What Is Equity Market? - Meaning, Benefits & Types | Research 360

Equity Market 101: Meaning, Benefits, Types and More

Equity Market is a system that enables individuals and corporations to purchase large amounts of stocks and securities from investors. Learn more about the benefits, types, and meaning of Equity Market with Research 360.
23 Nov, 2023 11:14am
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The Indian financial market can be further divided into various subcategories. Of these subcategories, the equity market is one of the most prominent and dynamic sections. Investors keen on creating wealth over the long term participate in the equity market and trade in the equity shares of various companies.

To make the most of your investments in this market segment, it is essential to understand what the equity market is, how it functions and what its benefits are. Let’s take a closer look at these details.

The meaning of equity and the equity market
In finance, the simple definition of equity is this — it is the ownership of assets. The more common meaning of equity is that it is the portion or amount of capital that an owner has invested in a company. Equity in a company is held in the form of shareholdings, commonly known as equity shares.

The equity market is that segment of the financial market where equity shares of different companies are traded among market participants. It is also where companies can raise capital by issuing new shares to interested investors. Today, the equity market is commonly referred to as the stock market or the share market.

Key market participants: A closer look at how the equity market works
Despite having a multitude of participants, the equity market functions seamlessly today on account of strict regulations in the country. Here is a closer look at the key participants in the equity market and the role they each play.

  • Companies
    The companies whose equity is sold to and traded among investors are perhaps the most vital participants in this market segment. These companies are listed on stock exchanges, as explained below.
  • Stock exchanges
    A stock exchange is a bourse where the shares of companies are listed and through which these shares are traded. India has two major stock exchanges, namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
  • Stockbrokers
    Stock brokers are intermediaries between the stock exchanges and the investors. They help facilitates the buy and sell orders placed by investors in the equity market. Many stock brokers are also registered depository participants. So, investors can open demat and trading accounts with these stock brokers to begin trading the equity market.
  • Investors and traders
    Investors and traders are those who buy and sell the equity shares of companies listed in the equity market. Investors can be individuals (known as retail investors) or entities (known as institutional investors).
  • Securities and Exchange Board of India (SEBI)
    SEBI is the regulatory body that oversees the functioning of the equity market in India. This entity is responsible for protecting the interests of investors and ensuring that the market functions smoothly.

The different types of equity markets
Depending on the structure of the market, the equity trading segment can be classified into the following two types.

  1. Primary market
    The primary market is that segment of the equity market where a company offers its shares to the public for the first time via an Initial Public Offering (IPO). In an IPO, the issuing company issues its shares directly to investors, without routing the issues through the stock exchange. Once the IPO is complete, the company’s shares are listed on the stock exchanges and are available to be traded in the secondary market.
  2. Secondary market
    The secondary market is where the shares of companies are traded after they have been listed on the stock exchanges. Investors who purchased shares of companies via IPOs can exit their positions in the secondary market. Similarly, investors who could not invest in a company’s shares in the primary market can easily purchase that company’s equity in the secondary market.

The benefits and functions of equity markets
The equity market offers several benefits to investors, companies and the overall economy. Here are some of the key benefits and functions of this segment of the financial market.

  1. Capital formation
    The equity market provides a platform for companies to raise capital by selling shares of their ownership to investors. This enables businesses to fund their operations, invest in growth opportunities, carry out research and development and create new jobs. The equity market thus plays a crucial role in facilitating economic growth and development.
  2. Investment opportunities
    The equity market also provides individuals and institutional investors with opportunities to invest in a wide range of companies across various sectors and geographies. By purchasing shares of publicly traded companies, investors can participate in the growth and profitability of these companies. This allows individuals to potentially grow their wealth and achieve their financial goals.
  3. Liquidity for existing investments
    The equity market offers liquidity for existing investments, allowing investors to exit their positions in a relatively easy manner. This liquidity provides investors with the ability to convert their investments into cash quickly if needed and enables them to respond to changing financial needs and take advantage of investment opportunities.
  4. Diversification
    By investing in the shares of companies in the equity market, investors can diversify their portfolios effectively. This diversification can be achieved by investing in a variety of stocks across different industries and regions, thus spreading out and reducing the overall risk. Diversification helps reduce the impact of individual company or sector-specific risks and increases the potential for long-term returns.
  5. Price discovery
    Lastly, the equity market also serves as a platform for price discovery, which involves determining the fair value of publicly traded companies. The continuous buying and selling of shares by market participants help establish market prices based on supply and demand dynamics. This price discovery mechanism provides important information to investors, helping them make informed investment decisions.

Conclusion
If you are planning to participate in the equity market, ensure that you invest or trade as per your financial goals and requirements. In terms of safety, the equity market is fairly secure in India since it operates within a regulatory framework that promotes transparency and fairness. Companies listed on stock exchanges are required to disclose relevant information, such as financial statements and corporate governance practices, to investors.

The bottom line is that the equity market can be considered a barometer of the overall economy. Movements in stock prices can reflect changes in investor sentiment, economic conditions, and market expectations. Analysts and policymakers also often use equity market performance as an indicator of economic health and investor confidence.

 

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