Submitted to: Dr.
Gagandeep Singh
Submitted by: Vishawjit Singh
Subject: Introduction to Financial Markets (IFM)
Roll No.: 25411022
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1. Introduction
The Indian stock exchange ecosystem is a cornerstone of the country’s financial
system, enabling the efficient allocation of capital between savers and businesses. It
comprises two primary exchanges—the Bombay Stock Exchange (BSE) and the
National Stock Exchange of India (NSE)—where equities, debt securities, exchange-
traded funds (ETFs), and derivatives are listed and traded. The system is regulated
by the Securities and Exchange Board of India (SEBI) to uphold transparency,
fairness, and investor protection.
This assignment (prepared in the spirit of the provided sample) offers a structured
overview of the market’s history, architecture, instruments, trading and settlement
mechanisms, indices, regulatory framework, and recent developments. It includes
comparative tables, visuals, and a concise glossary to support first-time learners.
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2. Historical Evolution of the Indian Stock
Market
• 1850s–1870s: Informal broker meetings in Mumbai (then Bombay) gradually
formalized into an organized market. In 1875, the Native Share & Stock Brokers’
Association—now the Bombay Stock Exchange (BSE)—was founded, making it
Asia’s oldest stock exchange.
• 1956: The Securities Contracts (Regulation) Act (SCRA) provided statutory
recognition and a framework for stock exchanges.
• 1988/1992: SEBI was established in 1988 and granted statutory powers under
the SEBI Act, 1992, strengthening investor protection following market crises in
the early 1990s.
• 1992–1994: The National Stock Exchange (NSE) was incorporated (1992) and
commenced operations (1994), introducing nationwide electronic screen-based
trading and robust clearing and settlement infrastructure.
• 1996–2000s: Dematerialisation via NSDL and CDSL replaced paper certificates;
internet trading and risk management standards matured; derivatives (index
futures/options, stock futures/options) launched.
• 2022–2023: India transitioned to T+1 rolling settlement for the equity cash
segment, reducing counterparty and liquidity risks and improving capital efficiency.
• 2024–2025: Records in index levels and market capitalisation were accompanied
by bouts of volatility linked to global interest-rate cycles and foreign portfolio
investor (FPI) flows.
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Key Reforms Timeline
Year/Period Reform / Milestone Impact
Asia’s oldest exchange;
1875 BSE established organised secondary market
emerges
Legal recognition and
1956 SCRA enacted
regulation of exchanges
Electronic trading;
1992–1994 SEBI Act; NSE launch nationwide access; stronger
oversight
Efficiency, transparency; risk
1996–2000s Demat; NSDL/CDSL; derivatives
management; product depth
Liquidity and tighter spreads;
2010s Algorithmic trading growth
new risk controls
Faster settlement; reduced
2022–2023 T+1 settlement (equities)
capital tied up
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3. Market Architecture & Participants
The market architecture integrates trading, clearing, settlement, surveillance, and
regulation. Key participants include retail investors, domestic institutional investors
(DIIs), foreign portfolio investors (FPIs), listed companies, stock brokers, depository
participants (DPs), custodians, clearing corporations, and regulators.
Core Building Blocks
Layer Core Entities / Systems Role
Order matching (price–time
Trading BSE (BOLT); NSE (NEAT)
priority), real-time dissemination
Guarantee and novation;
Clearing ICC (BSE); NSCCL (NSE)
margining; risk management
Demat holdings; settlement of
Depositories NSDL; CDSL
securities
Registration, compliance,
Regulation SEBI; SCRA; SECC norms
surveillance, investor protection
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4. Major Stock Exchanges: BSE vs NSE
(Comparative)
BSE (Bombay Stock NSE (National Stock
Feature
Exchange) Exchange)
Established / HQ 1875 / Mumbai 1992 / Mumbai
S&P BSE SENSEX (30
Flagship Index NIFTY 50 (50 stocks)
stocks)
BOLT (BSE On-Line NEAT (National Exchange for
Trading System
Trading) Automated Trading)
≈ 2,000+ (higher trading
Listed Companies 5,000+ (broad listing base)
liquidity)
Upgraded over time; high Ultra-low latency
Speed / Tech
throughput (microseconds)
Long-term investors; SME Active traders; institutional
Investor Profile
listings focus
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5. Key Terminologies
Term Brief Definition
Unit of ownership in a company; residual claim on profits
Equity / Share
and assets.
