What is Equity Market and How does it work?

In today’s world, equity is considered one of the best asset claclasses create wealth. In this blog, we will understand what exactly is equity market is and how it works.

What is Equity?

Before we get to know about equity market, let us understand first the word “equity” in a proper manner.

In layman’s language “Equity” stands for ownership of a company. The fractional ownership of a company gets traded in the secondary market. One can get this fractional ownership of the companies on the Stock Exchanges like BSE, NSE….

Equity market can be classified into two categories: Primary market & secondary market. In the Primary market, a company introduces its equity to the public investors for the first time through IPO(Initial Public Offer) and subsequently these shares get listed on the stock exchange and get traded on stock exchanges( Secondary markets).

For example : There are five friends, who want to start a company with an equal amount of investment in the company Rs.2 Crore each to form a company of valuation. They cumulatively put equity of Rs 10 Crores. Each founder has equal claims on the company’s profit. Suppose the total number of shares of the company is 1 Crore. Then each founder got an equal no. of shares due to equal holding of the company. So, each founder gets 20 lakh shares out of 1 Crore shares. Now, it can be said that the 100% ownership or equity held by its founders with 20% share to each.

If the company wanted to raise funds of Rs. 5 Crore for its growth, then it has to offer the equity to the public via IPO. The company can go for issue fresh shares. These fresh shares are now bought by public shareholders. There is another way, through which public gets equity of a company in the primary market is by the sale of shares by existing shareholders also known as “Offer for Sale (OFS)”

In these ways, the public gets ownership of a company.

From accounting perspective,

Equity= Asset- Liabilities

What is Equity Market?

The equity market is also known as Stock Market or Share Market is a marketplace where company shares get traded. The platforms on which stocks or equities are traded are known as stock exchanges.

In India, there are 3 stock exchanges named BSE (Bombay Stock Exchange), NSE (National Stock Exchange), and Metropolitan Stock Exchange (MSE). These stock exchanges work under the regulatory purview of SEBI (SECURITIES EXCHANGE BOARD OF INDIA).

Nearly 4790 companies are listed on BSE and nearly 1600 companies on NSE.

BSE has its popular index Sensex (a basket of 30 stocks) and NSE has NIFTY( a basket of 50 stocks). Indices are like senti-meters that measure the sentiment of the market.

How does the equity market work?

The equity market works through a network of stock exchanges, where shares of listed companies get traded. These stock exchanges provide a platform for buyers and sellers to do the transaction. There are various broker-members of the exchanges which provide access to general public Companies so that they can buy shares of the companies.

The prices of stocks are determined on the basis of Demand and Supply. The incremental buyer or seller defines the price by making the transaction.

The money gets debited from the buyer’s trading account which is linked to their bank account and shares get credited to their Demat Account (Depository Accounts).

These transactions get settled in T+2 days settlement cycle. Recently, exchanges have implemented T+1 days settlement cycle on 100 stocks, which will expand to the large number of shares in phased manner.

So, the equity market brings companies and investors together at one place. It offers facility to the companies to raise funds for their business and to the investors to invest in them and earn returns.

For equity investment advisory services, you can connect to Brighter Mind, which is a SEBI Registered Investment Advisor.