An equity market is a platform that allows companies to raise capital via different investors. A company thus issues stocks that investors or traders purchase in expectation of earning gains from future sales of said stock.
Often, the equity market is also interchangeably used with the stock market, which more or less, serves the same purpose of facilitating stock trading. Nevertheless, equity markets also encompass over-the-counter trading markets alongside exchanges.
Traders can realise gains based on the future performance of a stock they have invested in. Equity markets can also be represented as a common point where sellers and buyers of the stock meet to trade. Here’s an elaboration on the sub-parts of an equity market.
|Stock exchanges||The primary purpose of channelising trading through stock exchanges is to keep the process of trading fair and ethical. Traders buying or selling securities through these exchanges can thus assume protection as it mandates companies to abide by certain standards.
Under this purview, a stock exchange facilitates trading of stocks, securities and derivatives.
|Over the counter markets||Over the counter markets do not lay down such stringent rules as exchanges, and offer comparatively lesser privacy to both traders and listed companies.
Although an alternative to stock exchanges where companies can remain listed, the absence of transparency makes over the counter markets less popular than exchanges for traders.
Equity markets comprise structured trading and investment and can be defined into two types of platforms, i.e., primary and secondary markets.
Each company plans to offer its shares for public trading must start with Initial Public Offering or IPO. In this process, the company offers a part of its total equity to the public for raising capital initially. Once the IPO is complete, the stocks so offered are listed on the stock exchange for further trading.
The entire process of introducing the IPO by a company takes place in the primary market. In other words, this market comprises only the IPO introduction and investment.
Once the shares have already been listed on either of the exchanges, further trading for them is held in the secondary market. Here, the initial investors get an opportunity to exit their investments via stock sale in this live equity market. These stocks can comprise shares, along with other types of securities that can include convertible bonds, corporate bonds, etc.
While investors who failed to purchase shares in the primary market can do so here, it also opens up an opportunity for a wide range of traders to invest in such stocks.
Also, another typical characteristic of the secondary equity market is that trading here is usually done via intermediaries known as stockbrokers.
Shares and securities in India are primarily traded through two stock exchanges, i.e., NSE and BSE. Here’s a detailed look at these two exchanges.
Established back in 1992, the National Stock Exchange aimed to bring transparency in the equity share market of India. Currently, NSE holds the 12th spot in the ranking of the world’s biggest stock exchanges.
As the first exchange in the country, it came up with an end-to-end automated electronic system to facilitate stock trading for investors. Trading in the capital market on NSE started in 1994 while the year 2000 saw the commencement of derivatives trading on this platform.
Situated in Mumbai’s Dalal Street, the Bombay Stock Exchange was established back in 1875. As against NSE, BSE ranks 11th globally in terms of stock exchange market size and operations. Also, with a median trading speed of 6 microseconds, it also stands as the fastest stock exchange in the world.
Trading in the equity market primarily entails the seller fixing a price and a buyer agreeing to pay that price to purchase the security, thus executing a sale. In a general context, the understanding of what is equity in the share market extends to all types of shares and securities traded that are also termed as stock. Equity and stock are thus used interchangeably for the purpose of trading.
Procedures Involved in the Equity Market
An equity market does not solely serve to facilitate trading. It is functioning also encompasses other procedures. Here’s a gist of these procedures.
As explained earlier, trading is a fundamental procedure that involves buying and selling of securities belonging to listed companies. The procedure is completed through the screen-based automated system, with brokering agents providing these services to individual traders against stipulated fees. It serves as an open platform where buyers and sellers can place an order as per trade option availability.
Risk management is another specific procedure associated with stock markets. As investing in the equity market involves risk, the comprehensive system of risk management ensures that investors’ interest remains protected while exercising any curbs on frauds from a company’s end.
The system also enables the stock market to remain updated with any changing trading mechanisms and hedge possible market failures.
Every investment or trading made throughout the day is cleared and settled by the end of this particular day. A stock exchange does this through a well-defined cycle of settlement. In Indian exchanges, the T+2 cycle is adopted for such settlements, which means the settlements are made within two days after the trade has been concluded for a specific day, considered day 1.
An equity market comes with immense opportunities for individuals to fulfil their financial requirements for the future via strategic trading and investment. Such gains can help ride off the increasing inflationary pressure and the consequent strain on finances due to rising prices. It is thus ideal to get accustomed to the basics of the stock market along with its regulations for disciplined earning via investment and trading in the long run.