Statistical measure of a portfolio of securities (e.g.,
Index
SENSEX, NIFTY 50).
IPO (Initial Public
First-time public sale of shares to raise capital.
Offering)
Follow-on public offer / Offer for sale by
FPO / OFS
promoters/investors.
Demat Account Electronic holding of securities with NSDL/CDSL via DPs.
Interface with the exchange via a broker for order
Trading Account
placement.
Market / Limit /
Common order types used in execution and risk control.
Stop-Loss
Delivery vs Intraday Multi-day holding vs square-off on the same trading day.
Price × shares outstanding; used for large/mid/small-cap
Market Capitalisation
buckets.
P/E Ratio Price-to-earnings; relative valuation metric.
Liquidity & Volume Ease of trading and number of shares traded.
Volatility Degree of price fluctuation; risk indicator.
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6. Trading & Settlement Mechanics
India follows fully electronic, anonymous order-driven markets with price–time
priority matching. Investors place orders via SEBI-registered brokers; trades are
guaranteed and settled through clearing corporations. As of 2023, the equity cash
segment follows T+1 rolling settlement.
Order Flow (Simplified)
Step Description
1. Order Placement Investor places market/limit order via broker/app.
2. Routing Broker routes order to exchange (BSE/NSE).
3. Matching Order book matches buy/sell by price and time.
4. Execution Trade confirmation generated in real time.
5. Clearing Clearing corporation novates trade; collects margins.
Securities and funds exchanged on T+1 via
6. Settlement (T+1)
depositories/banks.
Primary vs Secondary; Cash vs Derivatives
Market Type What It Means
Capital raising via IPOs, FPOs; price discovery
Primary Market
during offering.
Trading of listed securities among investors on
Secondary Market
exchanges.
Outright buying/selling of shares for delivery (T+1
Cash (Equity) Segment
settlement).
Futures and options on indices and stocks;
Derivatives
hedging/speculation/arb.
Corporate bonds, government securities, ETFs,
Debt & Others
REITs, InvITs.
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7. Popular Indices
Index Exchange What It Tracks
30 large, liquid, and financially
S&P BSE SENSEX BSE
sound companies.
50 large-cap companies across
NIFTY 50 NSE
diversified sectors.
NIFTY Bank NSE 12 major banking stocks.
NIFTY IT / Pharma / Auto Sectoral leaders in respective
NSE
/ FMCG industries.
Next 50 after NIFTY 50; ‘Junior
NIFTY Next 50 NSE
Nifty’.
BSE 100 / 200 / MidCap / Broader universe and size-based
BSE
SmallCap composites.
Indices are used for benchmarking portfolio performance, constructing passive
funds (ETFs/Index funds), and gauging market sentiment. Sectoral and thematic
indices (e.g., ESG, PSU, CPSE, Energy) enable targeted exposure.
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8. Market Data Snapshots (Real Data)
This section presents simple charts using publicly reported figures for index levels
and FPI flows. Exact values and sources are listed below each figure and in the
References section. Note: 2025 figures are shown year-to-date where specified.
Figure 1: SENSEX 2020–2023 year-end closes and 2025 (Sep 5) close. Sources:
Yahoo Finance; Investing.com.
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Figure 2: NIFTY 50 year-end closes (2020–2024). Source: Wikipedia (NIFTY 50
page).
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Figure 3: FPI net equity investment by calendar year (2020–2025 YTD). Sources:
NSDL (via media compilations), TOI, Mint, ANI, Fortune India.
