPANTS

 Investing in equities is an important investment that we make to generate inflation-beating returns. This was the conclusion we drew from the previous chapter. Having said that, how do we go about investing in equities? Clearly, before we dwell further into this topic, it is essential to understand the ecosystem in which equities operate.

Just like the way we go to the neighbourhood Kirana store or a supermarket to shop for our daily needs, similarly, we go to the stock market to shop (read as transact) for equity investments. The stock market is where everyone who wants to transact in shares goes to. Transact, in simple terms, means buying and selling. You can’t buy/sell shares of a public company like Infosys without transacting through the stock markets for all practical purposes.

The main purpose of the stock market is to help you facilitate your transactions. So if you are a buyer of a share, the stock market helps you meet the seller and vice versa.

Now unlike a supermarket, the stock market does not exist in a brick and mortar form. It exists in electronic form. You access the market electronically from your computer and go about conducting your transactions (buying and selling of shares).

It is also important to note that you can access the stock market via a registered intermediary called the stockbroker. We will discuss more the stockbrokers at a later point.

There are two main stock exchanges in India that make up the stock markets. 

They are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). 

Besides these two exchanges, there are many other regional stock exchanges like Bangalore Stock Exchange, Madras Stock Exchange that are more or less getting phased out and don’t really play any meaningful role anymore.

Stock Market Participants 

The stock market attracts individuals and corporations from diverse backgrounds. Anyone who transacts in the stock market is called a market participant. The market participant can be classified into various categories. Some of the categories of market participants are as follows:

1. Domestic Retail Participants – These are people like you and me transacting in markets
2. NRI’s and OCI – These are people of Indian origin but based outside India
3. Domestic Institutions – These are large corporate entities based in India. A classic example would be the LIC of India.
4. Domestic Asset Management Companies (AMC) – Typical participants in this category would be the mutual fund companies such as SBI Mutual Fund, DSP Black Rock, Fidelity Investments, HDFC AMC, etc.
5. Foreign Institutional Investors – Non-Indian corporate entities. These could be foreign asset management companies, hedge funds, and other investors.

Now, irrespective of the category of market participant, everyone’s agenda is the same – to make profitable transactions. More bluntly put – to make money.

When money is involved, human emotions in the form of greed and fear run high. One can easily fall prey to these emotions and get involved in unfair practices. India has its fair share of such twisted practices, thanks to Harshad Mehta’s operations and the like.

Given this, the stock markets need someone who can set the game rules (commonly referred to as regulation and compliance) and ensure that people adhere to these regulations and compliance thereby making the markets a level playing field for everyone.