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What is Sensex, Nifty, and other such terms?

Understand what is sensex, nifty and other key terms that are a part of the stock market lingo and how they function.
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Financial market ecosystem

The two most important constituents of a financial market are the security issuer (equity or debt issuer) and the investor. The whole financial market ecosystem has been built and operates to bring these two constituents together. In this article, we will understand what is sensex, nifty and the other such terms in the financial ecosystem that support these two.

  • Security issuer

A security issuer is someone who needs money for some specific purpose and is willing to offer either a return in the form of interest (debt issuer) or a stake in the business (equity issuer) to anyone willing to give money. A security issuer can be a corporate entity or the Government. Each of these raise money from specific financial markets depending on the financial product (debt or equity) used. A debt issuer pays interest at specified intervals and returns the principal on maturity as per the terms and conditions specified. An equity issuer offers a stake in the business. The returns are not guaranteed as they totally depend on the business performance.

  • Investor

An investor is someone who has surplus money and is willing to invest it for a return. The main objective for investing is to achieve financial goals. An investor can be an individual, corporate entity, or the Government. An investor looks to invest surplus money through various financial products depending on his/her risk profile, return expectations, investment time horizon, taxation aspects, etc. 

  • Financial markets

Financial markets are intermediaries that bring security issuers and investors together. Financial markets act as a channel through which money flows from investors (who have surplus money) to security issuers (who need it). Different types of financial markets exist depending on the financial products that are traded in them. Some of these include: 

  • Money market: This market deals in debt securities with maturities of less than 1 year. The major borrowers in this market include the Government, banks, and corporates. The borrowers issue various securities, like for example, banks issue certificates of deposit, corporates issue commercial paper, and the Central Government issues treasury bills for borrowing money. As a return for investment, the investor gets either interest or the difference between the face value of the security and the discounted price at which it is issued. A retail investor can participate in this market through mutual funds.
  • Debt market: This market deals in debt securities with maturities of more than 1 year. The major borrowers in this market include the Government (Central, State, and local municipal bodies), banks, and corporates. The Central Government borrows from this market by issuing Government bonds, also known as G-secs, with various maturities ranging from 5 years to 30 years. The bonds pay interest. The State Governments borrow by issuing securities known as State Development Loans (SDLs). Banks and corporates issue various kinds of bonds that pay interest. The retail investor can invest in this market either through debt mutual funds or directly in case of some products.
  • Equity market: This market deals in the issuance and trading of equity and equity-related instruments. The two most well-known financial institutions in this market are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). They bring together corporates who raise money, by issuing shares, for various purposes and investors who are willing to invest for a stake in the business. The companies issue equity shares that give ownership rights to investors.
  1. Primary market:
    When a private company offers its shares to the public for the first time, it does it through a process called Initial Public Offering (IPO). The company announces the number of shares available for subscription, the opening and closing date, and the price band for bidding. Once the IPO closes, the company allots shares to successful applicants, the shares are listed on the exchange, and the trading of shares starts on the NSE and BSE.
  2. Secondary market:
    Once the shares are listed on the stock exchanges, they can be bought and sold by investors through the exchange. The shareholders are part owners of the company. They earn money in two ways: dividend and capital gain. From time to time, the company shares its profits with the shareholders by declaring dividends. When a shareholder sells his/her shares at a higher price than what it was bought for, the price difference is known as a capital gain.
  • Commodity market: This market deals with buying and selling of various commodities. The three main categories of commodities traded in this market include:
  1. Precious metals: This category includes trading in gold, silver, platinum, diamonds, and other precious metals.
  2. Industrial commodities: This category includes trading in crude oil, copper, aluminium, zinc, nickel, and other industrial commodities
  3. Agricultural commodities: This category includes trading in agricultural commodities like cotton, soyabean, palm oil, sugar, tea, coffee, and other agricultural commodities.

The main participants in this market include producers of the commodities (mining companies, farmers, etc.) and end-users of commodities (companies, individuals, etc.). Traders who act as intermediaries between producers and consumers also participate in this market.

