What is the Equity Market?

Knowing what is equity is of paramount importance before you start on your investment journey across stock exchanges in India. A company requires funds for its businesses and to meet its working capital requirements. To receive funds, it can resort to both debt and equity instruments. It can provide its shares or stocks through Initial Public Offerings (IPOs) to investors as part of raising funds through equities, or offer loan instruments with fixed interest rates, known as debentures.

Once a listed company offers its stocks to investors, these can be then traded – purchased and sold – in stock exchanges, like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE ).

The foremost benefit of trading in shares across stock markets is that you can become part- owners of the company. Every shareholder is a part-owner of the company, in direct relation to the shares owned.

What is an equity market?

  • An equity market is a platform for purchasing and selling stocks of various listed companies. Only those companies which have listed a part of their equities to public investors are known as listed companies. Equity market is also known as the stock market. Here, various traders conduct buying and selling of company’s stocks with the help of a stock broker.
  • You must understand that the first step for trading in stock exchanges is to have a demat account and a trading account. You must always select a reputed stock broker, who can allow you to open a free online Demat Account. Always look for features like cutting-edge trading platforms and access to comprehensive market reports, while selecting a stock broker.

What is equity?

  • From the end of a listed company, equity means the funds that the shareholders have invested. Equity funds also include a certain percentage of the profits earned by investors. Equity funds are utilised by the company for its growth and expansion.
  • From an investor’s point of view, equity is a primary asset. As an investor, you can also choose to invest in derivatives – like currencies, commodities and bonds – which allow equities to diversify beyond stocks. Remember, you must have a sound understanding of the market fundamentals before investing in equities.

What are the benefits of investing in equities?

  • It has been historically proved that investment in stocks provides the highest returns, over a long-term investment horizon. In fact investment in stocks and securities provide you with returns which can beat inflation. It is among the most viable investment avenues.
  • Investment in equities can also provide you income through dividend issuance. Issuing of dividends is a corporate action, where listed companies share their profits with existing shareholders. Though it is not mandatory for companies to issue dividends, companies issue dividends to signal profitability, and increase their investor base.
  • You must, however, remember that equities have a greater exposure to market volatility. Hence, you must conduct thorough market research, besides exercising due diligence, while investing in stock markets.
  • You can minimise the associated risks by choosing to invest in equity instruments, like Futures and Options (F&O).

What are the types of equity markets?

Equity markets consist of: Primary market and secondary market.

Primary Equity Market:

These are the shares offered to general investors through IPOs. Once the IPO is closed, the shares of a company are listed in the stock exchange. The two major stock exchanges facilitating trading in stocks are: The NSE and BSE.

Secondary Equity Market:

What if you did not purchase stocks of a company at the time of an IPO? You can purchase and sell these shares in the secondary market. Here, you can plan your investment by deciding an entry and exit point. You must remember that you can only trade in equities through a stock broker, who is registered with a government-regulated depository, and acts as a link between an investor and the stock exchange.

What are the procedures in equity markets?

Trading, settlement/clearance and risk management are the three procedures followed by stock exchanges for trading in stocks and securities.

Trading:

Here, the stock exchanges provide an open trade platform for buying and selling of stocks and securities. This is completely automatic and computerised, and traders can see the trades on a screen before placing orders.

Settlement and clearing:

Stock exchanges settle the trade during a day’s session with respect to a settlement cycle. In India, stock exchanges have adopted the T+2 settlement cycle. This means that after completion of a day’s trading session, traders receive the credits or sale proceeds within two working days.

Risk management:

To prevent fraudulent activities and mitigate risk to investors, stock exchanges have a sound risk management system in place. Some of the risk management practices include:

  • Margin requirements
  • Liquid assets
  • Pay-ins
  • Voluntary close-out

Conclusion:

Thus, as an investor you can trade in stocks and securities in equity markets to fulfil your investment objectives. Before starting investment in equities, remember to choose a trusted and reliable stock broke who can help you make wise investment decisions. Look for features such as free online Demat Account and Trading Account along with all-in-one, hassle-free trading platforms. Always choose a stock broker who can provide the best stock and scheme recommendations. An IIFL demat and trading account can give you access to research reports and charting tools that can help you make informed decisions.

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