Library / MiyeeStockBuddy: The Complete Guide to Indian Markets

Part 1. How the Market Actually Works

Most people meet the stock market as a number that goes up and down on television. That number hides a machine with a lot of moving parts, and almost every beginner mistake comes from not knowing what the parts are. This part builds the machine from the ground up. None of it is difficult. It is simply rarely explained.

1.1 A Share Is a Slice of a Business

When a company needs money to grow, it has two choices. It can borrow, which means paying interest and returning the money later. Or it can sell a piece of itself, which means giving up a share of the profits forever but never having to repay anything. The second is what a share is. Nothing more mystical than that.

If a company has divided itself into one crore shares and you own one hundred of them, you own one ten thousandth of that business. If it earns one hundred crore rupees this year, your slice of that year of earnings is one lakh rupees, whether or not the company chooses to hand it to you.

Think of it like this

Think of a tea stall on a busy corner. It earns thirty thousand rupees a month. The owner wants to open a second stall and needs three lakh rupees. He can borrow it from a moneylender at interest, or he can sell one third of the stall to you for three lakh.

If you buy that third, you never get your three lakh back as a repayment. What you get instead is a third of everything the stall earns from now until forever, including the second stall your money built. If both stalls do well, that third becomes worth far more than three lakh. If the corner loses its footfall, it becomes worth less.

A share is that third, cut into small enough pieces that thousands of strangers can each own a sliver, and listed on an exchange so any of them can sell their sliver on a Tuesday afternoon without asking the owner.

That last point, the ability to sell on a Tuesday afternoon without permission, is what a stock exchange exists to provide. It is called liquidity, and it is the single feature that makes shares different from owning a third of your neighbour’s actual tea stall.

1.2 Why a Price Exists At All

A share price is not a fact handed down by anybody. It is simply the price at which the last buyer and the last seller agreed to do business. That is the whole of it. Everything else in this guide is an attempt to understand who those people are and what they are likely to do next.

Think of it like this

Stand in a vegetable mandi at six in the morning. Forty buyers want tomatoes. Only ten crates arrived because the rain spoiled the rest. Nobody announces a price rise, yet the price rises anyway, because buyers outbid each other to get a crate before it runs out.

Now stand in the same mandi at eleven. The crates are still half full and the market shuts at noon. Sellers begin cutting the price, because unsold tomatoes are worth nothing by evening.

The exchange is that mandi, running all day, with shares instead of crates and a screen instead of shouting.

This is worth repeating, because it is easy to read a falling price as proof that a company is in trouble. Sometimes it is. Often it just means a large holder needed cash that week and there were not enough buyers that day to absorb the shares without a discount.

The order book, which is what you are really trading against

Behind the single price on your screen sits a list. On one side are all the buy orders waiting, each with a price and a quantity. On the other are all the sell orders. The exchange matches them automatically, highest bid against lowest offer, in the order they arrived.

Buyers waiting (bids)	Quantity	Sellers waiting (offers)	Quantity
1,242.60	340	1,242.85	210
1,242.55	1,100	1,242.90	780
1,242.40	600	1,243.10	1,450
1,242.10	2,300	1,243.50	3,100

The best buyer is willing to pay 1,242.60. The cheapest seller wants 1,242.85. The gap between them, 25 paise here, is called the spread, and it is a real cost you pay every time you trade in a hurry. In a heavily traded name like Reliance the spread is a few paise. In a thinly traded small company it can be one or two percent, which means you are down one or two percent the instant you buy.

A market order says "fill me now at whatever price is available". It always executes, and in an illiquid stock it can execute at a price that shocks you.
A limit order says "fill me only at this price or better". It protects you from a bad fill, at the cost of possibly not being filled at all.

The rule to remember

Use limit orders. A market order in a stock trading a few thousand shares a day can cost you more than a month of careful analysis earned. The only good reason for a market order is that you must get out immediately and the price hardly matters.

Volume, and why it is the second number you should look at

Volume is the number of shares that changed hands. Price tells you what happened. Volume tells you how many people were involved in making it happen.

A stock rising four percent on ten times its usual volume means a crowd decided something. The same four percent on a quarter of the usual volume may be one impatient buyer walking up a thin order book, and it frequently gives the move straight back the next morning. Every pattern in Part 5 of this guide is more reliable with volume behind it and less reliable without.

1.3 The Plumbing: Demat, Brokers, Settlement and Circuits

Four pieces of infrastructure sit between you and a trade. You will meet all of them, so it is worth ten minutes to know what each does.

The demat account

Shares in India are not paper. They live as electronic entries in a depository, either NSDL or CDSL, and your demat account is your locker inside it. Your broker is not holding your shares; the depository is, in your name. This matters: if a broker fails, your shares are still yours, because they were never on the broker’s books.