  • Currency market:
    This market deals with the buying and selling of various currencies. The importers and exporters are big participants in this market. Companies in sectors like IT, pharma, etc. earn a major portion of the revenue in US Dollars. Hence, they protect themselves against the appreciation of the Indian Rupee against the US Dollar. Similarly, oil companies and others that import a lot from other countries protect themselves against the depreciation of the Indian Rupee against the US Dollar.
  • Financial products offered by NSE

The security issuer and investor are brought together through various financial markets as discussed above. A lot of trading of various financial products happens through the NSE and BSE. Some of the financial products offered by the NSE for trading include:

  1. Equity shares (cash market)
  2. Exchange traded funds (ETFs)
  3. Indices like Nifty
  4. Mutual funds
  5. Sovereign Gold Bond (SGB)
  6. Equity derivatives
  7. Commodity derivatives
  8. Currency derivatives
  9. Corporate bonds etc.
  • Sensex and Nifty

Out of the financial products offered by the stock exchanges, the most popular products are the indices offered by the BSE and the NSE. The two most widely used applications of indices include:

  1. Underlying for derivatives in the F&O market (futures and options market),
  2. Benchmark for mutual fund schemes

An index is used to represent a value for the underlying securities. Its performance helps one gauge the state of the economy and financial securities. Investors use indices as a benchmark to measure the performance of a particular company or a mutual fund scheme. 

For example, investors tracking Reliance Industries will benchmark it with the Nifty 50 to measure whether it has outperformed, or performed inline, or underperformed the Nifty 50. Similarly, investors of an active large-cap mutual fund scheme will benchmark it against a large-cap index to measure whether the mutual fund scheme has outperformed, or performed inline, or underperformed the benchmark large-cap index.

Nifty 50:
The Nifty 50 Index, offered by the NSE, is a diversified stock index comprising shares of India’s 50 largest companies that represent 13 sectors of the economy. The Nifty 50 represents about 66% of the free-float market capitalisation of stocks listed on the NSE as of March 2021. The Nifty 50 index is used for purposes such as benchmarking index-based derivatives, index mutual fund schemes, etc.

Apart from the Nifty 50, the other indices offered by the NSE include:

  • Nifty Next 50 Index: It represents companies ranked 51 to 100 (in terms of market capitalisation) from the Nifty 100 Index
  • Nifty 100 Index: It represents the top 100 companies based on market capitalisation from the Nifty 500 Index.
  • Nifty 200 and Nifty 500: These indices represent the top 200 companies and top 500 companies based on market capitalisation
  • Midcap indices: The NSE offers various midcap indices based on the market capitalisation of companies. Some of these include Nifty Midcap 50 Index, Nifty Midcap 100 Index, Nifty Midcap 150 Index
  • Smallcap indices: The NSE offers various smallcap indices based on the market capitalisation of companies. Some of these include Nifty Smallcap 50 Index, Nifty Smallcap 100 Index, Nifty Smallcap 250 Index
  • Sectoral indices: The NSE offers various sectoral indices that represent companies belonging to those sectors. Some of these include Nifty Bank Index, Nifty IT Index, Nifty Auto Index, Nifty FMCG Index. After the Nifty 50, the Bank Nifty Index is one of the most used indices for derivative trades.

The NSE also offers indices in various other categories such as thematic indices, strategy indices, fixed income indices, hybrid indices, etc.

S&P BSE Sensex:
The S&P BSE Sensex is also popularly known as the Sensex. The Sensex represents India’s 30 largest, most liquid blue chip companies that are listed on the BSE. The Sensex index, offered by the BSE, measures the performance of these companies.

Just like the NSE, the BSE also offers a wide range of indices based on categories such as market capitalisation, sector & industry, theme, strategy, sustainability, volatility, Government, etc.

  • Stock Broker

As an investor/trader, if you wish to invest/trade in any of the above indices or financial products discussed earlier, then you need to do it through a stock broker. The BSE and NSE allow all transactions to happen only through registered stock brokers. The primary role of a stock broker is to facilitate buying and selling of securities allowed to be traded on the stock exchange. The broker levies a fee which may be a flat fee or a percentage of the transaction value. Apart from trade facilitation, stock brokers also offer research reports and investment advisory services. 

Some of the well-known stock brokers in India include:

  1. Zerodha
  2. ICICI Securities
  3. Motilal Oswal
  4. HDFC Securities
  5. Kotak Securities etc.

Trading account, demat account, and bank account

  • Importance of a 3-in-1 account:

In the above section, we understood how a stock broker facilitates the buying and selling of securities. This trade facilitation is done through a trading account provided by the stock broker. Also, once you buy securities, they need to be held in safe custody till they are sold. A demat account is an account that can be used to hold securities in electronic format. For buying securities, you need to pay the equivalent purchase amount through a bank account.

