We have read in the earlier chapter that equity is one such investment option that has the potential to deliver returns much higher than the rate of inflation. Now the question comes that how to invest in it? Before knowing the answer, it is important to know who invests in equity and how the whole system works.
Just like we go to the grocery store next to us and buy the things we need, similarly we invest in equity, or buy and sell in the stock market. While investing in equities, one word – Transact, you will hear again and again. Transact means buying and selling. And you cannot do this buying and selling of equity without the stock market.
The stock market mixes buyers and sellers of equities. But this stock market does not appear as a store or building, as your grocery stores look. The stock market is held in electronic form. You go to it through the computer and do business buying and selling there. Keep one thing in mind here that you cannot do the buying and selling of these shares without a stockbroker. A stockbroker is a registered intermediary, which we will explain in more detail later.
India has two main stock exchanges in the country – Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Apart from this there are also some regional stock exchanges like Bangalore Stock Exchange, Madras Stock Exchange and Delhi stock exchange. Now few people participate on the regional stock exchange.
Who participates in the stock market and why do they need to be regulated?
From an individual to companies invest in the stock market. People who buy and sell in the stock market are called market participants. These market participants are divided into several categories. Some categories of information are given below.
Domestic Retail Participants – Citizens of Indian Origin who reside in India, like us and you.
NRI’s and OCI – Citizens of Indian Origin who have settled abroad.
Domestic Institutional Investors – Under this, large Indian companies come, such as Life Insurance Company of India- LIC.
Domestic Asset Management Companies – This category usually includes domestic mutual fund companies such as SBI Mutual Fund, DSP BlackRock, Fidelity Investments, HDFC AMC etc.
Foreign Institutional Investors – This includes foreign companies, foreign asset management companies, hedge funds, etc.
Be it any category or category of investors, every entity participating in the stock market wants to earn profits. And when it comes to money, there is a lot of greed and fear in a human being. Any person can easily do wrong things by falling prey to greed and fear.
Some scams have also happened in India like Harshad Mehta scam etc. That is why it is necessary that there should be such a body, which makes rules and regulations and ensures that there is no wrongdoing in the market, and everyone gets the right opportunity to earn money. That’s why a regulator is needed.
Regulator
The regulator of the stock market in India is the Securities and Exchange Board of India, which we know as SEBI. The object of SEBI is to protect the interests of investors investing in securities, to promote and regulate the development of the securities market and to make provisions for matters connected therewith or incidental thereto.
SEBI ensures that Both the stock exchanges – NSE and BSE, do their job the right way. Stockbrokers and sub-brokers work as per rules. Any entity participating in the stock market should not do anything wrong. Companies should not use the stock market solely for their own benefit. Big investors, who have a lot of capital, should not manipulate the market according to their own benefits.
Keeping these objectives in view, it is necessary that SEBI regulates all the entities. All the entities listed below are directly linked to the share market. The wrong action of any one can cause a ruckus in the stock market.
- Credit Rating Agency- CRA -Examples: CRISIL, ICRA, CARE.
Rates the borrowing ability of corporates and the government. If the government or any company wants to take a loan, then these companies check whether the government or the company has the capacity to repay the loan.
- Debenture Trustees- Example: All banks.
When a company needs money, they can issue debentures, on which they talk about paying a fixed interest. Investors can buy these debentures. The debenture trustee ensures that the interest that the company has promised to pay is paid on time.
- Depositories- Example Example: NSDL & CDSL.
When you buy shares, they are credited to your depository account, which is also known as demat account. These two companies manage these demat accounts.
- Foreign Institutional Investors- FII – Example: Foreign companies, funds and foreign nationals
These are foreign entities, who wish to invest in India. They invest a huge amount for money and the effect of their investment is clearly visible on the movement of the Indian stock market.
- Merchant Bankers – Example: Karvy, Axis Bank, Edelweiss Capital
Helping companies to raise money from the primary market. If the company wants to raise money through IPO, then merchant bankers help the companies in this whole process.
- Asset Management companies -AMC – Example: HDFC AMC, Reliance Capital, SBI Capital
Sell Mutual funds schemes. AMC takes money from people, puts it in an account, and invests that money in the stock market. The aim is to pass on the benefits to the investors by making maximum profit.
- Portfolio management system- PMS – Example: Religare Wealth Management, Parag Parikh PMS
Sell PMS schemes, it is like mutual funds but here you have to invest at least 25 lakh rupees. There is no such condition in mutual funds.
- Stock Brokers and Sub Brokers – Example: Zerodha, Angelone, Sharekhan, ICICI Direct
They work as an intermediary between the investor and the stock exchange, you can buy and sell shares only through a registered broker. The sub-broker acts as an agent for the broker.
SEBI has made different rules and regulations for these entities. Everyone has to work within the ambit of these rules and regulations. You will find detailed information on these rules and regulations in the “Legal Framework” section on the SEBI website.
Important points of this chapter
- If you want to buy and sell shares, then you have to do it through the stock market.
- Buying and selling of shares in the stock market is done electronically and you can do this work through any stockbroker.
- There are many participants/players in the stock market.
- All the entities participating or operating in the stock market are required to be regulated and all have to abide by the rules made by the regulator.
- SEBI – SEBI is the regulator of the securities market. It regulates all the entities participating in the stock market by making rules and regulations.
- Most important thing- SEBI knows what you are doing in the stock market, if you did anything illegal then action will be taken against you.
Gaurav Heera is a well known name in the field of stock market analysis and education. His distinguished career, which spans more than ten years, has cemented his reputation as an expert with unparalleled knowledge and innovative strategies for navigating the intricate landscape of the financial markets.
