Equity Markets for Dummies | Introduction

The democratization of investing is beautiful—anyone with ₹500 can now own a piece of India’s best companies. But this accessibility is a double-edged sword. The same app that lets you buy blue-chips in seconds also makes it dangerously easy to YOLO your savings into penny stocks at 3 AM. The tools have evolved, but the fundamentals haven’t: know what you own, understand why you own it, and have the patience to let quality compound.

Attribution

Before we start, I want to make sure you I am not a SEBI certified analyst or so called ‘expert’ in the stock market from a finance background. I am a software engineer, trying to figure out the stock market, so I don’t have to rely on the mercy of Mutual Fund Houses and other financial institutions. All that I have learned is from my own research(from various sources) and experience(good and bad). Here is a list of resources and tools that I found useful out of all the garbage and scamster.

Sources

• LLA
• Varsity
• SEBI
• Rachana Ranade

Tools

• Moneycontrol
• TickerTape

Market Session Structure

Daily Trading Schedule:

1. Pre-Opening Session (9:00 AM - 9:15 AM)

• 9:00 - 9:07: Order Placement Phase - Place your orders
• 9:08 - 9:11: Order Matching Phase - System matches buy/sell orders
• 9:12 - 9:15: Buffer Period - Final price stabilization

2. Regular Trading Hours (9:15 AM - 3:30 PM)

• Main trading window for retail investors
• All buying and selling happens during this time

3. Post-Market Session (3:30 PM - 4:00 PM)

• Primarily for brokers to settle trades
• Limited retail participation

4. After Market Orders - AMO (4:00 PM - 9:00 AM next day)

• Place orders when markets are closed
• These orders get queued and execute at 9:15 AM next morning

Note: This 15-minute window absorbs overnight news and prevents wild price swings at market open. It’s like a pressure valve that establishes fair opening prices.

Imagine if markets opened directly at 9:00 AM. Overnight, major news breaks:

• Company announces fantastic results at 11 PM
• Or global markets crash while we’re sleeping
• Or RBI announces surprise rate cut on a weekend/holiday

Without pre-opening, big institutional traders (who monitor news 24/7) place orders instantly at 9:00 AM, while regular retail investors (you and me) are still processing the news. This results in stock opening at extreme price (very high or very low), and by the time you react, the opportunity is gone and you end up buying/selling at unfair prices.

How Pre-Opening saves retail investors

Phase 1: Order Collection (9:00-9:07 AM)

• Everyone places orders - institutions, retail traders, everyone
• No trades execute yet, just orders collected
• You have 7 minutes to process overnight news and place your order

Phase 2: Order Matching (9:08-9:11 AM)

• System runs an algorithm to find equilibrium price
• Calculates: “At what price can maximum shares be traded?”
• All buy and sell orders are matched at this SINGLE price

Phase 3: Buffer Period (9:12-9:15 AM)

• Opening price is displayed but frozen
• No new orders can be placed/modified
• Everyone can see where market will open

Outcome: Level playing field - your 9:02 AM order has same priority as institutional order. No one gets advantage, everyone gets same opening price.

Note: Pre-opening is like a “democracy vote” for opening price instead of a “fastest finger first” game. It protects small investors from being at a disadvantage against institutional players with faster systems and 24/7 news monitoring.

Trading Days & Holidays

Markets are OPEN:

• Monday to Friday (9:15 AM - 3:30 PM)
• Special Session - Muhurat Trading: Diwali evening (1 hour, around 6-7 PM).
• Orders placed on weekends/holidays queue as AMO and execute next working day at 9:15 AM.

Markets are CLOSED:

• Weekends (Saturday & Sunday)
• National holidays and major festivals (Republic Day, Independence Day, Holi, Diwali, Christmas, etc.)

Settlement Cycle

Indian equity markets operate on a T+1 settlement cycle, where trades execute immediately but settlement occurs one working day later.

Settlement Examples:

• The “T” stands for Trade date, “+1” means add 1 working day
• Trade on Monday → Settlement on Tuesday
• Trade on Friday → Settlement on Monday (skips weekend)

Note: India moved from T+2 to T+1 settlement(and T+0 for select stocks) in January 2023, making it one of the fastest settlement cycles globally. Read more.

Types of Markets

Example:

• Primary Market: Zomato IPO (2021) - Company raised ₹9,375 Cr directly from investors
• Secondary Market: You buying Zomato shares today on NSE - Money goes to the seller (and not Zomato)

Types of Accounts

To invest in stocks, you need three interconnected accounts:

1. Trading Account - Your execution gateway where buy and sell orders are placed through your broker.

2. Demat Account - Digital vault storing your securities in dematerialized form, maintained by depositories (NSDL or CDSL).

