What is Equity Market: Definition, Benefits & Types

Imagine becoming a part-owner of big companies like Infosys, TCS, or Reliance? How is this possible? Through the equity market. So, what is the equity market? It is a platform that allows publicly traded companies to raise capital from investors by selling their shares. 

In this blog, we will explain what the Equity Market is, how it works, its types, main participants, risks involved, and how to invest or trade in it. We will also look at future trends in equity markets.

Table of Contents:

• Introduction to the Equity Market
• Types of Equity Markets: Primary and Secondary
• Key Participants in the Equity Market
• How Does the Equity Market Work?
• Types of Equity Instruments with Examples
• Importance and Functions of Equity Markets
• Risks Associated with Equity Market Investments
• Investing vs Trading in the Equity Market
• Step-by-Step Process of Online Equity Trading
• Difference Between Equity Market and Stock Market
• Top Stock Exchanges in the Indian Equity Market
• Future Trends in Indian Equity Markets

Introduction to the Equity Market

“The equity market is a marketplace where companies issue shares and investors trade them.”

Put simply, it’s where you buy shares of companies and become a part-owner, enjoying rights and potential returns. Also called the stock market, it helps companies raise capital and connects buyers and sellers so shares can be exchanged efficiently.

In India, equity markets mainly mean shares listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Investments in private companies fall under private equity. The equity market also includes publicly listed stocks and securities traded over-the-counter (OTC).

Types of Equity Markets: Primary and Secondary

Before getting to the types of equity markets, let’s first understand what equity is in the share market. Equity refers to ownership in a company, held by shareholders.  

Now, let’s understand the two main types of equity markets, primary and secondary markets, in detail:

1. Primary Market

The primary market, or new issues market, is where companies or governments raise money by offering securities to the public for the first time. The most common example is an Initial Public Offering (IPO), where a company issues shares that later get listed on a stock exchange.

Money raised in the primary market goes directly to the issuer and is used for expansion, new projects, or debt repayment. In short, it’s the channel through which businesses tap into public investment for the first time.

2. Secondary Market

The secondary market is where existing shares and other securities are traded after being issued in the primary market. Here, investors buy and sell among themselves, with stock exchanges and brokers acting as facilitators.

This market provides liquidity and flexibility. It allows investors to easily enter or exit, and prices are determined by supply and demand rather than by the company directly.

The common secondary markets include stock exchanges like the National Stock Exchange of India (NSE), the Bombay Stock Exchange (BSE), the New York Stock Exchange (NYSE), Nasdaq, and the over-the-counter (OTC) market.

Key Participants in the Equity Market

The market works smoothly because investors, companies, brokers, and regulators all play their part. The equity market includes several participants. These include:

1. Investors: Investors include retail buyers seeking long-term growth, institutional and foreign investors putting in large sums that influence markets, and traders who aim for short-term gains. 

2. Issuer: Issuers are companies that raise funds by selling shares to the public. They provide new stocks in the market.

3. Brokers: Registered professionals or companies that help buy and sell stock on behalf of investors. They earn money through commission or fees.

4. Intermediaries: Institutions such as merchant bankers, depositories, and registrars who help in the issuance, transfer, and settlement of the shares so that the market processes go on smoothly.

5. Stock exchanges: Stock exchanges are the platforms where shares are listed and traded. They offer price discovery, transparency, and liquidity.

6. Regulators: SEBI keeps an eye on the market to make sure trading is fair and investors are protected.

How Does the Equity Market Work?

The equity market is a place that bridges the gap between companies that need capital and investors who are looking for wealth creation opportunities. The process starts with companies issuing shares, which investors can then buy or sell on stock exchanges.

1. Companies issue shares: They raise capital by offering shares to the public through an Initial Public Offering (IPO) in the primary market.

2. Shares are traded: Once listed, shares are traded on stock exchanges (like NSE and BSE in India) in the secondary market, where existing shareholders can sell to new investors.

