Introduction
The Indian stock market is one of the oldest and fastest growing equity markets in Asia. It plays a pivotal role in shaping the growth trajectory of Asia’s third largest economy. From the establishment of the Bombay Stock Exchange (BSE) in 1875 to the technology-driven National Stock Exchange (NSE) commencing operations in 1994, the Indian stock market has come a long way.
A brief overview of the key developments in the evolution of the Indian stock market provides context on its current status as an attractive investment destination. Understanding the functioning of popular stock indices like Sensex and Nifty 50 also helps investors make informed decisions. Furthermore, decoding the role of regulatory authorities like the Securities and Exchange Board of India (SEBI) assists in comprehending the structured framework in which the stock market operates.
| Year | Key Development |
|---|---|
| 1875 | Bombay Stock Exchange, Asia’s first stock exchange, was established |
| 1930 | BSE got permanent location at Dalal Street in Mumbai |
| 1956 | National Stock Exchange was established as a limited company |
| 1992 | SEBI Act gave statutory power to SEBI to regulate Indian securities market |
| 1994 | NSE commenced operations as India’s first electronic stock exchange |
| 2000 | Demat trading and settlement system introduced for NSE and BSE |
The Indian stock market has emerged as an integral contributor to the country’s economic growth and development. Besides being a platform for trading of equity shares, it enables businesses to raise capital for expansion, introduces financial transparency through regulations, attracts foreign investments, creates employment opportunities, integrates India with the global economy, and much more.
Overview of the Indian Stock Market
The origins of stock trading in India can be traced back to the late 18th century when the East India Company began dealing in security papers. By 1830, trading activities concentrated in Mumbai and stock broking became a full-time business. The boom in India’s textile industry further boosted trading volumes and paved the way for the establishment of the Bombay Stock Exchange (BSE) in 1875.
For nearly a century, the BSE remained the only stock exchange in India until the formation of regional exchanges in various cities. However, BSE continued to remain the nerve center of Indian stock trading. The launch of the National Stock Exchange (NSE) in 1994 was a game changer in the evolution of the Indian stock market. NSE introduced nationwide electronic trading, reduced settlement cycles, improved trading volumes and coverage, and enhanced transparency levels.
Currently, India is the world’s second best performing major stock market after Brazil. According to the World Federation of Exchanges (WFE), India ranked 10th in the world in terms of domestic market capitalization which stood at $3.21 trillion in March 2021. In comparison, the US boasted the world’s largest market cap at around $51.71 trillion.
India’s market cap as a percentage of GDP also grew from 78% in 2019 to 110% in 2021, indicating the growing depth and value of the Indian stock market. The Indian securities market is expected to continue its ascension as increasing numbers of domestic and foreign investors flock to invest in emerging market equities.
Key Stock Exchanges in India
There are two leading national stock exchanges in India – the 141-year old Bombay Stock Exchange (BSE) and the technology-driven National Stock Exchange (NSE) which commenced operations in 1994. Numerous regional stock exchanges once dotted the Indian securities landscape but rising operational costs have led to many mergers and exit of small exchanges. SEBI has also tightened norms to consolidate stock trading through the nationwide NSE and BSE platforms.
Bombay Stock Exchange (BSE)
Formed in 1875, the iconic Bombay Stock Exchange (BSE) is Asia’s oldest stock exchange. Initially started as a voluntary non-profit association of stock brokers, the BSE got its permanent location at Dalal Street in Mumbai in 1930. The street became synonymous with stock trading with frenzied activity on trading days.
Despite facing competition from the NSE since 1994, the BSE remains the premier platform for small and medium enterprises to raise equity capital. By 2022, over 5000 companies were listed on the BSE making it the world’s largest exchange by number of listed companies. Some key milestones in the evolution of the BSE include:
- 1986 – BSE launches the BSE SENSEX index that tracks the prices of 30 large blue chip companies
- 2000 – BSE provides nation-wide online trading through the BSEWEBx.com portal
- 2007 – BSE forms global alliances with the Singapore Stock Exchange and Abu Dhabi Stock Exchange
Sensex is the flagship index of the BSE representing the barometer of the Indian stock market. Launched in 1986, the 30-stock index is the oldest market index for equities in India. Sensex covers diverse sectors like finance, energy, IT, automotive, metals, infrastructure, healthcare, FMCG, telecom etc. Investors keenly track the index to gauge overall market sentiment and identify sectoral trends.