3. Savings Account - Fund source for purchases and destination for sale proceeds.

Note: Most brokers now offer 3-in-1 accounts integrating all three components for seamless transactions. Opening both the demat and trading account with the same broker ensures smooth and seamless transactions. You can buy/sell stocks and have them automatically credited or debited in your demat account without manual transfers.

Types of Orders

Price Movements

Gap Opening

Markets rarely open exactly where they closed. After-market orders accumulate overnight, creating supply-demand imbalances.

Gap Up Opening - Opening price exceeds previous close, indicating positive overnight sentiment.

Gap Down Opening - Opening price falls below previous close, signaling negative overnight news.

Circuit Breakers

Price band limits preventing extreme single-day volatility, typically set at 5%, 10%, or 20% bands.

Common Circuit Limits:

• 5% circuit - Large-cap stocks
• 10% circuit - Mid-cap stocks
• 20% circuit - Small-cap and volatile stocks

Market-Wide Circuit Breakers (Index Level)

Beyond individual stocks, NSE and BSE have market-wide circuit breakers that halt ALL trading when indices fall/rise sharply:

Index Circuit Breaker Levels:

Time-Based Rules:

• If 10% circuit hit before 1:00 PM → 45-minute halt
• If 10% circuit hit after 2:30 PM → No halt

Instances when market circuit breakers were hit

2009 Lok Sabha Election Results

• Impact: SENSEX locked at 14,272.62(+17.24%), NIFTY locked at 4,308.05(+17.33%).
• Reason: UPA II returned to power with better majority, no longer dependent on the Left.

COVID-19 Crash (March 2020)

• Impact: SENSEX crashed 13.15%, NIFTY down 12.98%. Level 2 (15%) circuit breaker triggered
• Reason: Global pandemic panic, nationwide lockdown announced

Harshad Mehta Scam (1992)

• Impact: SENSEX plunged 12.77%
• Reason: Securities scam exposure, massive manipulation uncovered

Global Financial Crisis (2008)

• Impact: 10%+ crashes on multiple days
• Reason: Lehman Brothers collapse, global banking crisis

Note: Circuit breakers protect the entire market from panic selling or euphoria. They give investors time to think rationally rather than selling/buying in fear. Sharp rallies often followed by profit-booking by big players at the expense of retail investors.

Face Value vs Market Value

Face Value - Nominal value printed on share certificate, used for dividend calculations and corporate actions.

Market Value - Current trading price determined by supply-demand dynamics.

Example: MRF face value = ₹10, market value = ₹1,55,000+

Corporate Actions

The chart above shows Infosys stock price growing from ₹95 to ₹1,500 over 30 years—a 15x return on paper. However, this only reflects price appreciation and ignores the massive impact of corporate actions like stock splits and bonus issues that multiplied shareholders’ actual holdings.

Dividends

It is the distribution of profits to shareholders based on face value (not market value). You can assume this as ‘interest’ earned on your long term investment.

Important Dates:

• Announcement Date: Corporate action declared
• Record Date: Shareholders on this date receive benefits
• Ex-Date: Trades after this date don’t qualify for announced benefits

Stock Split

When the company divides its shares into a larger number of shares, which increases the number of outstanding shares and reduces the price per share. For example, if you have 100 shares of a company @ Rs 50 per share and it splits 1:2. You will now have 200 shares @ Rs 25 per share. This is usually done to make the stock more affordable and attractive to small/retail investors.

Note: Not all companies choose to split shares. MRF, for instance, hasn’t split its stock since 1975—resulting in a current price of ₹1,55,000 per share. This deliberately high price acts as a barrier to speculative trading, attracting only experienced, long-term investors, who aren’t affected by short-term market volatility. This strategy maintains price stability and cultivates an exclusivity around the stock.

Bonus Share

When a company issues additional shares to existing shareholders drawn from accumulated reserves or profits. For example, if you own 100 shares of a company and it declares a 1:1 bonus, you’ll receive 100 additional shares—doubling your holding to 200 shares at no cost. This is typically done to reward loyal shareholders, improve liquidity, and signal strong financial health without affecting the company’s overall market capitalization.

Note: Unlike dividends, bonus shares are tax-free when received(only taxed upon sale). Companies with strong reserves often prefer bonus issues over cash dividends to conserve capital for growth while still rewarding shareholders. Indian IT giants like Infosys, TCS, and Wipro have consistently issued bonus shares over decades, significantly multiplying early investors’ holdings.

