What is Equity Market?

Last Updated: 10 Jan 2025

Understanding equity is paramount to beginning 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.

Understanding Equity Market

An equity market is a platform for purchasing and selling stocks of various listed companies. Various traders conduct buying and selling of a company’s stocks with the help of a stockbroker. The first step for trading in stock exchanges is to have a Demat and trading account and select a trusting stockbroker to open online Demat Account.

What is Equity?

From the end of a listed company, equity means the funds that the shareholders have invested. whereas 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.

Benefits of investing in equities

• Investment in stocks provides the highest returns, especially over a long-term investment horizon.
• Investment in equities can also provide you income through dividend issuance. Issuing dividends is a corporate action, where listed companies share their profits with existing shareholders.
• Equities have greater exposure to market volatility. Hence, conducting market research is important before investing.
• You can minimize the associated risks by choosing to invest in equity instruments, like Futures and Options (F&O).

Types of Equity Markets

• 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 on the stock exchange. The two major stock exchanges facilitating trading in stocks are the NSE and BSE.
• Secondary Equity Market: If you do not purchase stocks of a company at the time of an IPO, you can purchase and sell the shares in the secondary market. Here, you plan your investment by deciding on an entry and exit point.

Equity Market Procedures

1.Trading:

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

2.Settlement and clearing:

Stock exchanges settle the trade during a day’s session in a process known as 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.

3.Risk management:

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

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

What is Growth in the Equity Market?

Equity market growth refers to an increase in the value of stocks and overall market capitalization over a period of time. It occurs as companies grow their businesses, enhance profitability, and restore investor confidence. This growth is attributable to multiple factors, including positive earnings reports, strong economic conditions, technological advancements, and global market trends.
An expanding equity market is an indicator of a revolving economy, as more corporations are able to successfully raise capital through initial public offerings (IPOs) and secondary offerings. But such growth is not always progressive, as external factors can affect financial stability, including political instability, inflation, or global financial crises.

Importance of Equity Markets

Equity markets are essential to the financial ecosystem because they provide a platform for the exchange of stocks and serve as an important means by which companies can obtain capital. This capital enables businesses to grow, innovate, and hire others, fueling the nation’s economy.

Investors can create wealth through capital appreciation and dividends in these markets. In addition, equity markets are agile in terms of providing liquidity, allowing investors to quickly transform assets into cash. They enable price discovery, as stocks are sold and bought based on investors’ sentiments, but they also enable a transparent reflection of a company’s value in a free market system.

What are the Timings of the Equity Market?

In India, equity markets are open Monday to Friday, with the weekend being a holiday. The timing of the equity market is divided into three sessions: premarket session, normal market session, and post-market session.

During the pre-market session, which begins at 9:00 AM and lasts 15 minutes before the market’s official opening, investors can place orders for execution before the market has opened. The normal market session is from 9:15 AM to 3:30 PM, during which trading goes on continuously. The post-market session, or the closing session, is held from 3:40 PM to 4:00 PM to settle trades and price discovery.

Advantages of Equity Market

• High Potential Returns: Stocks can offer significant capital appreciation over time.
• Liquidity: Stocks can be easily bought and sold, providing flexibility for investors.
• Ownership: Shareholders own a portion of the company and may receive dividends.
• Diversification: Provides access to various sectors and industries, helping to reduce risk.
• Transparency: Regular financial disclosures and regulatory oversight ensure clarity and trust.
• Capital Raising: Companies can raise capital for growth and innovation through public offerings.

Disadvantages of Equity Market

• Volatility: Stock prices can fluctuate sharply, leading to unpredictability.
• Risk of Loss: Investments may lose value, especially during market downturns or poor company performance.
• Complexity: Requires knowledge and understanding to make informed investment decisions.
• Market Manipulation: Unethical practices, such as insider trading, can distort stock prices.
• Short-Term Focus: Investors may be pressured to make quick decisions based on market swings.
• Economic Sensitivity: Equity markets are affected by broader economic events, like recessions or geopolitical instability.

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, choose a trusted and reliable stockbroker who can help you make wise investment decisions. An IIFL Demat and trading account can give you access to research reports and charting tools that can help you make informed decisions.

Frequently Asked Questions

What is the difference between the stock and equity market?

The stock market is a marketplace where company shares are bought and sold, while the equity market refers to the broader system where stocks (equity securities) are traded. In essence, the stock market is a subset of the equity market, focused specifically on shares of publicly traded companies.