The broker and the trading account

You cannot walk up to the exchange yourself. A registered broker places orders on your behalf and takes a fee. The two big cost models are a percentage of the trade value, which suits small occasional trades, and a flat fee per order, typically twenty rupees, which suits larger trades. Add up what you actually pay in a year before deciding one is cheaper.

Settlement, and what T plus 1 means

When you buy, the shares do not arrive instantly. India settles equity trades on a T plus 1 basis, which means the shares reach your demat account and the money leaves your bank on the next working day after the trade. India was the first large market to move to this cycle, and a same day option is being introduced in stages.

The practical consequence is small but real: shares bought today cannot be delivered against a sale until tomorrow, and a dividend or bonus record date is judged on when settlement completes, not when you clicked buy.

Circuit limits, the brakes

To stop a panic or a manipulation running away, the exchange sets a daily band around each stock, often five, ten or twenty percent. Once the price touches the band it can go no further that day. In a stock stuck at its lower circuit there are only sellers and no buyers, which means you cannot exit at any price. This is the practical danger of very small companies, and no chart pattern will save you from it.

Careful here

A stock hitting the upper circuit every day looks like the easiest money you have ever seen. Remember that the same mechanism works in reverse, and that a stock which rose ten days in a row on the circuit can fall ten days in a row on the circuit while you sit unable to sell a single share.

1.4 Indices, and What Nifty and Sensex Actually Measure

An index is a basket of shares with a single number attached to it, so that "the market" can be discussed without listing two thousand companies. The Nifty 50 holds the fifty largest and most heavily traded companies on the NSE. The Sensex holds thirty on the BSE. Both are weighted by free float market capitalisation, which means the bigger and more freely traded the company, the more it moves the index.

That weighting has a consequence people miss. When a handful of very large companies rise and everything else falls, the Nifty can close green on a day when most stocks fell. The index is not a vote where every company counts equally. It is a weighing machine, and a few heavy names dominate it.

Index	What it holds	What it is used for
Nifty 50	The 50 largest, most liquid NSE companies	The default reference for the Indian market
Sensex	Thirty large BSE companies	The older benchmark, quoted in the news
Bank Nifty	Twelve major banks	The most actively traded derivative index in India
Nifty Midcap 150	Medium sized companies	Higher growth, higher falls, thinner liquidity
Nifty Smallcap 250	Small companies	Highest risk, most prone to circuit locks
India VIX	Expected volatility from option prices	The market’s own estimate of how bumpy the next month will be

Large cap, mid cap and small cap, in plain terms

Market capitalisation is simply the share price multiplied by the number of shares. It is what the market says the whole company is worth today. SEBI defines the buckets by rank, not by a fixed rupee figure: the largest hundred companies are large cap, the next hundred and fifty are mid cap, and everything from the two hundred and fifty first onwards is small cap.

Large caps move slowly, survive bad years, and are easy to sell in a hurry. Reliance, TCS, HDFC Bank.
Mid caps grow faster and fall harder. In a bad market they can lose half their value while the Nifty loses fifteen percent.
Small caps can multiply your money and can also become impossible to sell. Position size matters far more here than any indicator.

The rule to remember

The mistake is not owning small companies. The mistake is owning them in the same size you would own a large one, and discovering during a fall that there is nobody on the other side of your sell order.

1.5 Who Else Is In The Market

You are not trading against an abstraction. You are trading against specific groups with specific motives, and knowing which group is doing what explains most of the daily news.

Participant	Who they are	What moves them
Retail investors	Individuals like you	News, tips, emotion, salary cycles
Foreign Institutional Investors (FII)	Global funds allocating across countries	Global interest rates, currency, relative value between countries
Domestic Institutional Investors (DII)	Indian mutual funds, insurers, pension funds	Monthly SIP inflows, which arrive steadily regardless of headlines
Promoters	The founding family or group	Long term control, and occasionally a need for cash
Proprietary desks and algorithms	Firms trading their own money at speed	Tiny price differences, order flow, volatility

The FII and DII figures published every evening are worth a glance. When foreign money is selling and domestic money is buying, the market often goes nowhere for weeks while ownership quietly changes hands. When both sell together, falls are fast.

A useful habit

The steady monthly inflow from Indian retail investors through systematic investment plans has become a genuine floor under this market. It arrives whether the news is good or bad, because it is a standing instruction rather than a decision. This is one reason falls in recent years have been shorter than they used to be. It is not a guarantee of anything, but it explains a pattern you will notice.

1.6 The Two Honest Questions Before Any of This Matters

Before a single indicator, two questions decide more about your outcome than any technique in this guide.

1. What is this money for? Money you need in eighteen months has no business in shares. A perfectly good company can be down forty percent in eighteen months for reasons that have nothing to do with the company. Time is what converts a good business into a good investment, and you either have it or you do not.

2. How will I behave when it falls thirty percent? Not whether. When. Every long term holder of every good company has sat through this. If the honest answer is "I would sell", then the position is too large, and the fix is to make it smaller today rather than to promise yourself you will be brave later.