For all the above 3 activities, stock brokers usually provide a 3-in-1 account that provides the triple benefits of trading account, demat account, and bank account. If you already have a bank account, then you can just open a trading account and demat account with the stock broker and link your existing bank account to it.

Apart from equity shares, a demat account can be used to hold securities like gold ETFs and other ETFs, mutual fund units, bonds, Government securities, etc. A demat account provides a safe and convenient way to hold all the above securities in electronic format. Just like your bank account, a demat account maintains a record of the purchases and sales of various securities.

  • Trade processing:

Let us understand how a trade works with the help of an example. You log in to your trading account with your stock broker. You place a buy order to purchase 10 shares of, say, for example, TCS at Rs. 3,000 per share. The broker sends your buy order to the stock exchange (BSE or NSE depending on the exchange chosen by you). The exchange executes the buy trade and sends a confirmation to the broker who then displays the same to you. At the time of clearing, the 10 shares of TCS will be credited to your demat account and at the same time, your trading account/bank account will be debited with Rs. 30,000 plus brokerage, Securities Transaction Tax (STT), and other levies.

After a few days, you see that the TCS share price has risen to Rs. 3,300 and you decide to sell. You log in to your trading account with your stock broker. You place a sell order to sell 10 shares of TCS at Rs. 3,300 per share. The broker sends your sell order to the stock exchange (BSE or NSE depending on the exchange chosen by you). The exchange executes the sell trade and sends a confirmation to the broker who then displays the same to you. At the time of clearing, the 10 shares of TCS will be debited from your demat account, and at the same time, your trading account/bank account will be credited with Rs. 33,000 minus brokerage, Securities Transaction Tax (STT), and other levies. 

Important note: Some brokers like HDFC Securities, debit (for share purchase), and credit (for share sale) your linked HDFC Bank account directly. Whereas, some brokers like Zerodha require you to first transfer money from your linked bank account to your trading account to place a purchase order. Similarly, when you sell shares, the sale proceeds are credited to your trading account. You have to place a request to transfer the money from your trading account to your bank account.

  • Modes of placing orders:

You can also use your trading account to apply for Initial Public Offerings (IPOs) of companies that are offering shares to the public for the first time. 

You can place buy and sell orders from your trading account using various modes such as:

  • Visiting the broker’s office
  • Call the broker’s call centre or customer service number
  • Using the broker’s website
  • Using the broker’s mobile app

These days most of the transactions are done online either using the broker’s website or mobile app.

  • Depository

We understood the importance of demat account in the above section. These demat accounts are provided by depositories such as National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). These depositories provide various depository services to depository participants (DPs) that include banks, financial institutions, custodians, brokers, etc. Some of the services provided by NSDL and CDSL include:

  • Opening and maintaining of demat accounts: Even though you, as an investor, will open a demat account through a stock broker, the account is managed and maintained by a depository like NSDL or CDSL. Whenever you purchase securities, during clearing and settlement they are credited to your demat account by the depository. Similarly, whenever you sell any securities, during clearing and settlement they are debited from your demat account by the depository and transferred to the clearing house who further carries out instructions to credit them to the buyer’s demat account 
  • Cash corporate actions: When the issuer of securities has to pay a dividend to shareholders or interest on debt securities, they can get all the data for securities holders from depositories 
  • Non-cash corporate actions: For non-cash corporate actions like the issue of bonus shares or entitlement of rights shares, the issuing company decides the entitlement based on ownership data shared by the depositories. 
  • Periodic holding and transaction statements: The depositories sent periodic statements to demat account holders mentioning details of securities bought and sold during a specified period and the details of other existing securities held in the account. 
  • Pledging of shares: If a demat account holder needs to pledge his/her securities with a financial institution for a loan, the pledging service is provided by the depositories. 
  • Allotment of securities in public issues: In the case of an initial public offering (IPO) or other public issues, once the allotment of securities is decided by the company, the credit of securities is done by the depositories to the demat account of the beneficiary.

National Securities Depository Limited (NSDL):

The NSDL is the second largest depository with more than 2.1 crore investor accounts as on 31st March 2021 (Source: NSDL website). It was set up in 1996 with IDBI, UTI, and NSE as promoters. Subsequently, some other public sector banks and private sector banks have become shareholders of NSDL. It provides the opening of demat accounts and their servicing through various depository participants (DPs). It provides settlement of securities for transactions done on stock exchanges like NSE and BSE that are connected to NSDL.