National Stock Exchange (NSE)
The National Stock Exchange (NSE) introduced electronic screen-based nationwide trading for the first time in India. Within a decade of its inception, the NSE surpassed the BSE to become India’s largest stock exchange in terms of daily turnover and number of trades. Some key developments in the NSE journey include:
- 1994 – NSE commences operations as first electronic exchange in India
- 2000 – NSE launches benchmark Nifty 50 index of diversified stocks
- 2016 – NSE launches India’s first international exchange at Gujarat International Finance Tec-City (GIFT)
The NSE played a pivotal role in modernizing and expanding the Indian stock market through game-changing initiatives like fully automated screen-based trading, shorter settlement cycles, nationwide access and electronic depository based clearing and settlement systems. This increased transparency, speed of transactions, market integrity and investor participation across geographies.
Nifty 50 is NSE’s benchmark index tracking the weighted average prices of 50 diversified stocks across 13 sectors. As the index covers key sectors of the economy, it is considered to be the pulse of the Indian stock market. Launched in 1996, the Nifty 50 is used extensively by investors in India and globally to take investment decisions.
Comparison between NSE and BSE
While the BSE is older and has more listed companies, the NSE has higher trading volumes by value due to presence of most large corporations like Reliance Industries, ITC, HDFC Bank etc. The table below summarizes some key comparative metrics between the two leading Indian stock exchanges:
| Parameter | NSE | BSE |
|---|---|---|
| Year of commencement | 1994 | 1875 |
| Trading system | Fully electronic | Electronic trading but open outcry still exists |
| Listing companies | ~1600 | ~5000 |
| Market capitalization | ~$3 trillion | ~$2.3 trillion |
| Daily turnover | Higher | Lower |
| Benchmark index | Nifty 50 | Sensex |
| Trading hours | 9:15 am – 3:30 pm | 9:15 am – 3:30 pm |
While both exchanges compete fiercely, the common goal is to cooperatively strengthen the Indian securities market, protect investor interests, embrace technology and ensure structured growth of the industry.
Importance of the Stock Market in the Indian Economy
A well-functioning stock market is essential for economic development as it mobilizes savings, promotes capital formation and stimulates economic growth. Specifically, the Indian stock market plays a vital role in the growth trajectory of the country by:
- Raising capital for businesses – Companies issue shares through the stock market to raise funds for growth and expansion. This capital formation enables business investment in projects promoting industrialization and infrastructure growth.
- Wealth creation for investors – As the value of company shares rise over time, investors benefit through significant capital appreciation especially from blue chip stocks.
- Channelizing household savings – The stock market provides the public varied avenues for investments like equities, derivatives and mutual funds. This channels domestic savings into productive investments in the economy.
- Corporate governance – Listing requirements of stock exchanges induce transparency, accountability and better fiscal discipline in companies. This protects minority shareholder rights.
- Attracting foreign capital – The relatively high returns and growth potential of emerging markets like India enables it to attract foreign institutional investments. This provides forex stability and global integration of Indian economy.
- Employment generation – The growth of the financial sector has created new jobs for stock brokers, depository participants, registrars, merchant bankers etc.
- Barometer of the economy – Indices like Sensex and Nifty reflect market sentiment and economic health of the country. This helps investors make informed decisions.
- Government disinvestments – The government also raises resources by divesting parts of PSU equity through the stock market. This supports optimal resource allocation.
Thus, by enabling businesses to raise capital, creating investment avenues for small investors, integrating India with the global economy and boosting development – the Indian stock market is indispensable for national economic progress.