Effects on dividends

Bonus shares and stock splits multiply the number of shares you own. While individual dividend per share may reduce proportionally, your total dividend income remains the same initially. However, when companies raise dividends in the future, you benefit from a much larger shareholding—turning long term investments into substantial passive income streams over decades.

Now, coming back to the question, how much you would have earned if you had invested ₹4,750 in Infosys at IPO in 1993?

It would have grown to ₹7.64 Crores - a CAGR of 26% over 32 years. Through 8 bonus issues and 1 stock split, your original 50 shares would have multiplied 1,024 times to 51,200 shares. Beyond capital appreciation, these shares would generate ₹23 Lakhs annually in dividends alone at 2025’s dividend rate of ₹45 per share.

We will cover this in more detail in the next section. But still want to give a reality check - none of us would have the patience to hold on to the stock for 30 years. If you would study the chart, you would notice that during the dot com bubble burst there was bad peroid for the IT industry as a whole. Infosys(along with all the other IT giants) also took a major hit and dropped to ₹10. At this time, you(and me) would have exited from the stock and booked heavy losses. Assuming that we can maybe we recover our original capital by becoming intraday trader or even beter, by entering into F&O segemnt of the market.

These “legends” didn’t build wealth through luck or shortcuts—they built it through patience, research, and conviction:

Peter Lynch managed billions for Fidelity with a simple philosophy: invest in what you know. He bought Dunkin’ Donuts because his kids loved it, studied Taco Bell because he noticed long queues, and crushed the market—not with complex algorithms or insider tips, but by actually understanding the businesses he owned.

Rakesh Jhunjhunwala (Big Bull of India) bought Titan at ₹3 in 2002-2003 when everyone thought watches were dead (mobile phones showed time). He saw Indians’ love for jewelry and believed in Tanishq’s potential. Held through multiple corrections. Titan peaked at ₹3,000+ before his passing—a 1,000x return. He didn’t exit when it doubled or tripled; he held for 20 years because the business kept improving.

Ramdeo Agrawal (Motilal Oswal) identified PI Industries in early 2000s when it was a ₹20 stock. Studied the agrochemicals space, understood the export opportunity, and watched management execution year after year. Held through volatility. Stock crossed ₹4,000—a 200x return over 18 years. No fancy tools, just reading annual reports and understanding competitive moats.

Ashish Kacholia built wealth in mid-caps by spotting Mold-Tek Packaging at ₹35 when nobody cared about plastic packaging. Studied the business model, met management, understood the niche. Held through market crashes. Stock touched ₹900+—a 25x return. His edge? Deep research on boring businesses others ignored.

The common thread? They all did their homework, understood what they owned, and had the patience to sit through market tantrums. No WhatsApp tips, no telegram channels, no “hot stock of the week”—just boring old fundamental research and conviction.

Investor Categories

Market Capitalization Segments

Market Cap Formula:

Market Capitalization = Total Outstanding Shares × Current Market Price

Classification:

• Large Caps: Market cap > ₹10,000 crores (Blue-chip companies)
• Mid Caps: Market cap between ₹500 - ₹10,000 crores
• Small Caps: Market cap < ₹500 crores

Market Indices

NIFTY (NSE) - Top 50 companies across sectors (National Fifty)

SENSEX (BSE) - Top 30 companies (Sensitivity Index)

SX40 (MSE) - Top 40 companies (Securities Exchange 40)

Free Float Market Cap calculation excludes promoter holdings:

Understanding Free Float Market Cap:

Why it matters:

• Index calculations use free float, not total market cap
• More accurate representation of tradable value
• Promoter shares aren’t available for buying/selling
• Higher free float = Better liquidity

Short Selling Mechanics

Short selling enables profit from falling prices by selling borrowed shares.

How Short Selling Works:

The Process:

1. Morning 9:30 AM - You think HDFC Bank (currently ₹1,600) will fall today
2. You sell first - Sell 1000 shares at ₹1,600 (you don’t own them yet!)
3. Market falls - Price drops to ₹1,550 by afternoon
4. You buy back - Buy 1000 shares at ₹1,550
5. You profit - Sell high (₹1,600), buy low (₹1,550) = ₹50 profit per share(₹50,000 total profit)

Critical Rules:

• Must square off same day - Buy back before 3:30 PM
• If you forget - Shares go to auction market (3:30-4:00 PM)
• Auction consequences:
  • Any loss = You pay
  • Any profit = Goes to IEPF, not you!

When to short sell:

• You’re bearish (expect market/stock to fall)
• Only for intraday trading
• Good for volatile falling markets

Warning: Short selling is risky - losses can be unlimited if stock rises sharply. Don’t try it unless you’re sure about what you’re doing.

Tax Implications