3. Stock exchanges enable buying and selling: Stock exchanges connect buyers and sellers to interact and execute trades.

4. Brokers act as intermediaries: Investors typically use brokerage firms to access the stock market and place buy or sell orders.

5. Supply and demand determine prices: Stock prices are primarily determined by the forces of supply and demand. High demand pushes prices up, while high supply can cause prices to fall.

6. Settlement: Trades are completed when shares are delivered to the buyer and payment is made to the seller. In India, equity trades now follow a T+1 settlement cycle, which means settlement is completed the next business day.

7. Regulation and Monitoring: Regulatory bodies like SEBI in India oversee the market to ensure fair practices and protect investor interests. 

8. Wealth Creation and Capital Formation: Investors earn returns while companies raise funds to grow, creating wealth and supporting the economy.

Also Checkout: Difference between Private Equity and Venture Capital

Types of Equity Instruments with Examples

In India, the main equity instruments are common stocks, preferred stocks, and convertible securities. Each offers a different way to own or benefit from a company.

Take a look at different types of equity instruments:

1. Common Stock

Common stock is the simplest way to own a company. Buying common shares makes you a part-owner, usually with voting rights and a share of profits as dividends. For example, by purchasing stock in Reliance Industries, you gain a stake in the company based on how much stock you own and a say in major company decisions.

2. Preferred Stock 

Preferred stocks operate differently. Shareholders get fixed dividends and priority over assets if the company liquidates, but usually no voting rights. Their income tends to be more stable than common stock. For example, buying preferred stock of a company like Tata Steel provides a steady dividend income, though without voting rights.

3. Convertible securities 

Convertible securities combine fixed income and equity. They start as bonds or preferred shares and can later convert into common stock, giving investors a stable return with the potential for stock price gains.

In short, equity instruments offer different ways to invest. Whether you want ownership, regular income, or the chance for capital gains, there’s an investment option for you.

Importance and Functions of Equity Markets

Equity markets keep the economy moving. They give companies the cash they need to grow, and investors the chance to buy, sell, and build wealth.

Here are some of their key functions and importance:

1. Raising capital

Companies raise funds by issuing shares through IPOs, using the money for expansion, new projects, or research. Listed companies can also raise more funds through follow-on public offerings (FPOs).

2. Liquidity for investors

It gives investors liquidity, the ability to quickly buy or sell, and access cash.

3. Price discovery

The stock price is determined by both supply and demand curves and helps determine the fair value of a company.

4. Wealth creation

Investors are able to increase their investments through a rise in share prices and dividends.

5. Economic indicator

Market trends reflect the state of the economy and investor confidence.

6. Risk management with derivatives

Derivatives are investment contracts whose value is linked to an underlying asset, such as a stock or an index. They help investors manage risk and protect against price fluctuations.

In short, equity markets drive economic growth, support companies, and create opportunities for investors.

Risks Associated with Equity Market Investments

Investing in the stock market can be rewarding, but it also comes with risks. Understanding these risks is important for making smart decisions.

1. Systematic Risk (Market Risk)

Some risks affect the entire market and can’t be avoided, even with diversification. These are economic downturns, inflation, fluctuations in interest rates, or any global events. Examples of systematic risk are the COVID-19 pandemic, the 2008 financial crisis, and the global recession.

2. Unsystematic Risk (Company-Specific Risk)

Some risks affect only specific companies or industries. This may occur due to management issues, product-related issues, or the emergence of new players. Byju’s financial troubles in 2023 and the 2019 fall of Jet Airways are examples of risks that impacted only certain companies.

3. Other Risks Involved

1. Liquidity Risk: Certain stocks, particularly smaller ones, may be difficult to buy or sell within a short time at a reasonable price.
2. Inflation Risk: The money you earn today might not keep pace with inflation as prices rise, thus reducing the purchasing power of your money.
3. Interest Rate Risk: Interest rate changes may influence the price of the stocks and the cost of loans that a company may take. For example, if the RBI increases interest rates, companies have to pay more on loans. This reduces their profit and can bring their share prices down.
4. Political and Regulatory Risk: Any government regulations or modification of policy may affect the market or individual stock prices. For example, when the government introduced GST, some businesses struggled at first, and their stocks were hit. Or when tax rules suddenly changed, investors pulled money out and share prices dropped.