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9. Regulatory Framework: SEBI
SEBI (est. 1988; statutory powers via SEBI Act, 1992) regulates the securities
market—registering intermediaries, framing and enforcing regulations, combating
insider trading and unfair practices, and safeguarding investor interests. It oversees
exchanges, clearing corporations, and depositories, and prescribes disclosure,
corporate governance, and takeover norms. SEBI continually updates regulations to
address market microstructure, risk, and technology.
Objectives & Functions
Category Illustrative Functions
Curb insider trading; bar fraudulent practices; run investor
Protective
education.
Register and regulate exchanges, intermediaries; supervise
Regulatory
listings and takeovers.
Promote demat & e-trading; research, market development,
Developmental
financial literacy.
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10. Practical Guide: Getting Started
Step Action / Tip
1 Obtain PAN & Aadhaar; ensure KYC is updated.
2 Open a Demat + Trading account with a SEBI-registered broker (DP).
3 Link bank account; enable UPI mandates for IPOs (ASBA).
4 Define risk profile and goals; prefer SIPs and diversified funds initially.
5 Use GTT/alerts and stop-loss for risk control; avoid leverage early on.
Review costs (brokerage, STT, stamp duty, GST) and taxes (capital
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gains).
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11. Key Risks & Safeguards
Risk Description Safeguard
Asset allocation; SIPs; hedging
Volatility Sharp price swings, event risk
via options (advanced)
Prefer liquid stocks/ETFs;
Liquidity Wide spreads or low depth
staggered orders
Margin losses amplify Use minimal leverage; strict
Leverage
downside stop-loss; position sizing
KYC, DP/TP failures, 2FA; verified apps; DIS slips;
Operational
phishing alerts
Checklists; rules-based process;
Behavioural Herding, FOMO, overtrading
cooling-off periods
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12. Recent Trends (2024–2025)
• Strong 2023 index performance was followed by elevated volatility in 2024–
2025. Several months in 2024 saw subdued or marginal net FPI inflows, and 2025
(to August) recorded sizeable net outflows. Macro drivers include shifting global rate
expectations, commodity-price swings, and trade/tariff headlines.
• Sectoral rotation favoured consumption and autos intermittently, while global IT
services faced margin/ demand pressures. Financials reflected changes in credit
growth, deposit costs, and asset quality dynamics.
• Policy milestones—such as the completion of T+1 settlement, incremental
disclosure norms for SME listings, and governance scrutiny—aimed to protect
investors while preserving market depth.
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13. Impact on the Indian Economy
Channel Market–Economy Link
Capital Formation IPOs/FPOs fund capex and innovation; job creation.
Rising equity wealth can boost consumption and
Wealth Effect
savings diversification.
Banking & Credit Listed banks raise equity capital; support credit growth.
FPI/FDI flows and listings influence forex reserves and
FX & Flows
currency dynamics.
Government Revenues STT, capital-gains, and corporate tax from listed firms.
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14. Mini Case Studies
• Dematerialisation & T+1: Demat and faster settlement reduced settlement risk,
eliminated paperwork, and improved market velocity. T+1 further tightened cash
cycles for brokers and investors.
• IPOs & Wealth Creation: Large IPOs (e.g., 2021–2022 digital listings; 2022 LIC)
showcased breadth of primary issuance; SME-board IPOs improved access for
smaller enterprises while underlining the importance of due diligence.
• Risk Events: Episodes like 2008 GFC, 2020 COVID crash, and global rate
shocks stress-test market microstructure and risk controls; circuit breakers and
margining frameworks help contain systemic risk.
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15. Conclusion
The Indian stock exchange ecosystem blends deep market history with modern
infrastructure and regulation. For students and first-time investors, a disciplined
approach—rooted in asset allocation, diversification, and process—can harness the
benefits of equities while navigating risk. Ongoing reforms (market microstructure,
governance, disclosures) aim to enhance resilience as participation widens.
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