Terminology in Equity Market

Equity represents ownership in a company and confers a residual claim on assets after liabilities are settled. In the Indian context, equity is issued as shares that are held in dematerialised (demat) form through depositories such as NSDL or CDSL.

Share capital is the total nominal value of all issued shares. It is divided into equity shares (common stock) and, rarely, pre‑emptive rights shares. Equity shares carry voting rights and entitlement to dividends, whereas preference shares have preferential dividend rights but limited voting.

For the exam, remember that SEBI defines a "listed equity" as any equity security admitted to trading on a recognised stock exchange. The term stock is often used interchangeably with equity, but technically a stock is a collection of shares of a particular company.

• Equity – ownership unit, gives voting and dividend rights.
• Share – the physical or demat certificate representing equity.

Market capitalisation (or market cap) measures the total market value of a company's outstanding equity shares. It is a primary indicator of company size and is used by SEBI to classify stocks into large‑cap, mid‑cap and small‑cap categories.

The formula multiplies the current market price per share by the total number of equity shares issued and outstanding. Any change in share price or share count (e.g., after a bonus issue) instantly alters market cap, which is why the figure is refreshed continuously on Indian exchanges like BSE and NSE.

Exam relevance: Questions may present a share price and number of shares and ask you to compute market cap, or they may give market cap and ask for the implied share price. Remember to use the latest price, not the issue price, unless the question explicitly states otherwise.

The primary market is where new equity securities are issued to investors for the first time. Activities include Initial Public Offerings (IPOs), Follow‑on Public Offerings (FPOs), Rights Issues, and Bonus Issues. SEBI’s Issue of Capital and Disclosure Requirements (ICDR) Regulations govern these processes.

The secondary market is where existing shares are bought and sold among investors after the issue. Trading occurs on recognised stock exchanges under the SEBI (Stock Exchanges) Regulations, 1992. Prices here are determined by supply‑demand dynamics and are reflected in the daily market price.

For the exam, differentiate the two by focusing on who receives the proceeds (company vs. existing shareholders) and the regulatory filings required (prospectus for primary, continuous disclosure for secondary).

Besides ordinary equity shares, Indian markets feature pre‑emptive rights shares, which allow existing shareholders to purchase additional shares proportionally before the public. This protects against dilution.

Bonus shares are issued free of cost by capitalising reserves; they increase the share count without affecting market cap, often leading to a proportional price adjustment.

Stock splits divide each existing share into multiple shares, again leaving market cap unchanged but making the share price more affordable. SEBI requires companies to announce splits with a minimum 30‑day notice.

The Price‑Earnings (P/E) Ratio compares a company's market price per share with its earnings per share (EPS). It is a quick gauge of market expectations; a higher P/E suggests growth expectations, while a lower P/E may indicate undervaluation or lower growth prospects.

Another key metric is the Dividend Yield, which measures the cash return to shareholders relative to the share price. It is particularly important for income‑focused investors and appears in SEBI’s disclosure norms for listed companies.

Both ratios are frequently asked in NISM scenario questions where you must compute the ratio and interpret whether a stock appears over‑ or under‑valued based on industry benchmarks.

When an investor places an order on the NSE or BSE, the transaction follows a T+2 settlement cycle – trade date plus two business days. This means the buyer must have sufficient funds in the demat account by the settlement date, and the seller must deliver the shares.

Order types include market orders (executed immediately at best available price) and limit orders (executed only at a specified price or better). Understanding the difference is crucial for exam scenarios involving price slippage.

SEBI mandates that brokers provide a trade confirmation within 24 hours, and the depositories handle the electronic transfer of shares. Failure to settle on time can attract penalties under the SEBI (Depositories) Regulations.