How to Participate in the Indian Stock Market
Investing in the fast growing and relatively stable Indian stock market can be an exciting opportunity for portfolio diversification. However, a few prerequisites need to be completed by an investor before buying or selling shares on the NSE or BSE exchanges:
Opening Demat and Trading Accounts
The process has been simplified over the years by SEBI regulations so that new investors can seamlessly enter the markets. Here are the steps to open demat and trading accounts:
- Select a depository participant – Approach brokers like Kotak Securities, 5Paisa etc. who provide integrated demat account opening and trading services. Banks also offer this facility.
- Fill account opening form – Provide KYC details, PAN, bank account details, nomination etc. in the form.
- Verify documents – The depository participant will verify documents and PAN details online.
- Activate your demat account – After verification, demat account gets opened and is allotted a unique ID linked to your holdings.
Once the demat account is opened, one must open a linked trading account with the broker to buy/sell securities. This completes the account opening process for stock market investments.
Understanding IPOs
Companies seeking to raise capital through the markets issue shares via an Initial Public Offering (IPO). Investors have the opportunity to apply for share allotment in popular IPOs. The easy availability of information on upcoming IPOs through broker websites allows investors to make informed decisions about new listings.
Role of SEBI
The Securities and Exchange Board of India (SEBI) regulates the functioning of capital markets including stock brokers, merchant banks and mutual funds. SEBI’s objective is to protect investor interests through proper disclosure norms and improving transparency levels in the market. It also educates investors so they can make better investment decisions.
Introduction to Markets
There are primary and secondary markets for investors. The primary market deals with new issues like IPOs where companies raise capital by issuing shares to investors. The secondary market like BSE and NSE allows investors to buy/sell securities they are holding.
Investment Options in the Indian Stock Market
The Indian stock market offers a range of investment options for investors to choose from depending on their risk appetite, liquidity needs and investment horizon:
Types of Stocks
- Large Cap Stocks – These are shares of large established companies with solid reputation and sound financials. Market capitalization is over Rs 20,000 crore. Eg: Reliance, HDFC Bank.
- Mid Cap Stocks – The market cap range is Rs 5000-20,000 crore. They offer higher growth potential. Eg: IndusInd Bank, Asian Paints.
- Small Cap Stocks – These are stocks with market cap less than Rs 5000 crore and seen as riskier. Eg: Affle India, AAVAS Financiers.
Mutual Funds and ETFs
Mutual funds pool money from investors to invest in stock or debt markets. Equity funds mainly invest in shares across market caps and sectors. Index funds and ETFs passively track market indices.
Derivatives – Futures and Options
Derivatives allow investors to speculate on share prices without buying the underlying stocks. Call/Put options and index/stock futures are popular derivatives traded on the NSE and BSE.
Risks and Rewards
Higher rates of return also come with higher volatility. However, risks can be minimized through portfolio diversification across asset classes and adopting a long-term investment approach tracking broader market performance. Avoid speculative trading based on rumors or trends.
Case Studies / Research
Impact of Foreign Institutional Investors (FIIs) on Indian Stock Markets
Liberalization in the 1990s opened India’s equity markets to foreign institutional investors (FIIs) like mutual funds, pension funds and insurance firms. FIIs invest in Indian stocks and bonds boosting demand and liquidity. However, their investment approach is generally short-term oriented than long-term.
During market downturns, there is risk of herd behavior as FIIs may rapidly withdraw funds worsening the sentiment. This was evident during the 2008 global financial crisis when FII equity outflows peaked at $15 billion triggering a major crash in Indian indices. However, markets recovered subsequently as fundamentals were strong and FIIs returned when stability was restored.
More recently, FII equity outflows in 2022 due to the Ukraine crisis, rising inflation and tightening monetary policy globally has again led to correction in Indian indices. However, domestic institutional investors have provided stability through their inflows. Over the long term, India’s growth story remains intact due to strong economic fundamentals.
Overall, FIIs have played a pivotal role in developing the equity derivative markets, enhancing market efficiency and integrating India with the global economy. However, their hot money flows also increase short-term volatility risks during periods of global uncertainty. Regulators are focused on ring-fencing the Indian financial system from external shocks to protect domestic retail investors.
