Overview of Equity Market

The equity market, also called the stock market, is a platform where shares of listed companies are issued, bought, and sold. It enables companies to raise capital by offering ownership stakes to the public and provides investors a venue to trade those ownership units.

In India, the equity market is regulated by the Securities and Exchange Board of India (SEBI) and operates through recognized stock exchanges such as the BSE and NSE. The market’s primary purpose is to facilitate price discovery, liquidity, and efficient allocation of capital across the economy.

For the NISM exam, candidates must know the definition, the role of SEBI, and why the equity market is a cornerstone of the Indian financial system. Typical exam items ask you to match market functions with the correct segment (primary vs secondary) or to identify the regulator.

The primary market is where companies issue fresh shares to the public for the first time through an Initial Public Offering (IPO) or follow‑on public offering (FPO). Proceeds go directly to the issuing company, helping it fund expansion, repay debt, or improve working capital.

SEBI’s Listing Regulations prescribe eligibility, disclosure, and pricing norms for IPOs. The issue price is determined by a book‑building process, and the offering is allocated by the lead manager (merchant banker) after the price band is set.

Exam questions frequently test the sequence of steps in an IPO, the role of the lead manager, and the difference between primary‑market proceeds and secondary‑market trading.

Once shares are listed, they trade in the secondary market, where investors buy and sell existing shares. This market provides liquidity and continuous price discovery without affecting the issuing company’s balance sheet.

Trading in India follows a T+2 settlement cycle: the transaction date (T) plus two working days for the transfer of securities via the depositories (NSDL or CDSL) and funds via the clearing corporation. All trades occur on recognized exchanges under SEBI’s market‑integrity rules.

Typical NISM items ask you to identify the settlement period, the role of depositories, or the impact of a trade on the company’s capital structure.

Several entities interact in the equity market. Investors (retail, HNI, institutional) provide demand for shares, while brokers act as intermediaries, executing orders on behalf of clients. Depositories hold securities in electronic form, ensuring safe and efficient settlement.

Regulators such as SEBI set the overall framework, and stock exchanges (BSE, NSE) provide the trading platform and enforce market‑wide rules. Credit rating agencies, research analysts, and mutual fund distributors also influence market behaviour.

For the exam, you must match each participant with its primary function and the regulator overseeing it. Confusing the role of a broker with that of a depository is a frequent mistake.

Indices such as the BSE Sensex and NSE Nifty 50 track the performance of a selected basket of stocks, representing the overall health of the Indian equity market. They are market‑cap weighted, meaning larger companies have a greater influence on index movement.

These benchmarks are used by investors to gauge market trends, construct index‑linked products, and benchmark portfolio performance. SEBI requires transparent methodology disclosure for any index used in mutual fund or ETF products.

Exam questions often ask you to identify the number of stocks in an index, the weighting method, or the purpose of an index in performance measurement.

Equity stocks are classified based on their total market capitalisation. Large‑cap stocks typically have a market cap above ₹20,000 crore, mid‑cap fall between ₹5,000 crore and ₹20,000 crore, and small‑cap are below ₹5,000 crore. These thresholds are guidelines used by SEBI‑registered mutual funds for portfolio categorisation.

Large‑cap stocks are considered relatively stable with lower volatility, while small‑cap stocks offer higher growth potential but come with greater risk. Mid‑caps blend characteristics of both.

Exam items may present a stock’s market cap and ask you to identify its segment, or they may test the impact of segment allocation on a portfolio’s risk‑return profile.

Liquidity refers to the ease with which a share can be bought or sold without causing a material price change. Highly liquid stocks have narrow bid‑ask spreads and large order books, enabling efficient price discovery.

Order types such as market orders, limit orders, and stop‑loss orders influence how quickly trades are executed and at what price. The best‑bid and best‑ask prices displayed on the exchange form the basis of the quoted price for a security.

In NISM questions, you may be asked to identify the order type that guarantees execution but not price, or to explain why a thinly traded stock may exhibit higher volatility.

Equity investments are subject to market risk (price fluctuations due to macro‑economic factors), liquidity risk (difficulty in exiting a position), and company‑specific risk (earnings volatility, governance issues). Investors must assess these risks before recommending equities.

SEBI safeguards investors through regulations on insider trading, continuous disclosure, and corporate governance. Stock exchanges enforce real‑time surveillance to detect market manipulation, and depositories ensure secure holding of securities.

Exam candidates should be able to match each risk type with its characteristic and recall the primary SEBI regulation that addresses it, such as the Insider Trading Regulations for market‑manipulation concerns.