Introduction to Stock Market
The NSE and BSE
Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994. However, both exchanges follow the same trading mechanism, trading hours, and settlement process.
As of February 2020, the BSE had 5,518 listed firms, whereas the rival NSE had about 1,799 as of Dec. 31, 2019. Out of all the listed firms on the BSE, only about 500 firms constitute more than 90% of its market capitalization ; the rest of the crowd consists of highly illiquid shares.
Almost all the significant firms of India are listed on both the exchanges. The BSE is the older stock market but the NSE is the largest stock market, in terms of volume. As such, the NSE is a more liquid market. In terms of market cap, they're both comparable at about $2.3 trillion. Both exchanges compete for the order flow that leads to reduced costs, market efficiency and innovation. The presence of arbitrageurs keeps the prices on the two stock exchanges within a very tight range.
Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market indices for equities; it includes shares of 30 firms listed on the BSE, which represent about 47% of the index's free-float market capitalization. It was created in 1986 and provides time series data from April 1979, onward.
Another index is the Standard and Poor's CNX Nifty it includes 50 shares listed on the NSE, which represent about 46.9% of its free-float market capitalization. It was created in 1996 and provides time series data from July 1990, onward.
Market Regulation
The overall responsibility of development, regulation, and supervision of the stock market rests with the Securities and Exchange Board of India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants, in case of a breach.
Why would a company go public?
When a company gets listed on an exchange and investors can buy and sell their shares, then that company is said to be a public company. The process of taking a company public is known as an Initial Public Offering (IPO).
There are several reasons why a privately held company may decide to go through the IPO process. Going public essentially means that the existing shareholders will be selling some of their shares to the public. That can act as an exit strategy for the existing investors, while also allowing to diversify the investment risk to a more significant number of investors.
Moreover, going public is an excellent way for a company to raise funds and its profile. The higher profile, as well as the extra funds, will allow the company to expand faster and meet its goals.
Risks Associated with Equities
Market Risk
Market Risk refers to events that cannot be diversified away and can have a negative effect on your portfolio. In this instance, prices can go up or down against you in the market at any time and cannot be diversified away. This is also often referred to as Equity risk.
Liquidity Risk
As with any market, there is inherent Liquidity Risk. For every buyer, there needs to be a seller and vice versa. This problem is more evident in thinly traded stocks with significant gaps between the bid and ask price as well as during times of panic.
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