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How does the Indian Stock Market work?

The world of investments can be mind-boggling if the correct guidance about the stock market and its entities are not provided. Having knowledge about which companies are a prudent investment gives an edge to beginners who have just set foot on the stock market grounds. Having a sound knowledge about the functioning of full-time brokers, institutional investors, and discount brokers in India can help in choosing the right guidance at the right time of investment.

The mechanism of trading.
  • India operates with an order driven market rather than a quote driven market. A financial market where the buyers and sellers openly display the prices at which they wish to buy or sella specific security, along with the amount of securities required. However, a quote driven market includes displaying bids and asking specialists and designated market makers for that particular security.
  • An open electronic limit order book conducts the trades, and orders are matched using a trading computer. The entire process is order driven, which is why investors who place the market orders are matched with the best limit orders. This helps make buyers and sellers anonymous, and as the prices are displayed to everyone, transparency is ensured. However, the disadvantage caused by absence of market makers persists, as there is no guarantee that orders will be executed.
  • These orders should be placed through brokers. Some brokers may provide online facilities to retail consumers, whereas there may be personal assistance to beginners.
  • There are two market indices- Sensex and Nifty. Sensex consists of shares of 30 firms listed on the BSE, and it is the oldest market index for equities. It represents 45% of India’s free-float market capitalization. S&P CNX Nifty includes shares of 50 companies listed in the NSE, which contribute to 62% of its market capitalization.
A peek into trade timings and settlement cycles.
  • The rolling settlement in India has a T+2 arrangement, which is strictly followed by equity spot markets. Any trade that occurs at Monday has to get settled by Wednesday.
  • Trade timings are 9.55am to 3.30 pm Indian Standard Time (+5.5 hours GMT), for five days a week, i.e. from Monday to Friday.
  • Each exchange has its own clearing house which assumes the role of a central counterparty and bears the brunt of all settlement risk.All settlements of shares must be delivered in a dematerialized form.
  • Market regulations are important to maintain order within the market. The Security and Exchanges Board of India (SEBI), retains the responsibility to supervise, develop, and regulate the stock market.
  • It was constructed as an independent authority in 1992, and since then, SEBI has gone to all ends of the earth to introduce new practices, rules, and regulations which fall in line with the best market interests.
  • It holds the power to impose penalties on market participants that cause a breach, in order to eradicate any malpractices. Thus, SEBI is expected to provide fair judgement while protecting the interests of the stock market.
Thus, for any beginner with the drive to move forward in the stock market has to pay attention to the rules put in place by SEBI and take risks that make a difference in the market.

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