Knowing these risks helps investors make better long-term decisions. With this awareness, you can help avoid risks and aspire to a stable growth of your investments.

Investing vs Trading in the Equity Market

In the stock market, you can either invest, holding stocks long-term, or trade, buying and selling frequently. Here’s how investing and trading differ:

Step-by-Step Process of Online Equity Trading

Online platforms make equity trading simple. But before you can start, you must complete KYC (Know Your Customer) compliance, which verifies your identity and is mandatory for opening a Demat and trading account in India.

Here’s how it generally works:

Step 1: Open a Demat and trading account

The first step in trading equity online is to open a Demat account where you hold your stocks, and a trading account to place buy and sell orders.

Step 2: Choose a reliable broker

Then select an established and reputable broker that has affordable commissions and a wide range of financial instruments.

Step 3: Research stocks

Next, learn as much as you can about the stocks in which you have an interest by researching company fundamentals (if you are looking at long-term investment prospects) or prices and trends (if you are a short-term trader).

Step 4: Place your trades

When ready, place trades using market or limit orders.

Step 5: Monitor and review

Lastly, monitor your portfolio regularly to track performance and adjust if needed.

Difference Between Equity Market and Stock Market

The terms equity market and stock market are often used as if they mean the same thing, but there are small yet important differences between them. Let’s understand the difference between the two:

The stock market is a part of the larger equity market. Though both involve ownership of part of a business, there are more varied types of investments that are placed in the equity market, such as the trading of shares in listed companies.

Top Stock Exchanges in the Indian Equity Market

In India, most trading of shares and securities happens on two main exchanges: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Both are important for the country’s stock market.

1. National Stock Exchange (NSE)

In 1992, the NSE was launched to open up the Indian stock market. It was also the first in India to use a fully electronic trading system. NSE started operations in 1994 and introduced derivatives trading in 2000. Today, it is one of the 15 largest stock exchanges in the world.

2. Bombay Stock Exchange (BSE)

The BSE is the oldest stock market in India, which was established in 1875, on Dalal Street, Mumbai. It is the 11th largest globally and also the fastest, where trades occur within 6 microseconds.

Future Trends in Indian Equity Markets

The Indian equity market is growing, with more retail and domestic investors joining the market.

1. Investors are growing

The number of people entering the market using SIPs and online accounts is increasing. Retail participation is on the rise and domestic investors will play a bigger role in the growth.

2. Government support and faster trading

Government support is helping more people invest. India Stack makes it easy to open accounts and use digital payments, while T+0 settlement makes trading faster and safer.

3. ETFs are popular

ETFs are gaining popularity for being low-cost and diversified, changing how money flows in the market.

4. Tech is transforming investing

Technology is making investing faster and easier, with the use of AI, algorithmic trading, and other platforms. Brokerages must adapt to these changes to remain competitive.

5. Sectors to watch

Technology, renewable energy, healthcare, infrastructure, and consumer goods are expected to be industry leaders as the economy picks up.

6. Global trends matter

The market is still being influenced by inflation, international policies, geopolitical tensions, and commodity prices. The investor who monitors such trends will gain.

The Indian stock market has strong potential but comes with risks. Understanding trends, monitoring global events, and choosing investments wisely are key to success.

Conclusion

Ultimately, what is the equity market? It is a system where companies grow and investors participate in that growth. It provides income in the form of dividends and share value appreciation, and supports firms in their growth. If you are new, start small, learn step by step, and focus on long-term growth. By staying informed and careful, the equity market can become a strong tool to build your wealth and reach your financial goals.

What is Equity Market: Definition, Benefits & Types – FAQs