Stock Market Basics

1 Introduction

A stock market is simply an organised place where buyers and sellers meet to trade ownership in companies. When you buy a share of a company like Reliance Industries or Infosys, you are buying a small slice of that business. If the business grows and prospers over time, your slice can become more valuable; if it struggles, your slice can lose value. That two-way risk is the heart of investing.

In India, this trading happens primarily on two stock exchanges — the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange) — and, for commodities, on the MCX (Multi Commodity Exchange). This module explains the entire machine: the instrument (shares), the venues (exchanges), the people (participants), the plumbing (infrastructure), and the mechanics (orders, IPOs, settlement, corporate actions).

2 Why this matters

You cannot analyse a chart, value a business, or manage risk if you do not first understand what you are actually trading and how the trade is processed. Most costly beginner errors — buying an illiquid stock, misunderstanding a stop-loss order, being surprised by a stock "halving" on an ex-split date — come from skipping these basics.

Think of this module as learning the rules and the board before you learn strategy. A strong foundation here makes Technical Analysis, Fundamental Analysis, and Derivatives far easier to absorb later.

3 Core concepts

3.1 What is a share?

A company divides its ownership into equal units called shares (or equity shares). If a company has issued 1,00,000 shares and you own 1,000, you own 1% of that company. As a shareholder you generally get:

• Ownership & residual claim — a proportional claim on the company's assets and profits after all debts are paid.
• Voting rights — a say (one vote per share, typically) at the Annual General Meeting on major decisions.
• Dividends — a share of profits, if and when the company chooses to distribute them.
• Rights in corporate actions — entitlements during bonuses, splits, rights issues and buybacks (covered below).

Shares are held electronically in a demat account with a depository, so you never handle paper certificates today.

3.2 Stock & commodity exchanges

An exchange is a regulated marketplace that matches buy and sell orders and guarantees the trade. India's main venues:

Exchange	Primarily trades	Flagship index
NSE	Equities, derivatives (F&O)	NIFTY 50
BSE	Equities (oldest in Asia, est. 1875)	SENSEX (30 stocks)
MCX	Commodity derivatives (gold, silver, crude…)	MCX iCOMDEX
NCDEX	Agricultural commodity derivatives	—

Most large companies are listed on both NSE and BSE; you can buy on whichever shows a better price, since they are usually nearly identical.

3.3 Market participants

Knowing who you are trading against helps you understand price behaviour:

• Retail investors — individuals like you, trading personal capital.
• HNIs / UHNIs — high- and ultra-high-net-worth individuals with larger capital.
• DIIs — Domestic Institutional Investors (Indian mutual funds, insurers like LIC, pension funds).
• FIIs / FPIs — Foreign Institutional / Portfolio Investors; their inflows and outflows move Indian indices meaningfully.
• Proprietary desks & market makers — firms trading their own capital and providing continuous buy/sell quotes (liquidity).

3.4 Market infrastructure (the plumbing)

Behind every trade sits a chain of institutions that make it safe:

• SEBI — the Securities and Exchange Board of India, the regulator that writes and enforces the rules.
• Stockbrokers — your gateway to the exchange (e.g. full-service and discount brokers). You cannot trade directly with the exchange.
• Depositories — NSDL & CDSL — hold your shares electronically in demat form.
• Clearing corporations — sit between buyer and seller, guaranteeing that the trade settles even if one side defaults.

3.5 Order types

How you tell the exchange to act:

• Market order — execute immediately at the best available price. Fast, but the price is not guaranteed.
• Limit order — execute only at your chosen price or better. Price is controlled, but it may not fill.
• Stop-loss order — a resting order that activates once price reaches a trigger, used to cap a loss on an existing position.
• Cover & Bracket orders — broker order types that bundle an entry with a compulsory stop-loss (and, for bracket, a target).

3.6 IPOs — how a company gets listed

An Initial Public Offering (IPO) is the first time a private company sells shares to the public and lists on an exchange. The price is usually discovered through book-building (a price band within which investors bid). After listing, the shares trade freely on the secondary market — which is where almost all day-to-day trading happens.

3.7 Settlement — the trade lifecycle

When you buy, the shares do not appear instantly. India runs on a T+1 settlement cycle (as of recent reforms): trade today (T), and shares/cash settle the next working day (T+1). The clearing corporation nets all trades and ensures delivery of shares to buyers and money to sellers.

3.8 Corporate actions

Companies periodically do things that change the share count or price — vital to understand so you are never "surprised":

Action	What happens
Dividend	Cash paid out per share from profits.
Bonus issue	Free extra shares (e.g. 1:1) — price adjusts down proportionally; your total value is unchanged.
Stock split	One share becomes many (e.g. ₹10 face value split to ₹2) — price drops, quantity rises, value unchanged.
Rights issue	Existing holders get the right to buy more shares at a set price.
Buyback	The company repurchases its own shares from the market.

3.9 Market cycles

Markets move in broad phases — periods of rising optimism (bull phases) and falling pessimism (bear phases), interrupted by sideways consolidations. No one can reliably predict the turns; the goal of education is to understand the phases, not to forecast them.

4 Visual explanation — the journey of an order

Here is what actually happens, end to end, when you place a buy order:

Illustrative diagram of the order-to-settlement flow.

5 Indian market examples

6 Case studies

The dematerialisation revolution

Before the late 1990s, Indian shares were physical paper certificates — slow to transfer, easy to forge, and prone to "bad delivery". The creation of NSDL (1996) and later CDSL, alongside electronic trading on the NSE, transformed Indian markets into one of the most efficient settlement systems in the world. This is why your shares now appear in a demat account in T+1 instead of weeks.

Shortening the settlement cycle

India progressively shortened its settlement cycle from T+5 years ago, to T+3, then T+2, and to T+1 in phases — making it one of the fastest-settling major markets globally. Faster settlement reduces the risk that sits between trade and delivery. It is a good case study in how market infrastructure, not just stock picking, shapes investor outcomes.

7 Interactive exercise — match the participant

Quick check before the full quiz: read each description and pick the right participant.

8 Common beginner mistakes

9 Pro tips (institutional perspective)

10 Summary — key takeaways

• A share is a unit of company ownership giving you a residual claim, votes and dividends.
• NSE, BSE (equities) and MCX (commodities) are India's main exchanges; NIFTY 50 and SENSEX are flagship indices.
• You trade through a broker; shares sit in a demat account at NSDL/CDSL; clearing corporations guarantee settlement; SEBI regulates it all.
• Market orders prioritise speed; limit orders prioritise price; stop-loss orders cap risk.
• IPOs create new listings; the secondary market is where daily trading happens; India settles in T+1.
• Corporate actions (dividend, bonus, split, rights, buyback) change price and/or quantity — never be surprised by them.

11 Knowledge check

Answer all six, then press Check answers to see your score and explanations.

12 Practical assignment