Mark Twain once divided the world into two kinds of people: The same could be said about investors. There are two kinds of investors: India may look like a small dot to someone in the U. Here we'll provide an overview of the Indian stock market and how interested investors can gain exposure.
Most of the trading in the Indian stock market takes place on its two stock exchanges: The BSE has been in existence since The NSE, on the other hand, was founded in and started trading in However, both exchanges follow the same trading mechanism, trading hours, settlement process, etc. Almost all the significant firms of India are listed on both the exchanges.
Both exchanges compete for the order flow that leads to reduced costs, market efficiency and innovation. The presence of arbitrageurs keeps the prices on the two stock exchanges within a very tight range. Trading at both the exchanges takes place through an open electronic limit order book , in which order matching is done by the trading computer.
There are no market makers or specialists and the entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous. The advantage of an order driven market is that it brings more transparency , by displaying all buy and sell orders in the trading system.
However, in the absence of market makers, there is no guarantee that orders will be executed. All orders in the trading system need to be placed through brokers , many of which provide online trading facility to retail customers.
Institutional investors can also take advantage of the direct market access DMA option, in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system.
For more, read Brokers And Online Trading: This means that any trade taking place on Monday, gets settled by Wednesday. All trading on stock exchanges takes place between 9: Delivery of shares must be made in dematerialized form, and each exchange has its own clearing house , which assumes all settlement risk , by serving as a central counterparty.
The two prominent Indian market indexes are Sensex and Nifty. It was created in and provides time series data from April , onward. It was created in and provides time series data from July , onward.
To learn more about Indian stock exchanges please go to http: Since then, SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants, in case of a breach. For more insight, see http: India started permitting outside investments only in the s.
Foreign investments are classified into two categories: All investments in which an investor takes part in the day-to-day management and operations of the company, are treated as FDI, whereas investments in shares without any control over management and operations, are treated as FPI. For making portfolio investment in India, one should be registered either as a foreign institutional investor FII or as one of the sub-accounts of one of the registered FIIs.
Both registrations are granted by the market regulator, SEBI. Foreign institutional investors mainly consist of mutual funds , pension funds , endowments, sovereign wealth funds , insurance companies, banks, asset management companies etc. At present, India does not allow foreign individuals to invest directly into its stock market.
Foreign institutional investors and their sub accounts can invest directly into any of the stocks listed on any of the stock exchanges. Most portfolio investments consist of investment in securities in the primary and secondary markets , including shares, debentures and warrants of companies listed or to be listed on a recognized stock exchange in India. FIIs can also invest in unlisted securities outside stock exchanges, subject to approval of the price by the Reserve Bank of India.
Finally, they can invest in units of mutual funds and derivatives traded on any stock exchange. FIIs must use special non-resident rupee bank accounts, in order to move money in and out of India. The balances held in such an account can be fully repatriated.
For related reading, see Re-evaluating Emerging Markets. The government of India prescribes the FDI limit and different ceilings have been prescribed for different sectors. Over a period of time, the government has been progressively increasing the ceilings.
By default, the maximum limit for portfolio investment in a particular listed firm, is decided by the FDI limit prescribed for the sector to which the firm belongs.
However, there are two additional restrictions on portfolio investment. However, the same can be raised up to the sector cap, with the approval of the company's boards and shareholders. Regulations also impose limits for investment in equity-based derivatives trading on stock exchanges.
For current restrictions and investment ceilings go to https: Foreign entities and individuals can gain exposure to Indian stocks through institutional investors. Many India-focused mutual funds are becoming popular among retail investors.
Investments could also be made through some of the offshore instruments, like participatory notes PNs and depositary receipts , such as American depositary receipts ADRs , global depositary receipts GDRs , and exchange traded funds ETFs and exchange-traded notes ETNs. To learn about these investments, see 20 Investments You Should Know.
As per Indian regulations, participatory notes representing underlying Indian stocks can be issued offshore by FIIs, only to regulated entities.
However, even small investors can invest in American depositary receipts representing the underlying stocks of some of the well-known Indian firms, listed on the New York Stock Exchange and Nasdaq. ADRs are denominated in dollars and subject to the regulations of the U. Likewise, global depositary receipts are listed on European stock exchanges. India ETFs mostly make investments in indexes made up of Indian stocks. The Bottom Line Emerging markets like India, are fast becoming engines for future growth.
Maybe it's the right time for outside investors to seriously think about joining the India bandwagon. Dictionary Term Of The Day. A reduction in the ownership percentage of a share of stock caused by the issuance Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Trading Mechanism Trading at both the exchanges takes place through an open electronic limit order book , in which order matching is done by the trading computer.
Who Can Invest In India? A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur A conflict of interest inherent in any relationship where one party is expected to act in another's best interests.
Passive investing is an investment strategy that limits buying and selling actions. Passive investors will purchase investments How much a fixed asset is worth at the end of its lease, or at the end of its useful life.
If you lease a car for three years, No thanks, I prefer not making money. Get Free Newsletters Newsletters.More...