Investing in the Indian Stock Market
For anyone looking to
invest overseas, you don’t have to be an expert in foreign investment to know
that the Indian stock market is well worth keeping an eye on. In fact, many
investors are doing much more than keeping an eye on the world’s second fast
growing economy. Only behind China, in terms of the in terms of recent economic
growth make it a very attractive proposition to some investors and could
explain why investors from all corners of the globe are choosing to do business
in the planet’s largest democracy.
Growing investment
opportunities for foreign retail investors
With a population pushing
close to 1.2 billion, India is an ever changing hot bed of vibrant cultures,
themes and business opportunities. The lifestyles of many Indian people, for
example, have altered radically over recent years. With its growing middle
classes (just over 200 million people), many of whom are reveling in new found
wealth, India boasts one of the world’s youngest populations, with about half
being aged 26 or younger. This again makes India an attractive proposition to
outside foreign investors, which has also been boosted by the fact Indian
government’s decision to allow foreign retailers to open stores in the
country, for the first time. A move of this kind not only benefits the
Indian economy but also that of the investing company who will no doubt look to
take benefit from India’s meteoric economic growth. There was once a time when
some investors would look no further than FTSE 100 investing opportunities when entering
the stock market. However, such is the presence of India as an emerging market,
the stock market there is hard to ignore. Investors now realize growth at an absolute
bargain price is available from a number of emerging Indian companies.
India’s main stock markets
India has two central
exchanges upon which the vast majority of India’s trading takes place – The
Bombay Stock Exchange and the National Stock Exchange. The BSE was founded in
1875, yet the NSE has only been in existence since 1992 and only started
trading properly in 1994. It is worth noting that these rival exchanges follow
the same mechanisms for trading, including the same settle processes and trading
hours. There are approximately 4700 companies listed with the BSE, where as the
NSE has just over 1200. One thing that investors might find interesting with
regards to the BSE is that over 90% of its market backing comes from only about
500 companies.
Nearly all the major
companies in India are listed on both of these exchanges. Where spot trading is
concerned, it’s the NSE which has the dominant share, with more than 70% of the
market. As for derivatives trading, the NSE almost has monopoly with 98% of the
market.
Trading on the India’s
stock exchanges
Trading on both the BSE
and NSE is takes place electronically, on a trading computer using a limit
order book. Buyers and sellers on the BSE and NSE remain anonymous as the
process of trading is order driven; therefore there are no specialists or
market makers. The advantage of using this kind of trading system is that there
is much more transparency as all orders to buy and sell are accurately
displayed within the system. However, the consequence of not using specialists
is that there is a risk that not all orders will be carried out. All orders on
both trading exchanges need to be placed through stock brokers. Many stock
brokers can now offer their clients bespoke online trading facilities. The same
is also true for institutional investors who can take advantage of on a direct
market access trading option. This enables the investor to place orders
directly onto the markets trading system.
India’s market indexes
Sensex and Nifty are the
two most prominent indexes used on the Indian markets. Created in 1986, Sensex,
is used for equities, is the oldest market index and includes around 30
companies which are listed on the BSE. The S&P CNX Nifty is India’s other
index, which actually represents about 65% of its free-float market share. It
includes just over 50 companies listed on the NSE and was created in 1996.
Sensex and Nifty hold time series data onward from April 1979 and July 1990,
respectively.
Engines of growth
The bottom line on
investing in the Indian stock market is that emerging markets, such as this one
are fast becoming the engines of future economic growth. Although, currently
only a small percentage of Indian household savings are invested in the country’s
stock market, a growing GDP could mean that is about to change as the market
becomes more financially stable. With this in mind, maybe it’s about time that
more outside investors jump on board the Indian stock market bandwagon.