Equity Market: Meaning, Benefits, Types & How it Works

The equity market, also known as the stock market or share market, is a marketplace where investors buy and sell shares of publicly listed companies.

When an investor purchases a company's equity shares, they acquire a proportionate ownership interest in that business. The value of this investment can rise or fall depending on the company's performance, market conditions, investor sentiment, and other factors.

This article talks about the equity market, its benefits, and types.

Key Takeaways

• The equity market enables businesses to raise money by selling shares to investors in exchange for stakes in the business.
• The equity market has two sectors: the primary market for new issues and the secondary market that provides liquidity.
• Supply and demand, business performance, and economic conditions are the key factors that affect share prices.
• To safeguard investors and promote fair trade, SEBI acts as a regulator.
• Investing involves risk and growth potential and requires a demat and trading account.

What is an Equity Market?

Companies issue shares on the equity market to raise money, and investors purchase and sell these shares to acquire a portion of the company.

It connects investors and capital-seeking businesses through both less-regulated over-the-counter trading and official stock exchanges such as the NSE and BSE.

Although the phrase is often used interchangeably with stock market and share market in India, it encompasses more than trading pre-existing shares. The equity market also includes new issues for capital raising.

How Does the Equity Market Work

From obtaining capital to settling a trade, the equity market follows a series of procedures.

Step 1: Businesses raise money

Through an Initial Public Offering (IPO), a business that needs capital issues shares for the first time to the general public. Investors buy these shares in exchange for part-ownership. Investors apply for IPO shares through ASBA (Application Supported by Blocked Amount). Under ASBA, the application amount stays blocked in the investor's bank account and is debited only when the shares are allotted.

Step 2: Shares are listed and traded

After the IPO allocation, the business lists its shares on the stock exchange. Investors can now trade their shares freely. This means that shareholders can choose to liquidate their holdings at any time at the prevailing market price.

Step 3: Orders are placed by buyers and sellers

Through SEBI-registered stockbrokers, investors place buy or sell orders. Using trading applications, they specify the price and number of shares they want to trade. A limit order lets the investor set the price at which they are willing to buy or sell.

Step 4: Trades are completed and matched

The exchange's algorithm rapidly executes a deal by matching compatible orders based on price and time priority. This is called price-time priority: the order with the best price is matched first, and if two orders have the same price, the one entered earlier gets priority. Orders that do not find a match right away wait in the exchange's order book (the limit order book) until a matching order arrives.

Step 5: Clearing and settlement occur

Under SEBI's T+1 cycle, within a day after the trade is executed, a clearing house confirms the trade. The shares move from the seller to the buyer, while the funds (the price of the shares) are transferred from the buyer to the seller. In India, this is handled by clearing corporations such as NSCCL (National Securities Clearing Corporation Limited, the clearing arm of NSE) and ICCL (Indian Clearing Corporation Limited, the clearing arm of BSE).

Types of Equity Market

• Primary market: Here, businesses generate new capital inflow by issuing new shares through an IPO. The proceeds, that is, the money raised when investors buy the shares, are used for debt repayment, expansion, or any other purpose.
• Secondary market: Once the equity shares are listed after an IPO, investors can trade them between themselves on exchanges such as the NSE and the BSE. Only investors swap shares and book gains in these transactions; the issuing company does not profit.

The secondary market has two main segments:

• Equity Cash / Spot Segment: Shares are bought and sold at the current market price. This segment is used in two ways:
  • Delivery trading: The investor buys shares and holds them beyond the trading day, so the shares are credited to their demat account.
  • Intraday trading: The investor buys and sells the same shares within the same trading day, so no shares are delivered to the demat account.
• Equity Derivatives Segment: This segment deals in Futures & Options, which are contracts whose value is based on an underlying share or index.

Key Participants in the Equity Market

Participant Role	Key Entities	Primary Function
Issuers	Companies issuing shares, such as those launching an IPO	Raise money by selling part-ownership of the business to the general public.
Retail investors	Individual investors	Purchase and sell shares for their own financial objectives.
Institutional investors	Mutual funds, insurance companies, and foreign portfolio investors	Invest larger amounts than retail investors, giving them significant influence on the market.
Stockbrokers	SEBI-registered brokers	Carry out orders on behalf of investors and act as a bridge between them and the market.
Stock exchanges	NSE and BSE	Offer an organised marketplace and trading infrastructure for the purchase and sale of equities and other assets.
Depositories and depository participants	NSDL and CDSL	Electronically hold shares and other assets. Like a bank holds money, DPs hold shares.
Clearing corporations	NSCCL (NSE) and ICCL (BSE)	Act as middlemen between buyers and sellers, ensuring that funds and securities are delivered to their intended destinations.
Regulators	SEBI and RBI	Set frameworks and oversee the market's operations and performance to ensure investor safety, transparency, accountability, and more.