Case Study on the Growth of a Major Indian Company through Stock Market Funding
A stellar example of a company utilizing the Indian stock market to fund massive growth over the past decade is India’s largest renewable energy firm – Adani Green Energy. In 2015, the company raised ₹3000 crore through its maiden public issue with shares listed on the NSE and BSE.
Thereafter, Adani Green has regularly tapped the equity and debt markets to finance its ambitious solar and wind energy projects across India. By 2022, its market capitalization zoomed to over ₹4 lakh crore making it one of India’s top 10 most valued firms. Its story underlines how the Indian stock market enables innovative firms with viable business models to raise long-term growth capital from investors.
In turn, investors have also reaped enormous returns from the meteoric rise of Adani Green shares over the years. This showcases the symbiotic relationship between listed companies and their shareholders. For emerging economies like India, such success stories highlight the critical role the stock market plays in channelizing funding from investors across the globe into productive investments that deliver profitable growth.
Expert Opinions
Quotes from Financial Analysts on the Future of the Indian Stock Market
“The Indian stock market is expected to be among the world’s top 5 equity markets in terms of market capitalization over the next decade owing to strong economic growth, favorable demographics, rising foreign investments and growing number of listed companies,” says Robert Smith, Lead Analyst at Indira Securities.
“India’s commitment to infrastructure development, renewable energy adoption and digital transformation will ensure sustainable double-digit earnings growth for listed companies. This makes the Indian stock market an irresistible long-term investment destination,” emphasizes Piyush Sharma, Fund Manager at Nippon India Mutual Fund.
Advice from Seasoned Investors on Starting in the Indian Stock Market
Veteran investor Rakesh Jhunjhunwala advises new investors to “start modestly through mutual funds and not be tempted to trade actively. Equities reward patience – so adopt a long-term approach tracking economic cycles.”
Billionaire stock market investor Ramesh Damani suggests “reading extensively to build knowledge foundations before committing large sums to equities. Keep an eye on company fundamentals rather than stock tips.”
Conclusion
The Indian stock market will continue to offer attractive returns as the economy grows. However, investors should adopt a cautious and informed approach, begin modestly and keep enhancing their financial literacy regarding markets. Overall, the stock market remains an indispensable aspect of India’s growth story.
FAQs
1. What are the key stock exchanges in India?
The two leading stock exchanges are the 141-year-old Bombay Stock Exchange (BSE) and the technology-driven National Stock Exchange (NSE) which started operations in 1994.
2. What is the benchmark index of the Indian stock market?
The two most tracked benchmark indices representing the overall market are BSE Sensex and NSE Nifty 50. The Sensex covers 30 large cap stocks while the Nifty 50 covers 50 stocks across sectors.
3. What is the role of SEBI in the Indian stock market?
The Securities and Exchange Board of India (SEBI) regulates the securities market to protect investor interests through proper disclosure norms, improving transparency and educating investors.
4. How do I start participating in the Indian stock market?
Open a demat and trading account with a broker, complete KYC formalities and start investing in stocks, IPOs, mutual funds etc. based on your risk appetite and investment goals.
5. What are the investment options for a new investor?
Equities across market caps, equity mutual funds, IPOs, derivatives like index futures and options and ETFs are some of the available investment avenues in the stock market.
6. What is the difference between primary and secondary markets?
In the primary market, companies issue IPOs to raise capital from investors. The secondary market like BSE and NSE allows investors to buy/sell listed securities.
7. What are the risks of equity investing?
Equity investments are volatile and can decline in the short run. However, they tend to outperform other asset classes like gold, bonds etc. over the long term of over 5-10 years.
8. How important is the stock market for India’s economic growth?
The stock market plays a pivotal role in capital formation, introducing financial discipline in companies, attracting foreign investments and enabling wealth creation for investors.
9. Why do foreign investors invest in Indian equities?
India offers higher returns compared to developed economies and has strong growth potential. This makes Indian equities an attractive component in the global portfolio of institutional investors.
10. Which companies use the stock market to raise funds?
Hundreds of companies across sectors utilize the capital market every year to raise funds from investors across the globe to finance their growth plans and business expansion.
