The stock market revolves around the concept of a give-and-take relationship. Investors give the company the money it needs for business operations, and in return, they receive the company’s shares.
When you are a shareholder in a company, your profits are directly proportional to how the company is performing. You may earn 10x profits, or you may lose most of what you invested. It depends on how strategically you invest and how you manage your portfolio.
As a beginner, it may be difficult for you to understand where to invest, when is the right time to invest in the stock market, and how to invest. Let us help you understand stock market basics so that you have decent knowledge of how the market works before you actually start investing:
What are Stocks?
A stock is like a small share of a company where you can invest to build wealth. When you buy a stock of a particular company, it means that you own a small piece of that company. The price of this stock can go up or down depending on how the company is performing as a whole.
When the company makes a profit, you make a profit as a shareholder. So, in short, stocks are a way to build money by investing in successful companies or companies that hold significant earning potential.
What is the Stock Market?
The stock market, or share market, is like a marketplace where companies list their shares and individuals can buy them. The Indian stock market is regulated by SEBI (Securities and Exchange Board of India), which is responsible for ensuring that all listed companies comply with regulations.
Although the terms stock market and share market are used interchangeably, there is a slight difference between the two. The stock market is where individuals can trade stocks, bonds, mutual funds, etc. On the other hand, the share market only allows you to invest in the shares of companies.
How Does the Share Market Work?
Companies list their shares in the stock exchanges (like NSE and BSE) that form the stock market. By listing these shares for sale, companies can raise the money they need to grow their business. As investors buy these shares, they become the company’s shareholders.
In return, companies get the money and put it into business operations or expansion. This further benefits the investors also, as their shares become more valuable over time when the company grows.
If the company makes profits, the stock value may increase, and investors can sell their shares at a higher price. Along with the increased value of the share, investors can also make money from dividends that companies offer to their investors upon profit-making. However, if the company’s profits fall, investors may lose their money as well.
Types of Share Market
It is important to understand the types of share markets when learning stock market basics. The share market can be divided into two categories or two phases:
1. Primary Market
The primary market is the initial phase when a company first registers itself as a stock exchange-listed entity. This is executed through an IPO (Initial Public Offering).
At this stage, companies usually seek substantial financing, attracting institutional investors or HNIs (High Net-Worth Individuals). These investors analyze essential factors before participating in an IPO to buy securities of a company.
2. Secondary Market
The secondary market is the phase where the institutional investors and HNIs exit by selling their shares, and other retail investors buy the shares. This transition is usually facilitated by intermediaries like brokers. Basically, it’s like one investor buying shares from another.
Financial Instruments That You Can Trade in The Stock Market
The stock market allows you to invest in multiple financial instruments along with shares. Here’s a list of all financial assets that are involved in stock market trading:
1. Shares
Shares are like units of a company that investors can own by buying them. For example, if a company lists 1,000 shares and you buy 10 of them, you have 1% ownership in the company’s stock. These are traded in the secondary market when institutional investors and HNIs sell the securities bought during the IPO.
2. Mutual Funds
Mutual Funds are investment assets that pool money from various investors to purchase a diverse range of securities, such as stocks, bonds, and other assets.
These are managed by professional fund managers who pool money from investors and put it into different financial assets in the stock market to maximize profitability and minimize risk through diversification. Mutual funds are a great choice for beginners or investors who want a diversified portfolio and decent returns over time.
3. Bonds
Companies release bonds to borrow money from various investors who receive regular interest payments in return. Investors provide the companies with the required funds, and they receive monthly interest payments along with the invested principal amount upon bond maturity. Investors who are looking for regular income in return for their invested money can consider trading bonds in the stock market.
4. Derivatives
Derivatives allow future trading, helping investors protect their financial instruments against market volatility. It is like a contract between the buyer and the seller where the trade of a financial asset is fixed at a future price.
For example, if A buys 100 shares priced at Rs. 50 each from B, with the contract expiring on a particular date. Now, even if the price of that share rises, A can receive the delivery of shares at Rs. 50 each after the contract expires, or they can keep the profits.
Understanding Stock Market Basics: Terms & Definitions
Before you plan to invest in the stock market, you must be aware of some terms and definitions that come under stock market basics:
1. Demat Account: A demat (or dematerialised) account is a digital account where you can trade, hold, and manage your shares or other financial instruments of the stock market. It allows you to manage all your holdings online without the hassle of getting printed certificates.
2. BSE: BSE stands for Bombay Stock Exchange, which is the first and largest securities exchange market in India. It was established in 1875 and provides a convenient platform for stock trading and securities exchange.
3. NSE: NSE stands for National Stock Exchange, which is the second-largest stock exchange in India and the first to implement electronic trading in the country. According to WFE (World Federation of Exchanges), NSE is also the fourth-largest stock exchange in the world in terms of the trading volume of equities.
4. Stock Trading: Stock trading is the process of buying and selling shares of a company in the stock market. The ones who perform this process are called stock traders or investors.
5. SEBI: SEBI stands for Securities Exchange Board of India. It is a regulatory body responsible for overseeing all the transactions of the stock market to prevent fraudulent activities by companies, traders, brokers, or investors.
6. Sensex: BSE has a collection of the top 30 stocks in terms of market capitalization. This collection is known as the Sensex.
7. Nifty50: Nifty50 is NSE’s collection of the top 50 companies listed under its stock exchange.
8. Stock Market Index: A stock index or stock market index is an index that measures the performance of the stock market or a market segment.
9. Investment Portfolio: An investment portfolio is the collection of all financial assets held by an investor. It can include stocks, mutual funds, bonds, derivatives, gold, property, etc.
10. Bull Market: A bull market is the phase when the economy grows and customers spend more. This is when companies are likely to earn more profits, and share prices may go up.
11. Bear Market: A bear market is the phase of economic slowdown when companies are likely to earn less profit as customers spend less and GDP drops. This is when share prices may fall.
12. Ask price: The ask price is the lowest price at which a seller can sell the stock or shares of a stock.
13. Bid Price: The bid price is the highest price at which an investor or buyer is willing to buy shares of a stock at a given time.
14. IPO: IPO or Initial Public Offering refers to when a company sells its securities in the primary market for the first time. The funds raised from the IPO are the largest source of money for the company.
15. Dividend: A Dividend is a percentage of profit that a company distributes among its shareholders when it earns profits. This can be offered in the form of cash payments or stocks.
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FAQs
1. What are the basics of stock market investing?
Ans. Some important stock market basics that every stock trader should know are: demat account, ask price, bid price, IPO, BSE, NSE, Sensex, Bull Market, Bear Market, Investment Portfolio, diversification, etc.
2. Is the stock market the same as the share market?
Ans. The terms stock market and share market are used interchangeably, but are slightly different. A share market is where only the shares of companies are traded. On the other hand, stock markets facilitate the trade of multiple financial instruments, such as shares, mutual funds, bonds, derivatives, etc.
3. Do I need a Demat account to invest in the stock market?
Ans. Yes, you need to have a demat account to invest in the stock market.
4. What are the main types of stock markets?
Ans. Two main types of stock markets include the primary market and the secondary market.
5. What are the risks involved in stock market investing?
Ans. Stock market investing is always subject to fluctuations and risks. Therefore, it is advisable to have a diversified portfolio of investments and invest in a company only after thorough research.
