Lesson 6 of 13 · Free
Contents
- 1 The Stock Markets
- 1.1 What “the stock market” actually is
- 1.2 What moves stock prices
- 1.3 How a stock actually gets traded
- 1.4 What happens after you own a stock
- 1.5 How returns are calculated
- 1.6 Where you fit in
- 1.7 Primary vs Secondary Markets — Two Sides of the Same Coin
- 1.8 NSE vs BSE — Why Two Exchanges?
- 1.9 FAQs — Trading Mechanics
The Stock Markets
Primary vs secondary markets, what moves prices, how a trade actually flows, what ownership entitles you to, how returns are computed.
What “the stock market” actually is
The phrase “stock market” gets thrown around as if it were one place. It isn’t. In India, “the market” is the combined activity across two main exchanges — the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) — plus the broader ecosystem of regulators, intermediaries, and listed companies. The NSE is the volume leader; the BSE is older (1875, Asia’s oldest exchange) but smaller in equity trading.
The market itself splits into two distinct halves: the primary market, where new shares are issued (IPOs, FPOs, rights issues) and money flows to companies; and the secondary market, where existing shares change hands between investors and no money reaches the company.
What moves stock prices
Daily price moves come from one mechanism: the balance of buyers and sellers. Each willing buyer puts in a bid; each willing seller puts in an ask; the exchange matches them. If buyers outnumber sellers at a given price, the price ticks up. The reverse pushes it down.
Underneath that mechanism, four broad categories drive sentiment:
- Company-specific news. Quarterly results, management changes, new product launches, regulatory approvals or rejections, contract wins/losses.
- Sector trends. Oil prices for energy, monsoon for FMCG and agri, interest rates for banks and real estate, government policy for defence and railways.
- Macro factors. RBI policy, inflation, GDP growth, fiscal deficit, currency moves, FII flows.
- Global cues. US Fed decisions, China growth, oil shocks, geopolitical events. Indian markets are increasingly correlated with global risk-on/risk-off mood.
How a stock actually gets traded
Indian equity trading happens between 9:15 am and 3:30 pm IST on working days. There’s a pre-open session from 9:00 to 9:15 where opening prices are discovered through an auction. There’s a post-close session from 3:40 to 4:00 for closing-price-based orders.
Your order goes through this path: your broker’s terminal → broker’s order management system → exchange’s matching engine → counterparty’s broker → counterparty. Latency is in milliseconds for retail; in microseconds for high-frequency institutional traders co-located in NSE’s Mumbai data centre.
The exchange matches orders based on price-time priority: best price wins, and at the same price the earlier order wins. The matched trade gets a unique trade number, both sides receive contract notes, and the obligation enters the clearing pipeline.
What happens after you own a stock
From the moment shares hit your demat, you’re legally a part-owner of the company. That entitles you to:
- A proportional share of profits when distributed as dividend.
- Voting rights at AGMs and EGMs (one vote per share for equity).
- Information rights — quarterly results, annual report, board changes, related-party transactions.
- Capital appreciation if the company does well and the market re-rates.
- A claim on residual assets in winding up — though equity ranks last, after lenders and preference shareholders.
You’re also exposed to the company’s risks: bad management, sector downturns, regulatory shocks, fraud. There’s no upper limit to the upside of an equity holding, but there’s a clear floor: zero. The stock can’t go negative.
How returns are calculated
Three measures matter:
- Absolute return = (Selling price − Buying price) ÷ Buying price. Simple but ignores time.
- CAGR (Compound Annual Growth Rate) = ((Final ÷ Initial)^(1/years) − 1). Standardises across different holding periods.
- XIRR = compound rate for irregular cash flows. Use when you’ve added or withdrawn money during the holding period (SIP into a stock, partial selling).
Add dividends back into your return calculation — they’re real cash that landed in your account. “Total return” includes both price appreciation and dividends.
Where you fit in
Three broad investor personas exist:
- Investor — buys for years, focuses on business fundamentals, mostly ignores daily price noise. Most retail participants should be here.
- Trader — holds for days to weeks, uses charts and momentum, watches daily moves. Requires more time and a higher pain tolerance.
- Speculator — holds for hours, trades on news flow and short-term swings. High variance; most lose money over time.
There’s no objectively right answer. There’s only what fits your time, temperament, and goals. The single biggest mistake is choosing a persona that doesn’t match your life — most failed retail traders are investors who got bored.
Cement what you just learned
Head to our free Study Hub and find NSE & BSE Basics. Each topic comes with four interactive study modes — quiz yourself, flip through flashcards, unscramble jumbled terms, and solve a topic-specific crossword. No login required.
Primary vs Secondary Markets — Two Sides of the Same Coin
Indian equity capital flows through two distinct markets that often get conflated. The primary market is where new securities are issued (IPOs, FPOs, rights issues, QIPs); the secondary market is where existing securities change hands between investors.
| Aspect | Primary Market | Secondary Market |
|---|---|---|
| Money flows to | The issuing company | Selling investor (not company) |
| Price determined by | Book-building or fixed price | Continuous order matching |
| Frequency | One-off events | Every trading day 9:15 AM-3:30 PM |
| Settlement | ~T+5 from issue open | T+1 since Jan 2023 |
| SEBI rules | ICDR Regulations 2018 | LODR Regulations 2015 |
NSE vs BSE — Why Two Exchanges?
NSE (founded 1992) dominates daily volume with 90%+ share of cash equities and ~99% of derivatives. BSE (founded 1875, Asia’s oldest exchange) retains primary listing relevance for some legacy names and competitive pricing on certain segments. The two exchanges are interoperable — most stocks list on both, brokers route orders to the venue with best execution. SEBI’s 2023 norms further reduced fragmentation risks by mandating identical settlement cycles. As an investor you do not pick the exchange; your broker’s smart-order-router does that automatically.
FAQs — Trading Mechanics
What is pre-open and how do I use it?
9:00-9:15 AM is the pre-open auction where buyers and sellers place orders without immediate matching. At 9:15 AM the market-clearing equilibrium price opens trading. Use limit orders only; market orders in pre-open get matched at the equilibrium price which can be far from your expectation.
What is the circuit filter?
SEBI restricts intraday moves to ±2%, 5%, 10% or 20% depending on the stock’s volatility band. When circuit triggers, trading halts. Useful for retail protection from manipulation but frustrating in genuine news flow.
Is BSE worth using if NSE has 90% volume?
For most blue-chip equities NSE is sufficient. BSE matters for: certain mid-cap and small-cap listings, IPO listings (BSE often gets the primary listing first), and arbitrage between the two exchanges. Discount brokers route automatically.
The Tick Size, Lot Size and Spread Economics
Indian exchanges set tick size (minimum price increment) at ₹0.05 for stocks priced above ₹250 and ₹0.01 for below — a small detail but it controls bid-ask spread economics. A ₹0.05 tick on a ₹100 stock is a 0.05% spread; on a ₹1,000 stock it is 0.005%. Lot size in F&O is calibrated by SEBI to keep contract value around ₹5-10 lakh — currently NIFTY lot 50, Bank Nifty lot 15, single-stock options like Reliance lot 250, HDFC Bank lot 550. Larger lot sizes effectively price out small retail from individual stocks — a deliberate policy after the 2022 SEBI study found 89% of retail option traders lost money. For market-makers, profitable scalping depends on capturing spreads of one or two ticks per trade across thousands of trades — explaining why algorithmic and HFT volume now accounts for 50%+ of Indian cash-segment turnover.
Go deeper with these market classics
Hand-picked books to reinforce what you’ve learned in this lesson.