Central Depository Services Limited (CDSL):

CDSL is India’s largest depository with more than 3.3 crore investor accounts as on 31st March 2021 (Source: CDSL website). It was established in 1999 with the goal of providing convenient, dependable, and secured depository services. CDSL provides the opening of demat accounts and their servicing through various depository participants (DPs). It provides settlement of securities for transactions done on stock exchanges like NSE and BSE that are connected to CDSL. 

CDSL provides services like electronic voting (e-Voting: internet-based system and M-Voting: mobile application for e-Voting) through which shareholders can vote on company resolutions. It also provides an e-Locker facility through which account holders can store important documents in electronic format in one central secure location.

  • Clearing corporation

In the above sections, we have understood the role of the depositories, and the importance of demat accounts provided by them. A demat account holds the securities that you have bought. In a buy trade that happens through a stock exchange, before the securities reach your demat account, they have to be cleared and settled. This important function of clearing and settlement is done by the clearing corporation. 

Clearing is the process of determination of obligation. The obligations are then discharged through the process of settlement. During the clearing and settlement process, the clearing corporation works out:

  1. What members are due to deliver on the settlement date, and
  2. What members are due to receive on the settlement date

For example, Investor A has placed a buy order for 10 HDFC shares at Rs. 2500 per share through his stock broker on the NSE. On the other end, Investor B has placed a sell order for 10 HDFC shares at Rs. 2500 per share through her stock broker on the NSE. 

During the clearing process, the clearing corporation will determine the obligations of the clearing members which will include the following:

  1. Investor A’s clearing member will have to pay Rs. 25,000 and in return will receive delivery of 10 HDFC shares
  2. Investor B’s clearing member will have to deliver 10 HDFC shares and in return will receive Rs. 25,000

Now that the obligations are determined, at the time of settlement, the following will happen:

  1. Investor A’s bank account will be debited by Rs. 25,000 and his demat account will be credited with 10 HDFC shares
  2. Investor B’s demat account will be debited by 10 HDFC shares and her bank account will be credited with Rs. 25,000

The Indian stock markets follow a T+2 settlement cycle which means trades done on T day are settled on the 2nd business day after the trading day (T day).

Clearing corporations also serve the important role of a counterparty to the trade. This eliminates counterparty risk where if either the buyer or seller fails to deliver on their obligation, the clearing corporation will step in and take the role of the party backing out. For example, if the seller defaults and doesn’t deliver the shares, the clearing corporation will deliver the shares to the buyer.

NSE Clearing

The clearing and settlement of all trades executed on the NSE are handled by NSE Clearing Limited (formerly known as National Securities Clearing Corporation Limited or NSCCL). The NSE Clearing is a wholly-owned subsidiary of the NSE and was set up in 1996. 

Indian Clearing Corporation Limited (ICCL)

The Indian Clearing Corporation Limited (ICCL) carries out the clearing and settlement functions for all trades executed on the BSE. The ICCL is a 100% subsidiary of the BSE

  • Financial advisor

When investing in financial markets, the role of a financial advisor is very important. A qualified and experienced financial advisor will help you with the following:

  1. Identify financial goals
  2. Do your risk profiling
  3. Recommend an appropriate asset allocation
  4. Make a goal plan for every financial goal
  5. Implement the goal plan
  6. Do a regular review of the goal plan till you achieve the financial goal

In short, a financial advisor plays an important role in handholding the investor in the entire financial planning journey from identifying financial goals till they are achieved.

Let us now summarise what all we have covered in this article:

  1. The security issuer and investor are the two most important constituents of any financial system and the entire financial ecosystem is built to bring these two together.
  2. The various financial markets that act as intermediaries between security issuers and investors include money market, debt market, equity market, commodity market, forex market, etc.
  3. The various financial products offered by the NSE include equity shares (cash market), exchange-traded funds (ETFs), indices like Nifty, mutual funds, sovereign gold bond (SGB), equity derivatives, commodity derivatives, currency derivatives, corporate bonds, etc.
  4. The Sensex and the Nifty are the two most tracked indices offered by the BSE and the NSE
  5. Equity buy and sell transactions can be placed on the stock exchange only through registered stock brokers
  6. Stock brokers offer 3-in-1 (trading, demat, and bank) account to facilitate buy and sell transactions
  7. Demat accounts are provided and managed by depositories like NSDL and CDSL
  8. Clearing corporations like NSE Clearing and ICCL carry out clearing and settlement of trades executed on the NSE and BSE
  9. A financial advisor plays an important role in handholding the investor in the entire financial planning journey from identifying financial goals till they are achieved

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