Do you wish to try your luck in the share market?
“We think you should not. Instead, save your money and invest it somewhere else.”
The Stock Market is not about gambling and luck. People with the “luck” and “get rich quick” mindset or a piece of random investment advice end up losing their hard-earned money. So, don’t be one of those people.
You may ask “what is the right mindset”, here is our opinion:
We all know that knowledge is power, and the same holds true in the share market. Here, a curious person who first focuses on understanding the stock market and accumulating more and more information is considered to have the right mindset.
If you are a curious soul, this blog is going to help you a lot because you are going to read about all the basics of the share market that you must know before entering the market.
Without further ado, let’s jump straight into the questions and concepts regarding stock market basics that have been bugging you for a while now:
What is the Stock Market?
In simple terms, you may consider the stock market as the place where shares and other financial securities are traded. Can you just walk into a grocery store and demand medicines? No, because you will get the medicines at the medical store.
Similarly, you need to turn to a stock exchange if you wish to buy or invest in shares or any other securities. You also need a savings account and Demat and trading account to be able to trade stocks on the exchange. The share market consists of multiple stock exchanges that facilitate us to buy and sell any of the financial institutions like shares, bonds, debentures, etc.
Also read: What is Stock Market? & How does it work?
Some of the most prominent stock exchanges around the world are:
- NASDAQ or National Association of Securities Dealers Automated Quotations in the United States
- NYSE or New York Stock Exchange in the United States
- EURONEXT or European New Exchange Technology in Europe
- NSE or National Stock Exchange in India
- BSE or Bombay Stock Exchange in India
- Shanghai Stock Exchange in China
With this settled, let us now focus on the basics of the stock market that you must know:
What is a stock?
In a general sense, stocks (also known as equity) refer to the holdings of a particular person in one or more companies. Stock is more like fractional ownership over the company. For example:
If Mr. Arun purchases the stocks of A, B, and C companies, it means that he now has fractional ownership over these companies (that equals the percentage of his shares in these companies).
Moreover, Mr. Arun also shares a claim over a part of the profits as per the proportion of his shares in the total number of shares in these corporations. However, his claim also depends on the type of stocks. (Scroll a bit to find the main types of stocks.)
You might be wondering why these corporations issue stock. The simplest answer to this question is that these organizations need money to operate their business, so, they issue (sell) stocks to raise funds.
Before we move further, we would also like to point out an important stock market lesson. You must know that it is the corporations that issue stocks, and in the eyes of law, these corporations are, in fact, treated as legal persons. Yes, it is true!
It is because of this provision that corporations can be sued, purchase land and properties, lend and borrow money, file for taxes, etc. For example:
When people sue Burger King, they are actually suing the Burger King’s corporation.
This also means that the corporation is the owner of all its assets and the shareholders do not have any ownership over the furniture or any other property of its corporate office. Therefore, unlike general belief, purchasing stocks does not imply that you become the owner of the corporation. Instead, you will be called the owner of the shares of that corporation.
What commodities are traded in the stock markets?
To understand the stock market basics and boost stock knowledge you have to know about all the financial instruments that are traded in the stock market.
Quick read: Stock market trade settlement process
There are four major categories of commodities that are bought and sold in the stock markets.
A share is a financial instrument that represents a very small percentage of ownership over a specific company. It is more like a financial asset that ascertains equitable distribution of profit among all the shareholders of the company.
Usually, stocks and shares are the terms that are used interchangeably, but there is a hairline difference between the two. As discussed earlier, stocks represent a person’s holding of shares in different organizations, whereas shares refer to a person’s holding in a single company.
Suppose Mr. Arun purchases the shares of ABC company. As soon as he buys the shares he gets a stake in the company. It means that if the company makes profits over the course of a few years Mr. Arun is rewarded in the form of dividends.
When traders buy and sell shares, they aim to purchase them at a low price and sell it at a comparatively higher price to make profits. It is therefore that most investors wait for the market prices to fall so that they can purchase the shares and wait for the prices to rise to sell their shares.
Also, there is a difference between the stock market and the share market. Usually, both the terms are used interchangeably but it is better to know the difference between the two. No, you don’t have to focus on how to understand the share market separately. The basic knowledge of the stock market covers it all.
As you might have guessed, the stock market facilitates the trading of shares, Mutual Funds bonds, debentures, and other securities. Whereas, the share market is only concerned with the trading of shares.
Just like selling stocks, companies also issue bonds to raise capital for their operations or other company projects. Let us suppose that one of the publicly traded companies, XYZ wishes to borrow money for a specific project. There are two options:
- The company can choose to borrow money from a bank and pay regular installments along with the interest on the loan amount
- Alternatively, XYZ can borrow money from multiple investors in the form of bonds which can be paid off through periodic interest payments
You might not notice much difference between borrowing money from a bank or issuing bonds but corporations prefer bonds over loans from Financial Institutions. Do you know why companies have this particular preference?
The basic reason for this preference is that while lending money, banks decide the interest rate on the amount that a company borrows, but it is the corporations that decide the interest rate on the bonds. Moreover, the rate of interest paid by Financial Institutions in India is generally much higher.
Let us suppose that Mr. Arun’s friend, Miss Ranjitha, purchases bonds of a particular company. Learning the stock market means you should know that she will receive a receipt stating that she has lent money to the company by purchasing the bond.
Now, the company has to pay Miss Ranjitha the total amount of the bond at a definite rate of interest in the form of installments over a pre-decided period of time. You can consider it as an investment that gives you a certain amount of money over a definite time. However, you must have a trading account to buy and sell bonds.
Mutual Funds (MFs)
You might have seen the advertisement where several celebrities including Sachin Tendulkar tell you, “Mutual funds Sahi hai” meaning these funds are the right choice. The main aim of these advertisements is to encourage the masses to invest in such funds.
If you are learning stock market basics you must know about Mutual Funds as well. After all, an introduction to the stock market cannot be complete without the mention of MFs. These funds are considered to be the indirect way of investment in the stock exchanges. Let us explain:
It is quite obvious that a lot of people don’t have the professional knowledge required to trade in the stock market. However, if these people wish to invest in the stock market with their limited resources, what options do they have?
The best option, in this case, is to invest in MFs. When people invest in such funds, a professional fund manager (working under institutional investors) pools the funds of multiple investors, and then the aggregate amount is invested in financial instruments.
MFs are available for a variety of financial instruments including equity, debt, hybrid funds, etc. The main reason behind the popularity of MFs is because of the range of diversification that they offer.
The amount of your investment is pooled with the money of other investors and then invested in different asset classes. This helps in reducing the risk because the problem arriving in one asset class could be easily tackled by the other asset class involved in the entire portfolio.
Moreover, Mutual Fund investors get a lot of tax benefits from the Government of India. Under Section 80 C of the Income Tax Act, a person can invest up to Rs. 1.5 Lakhs to save around Rs. 46,800.
The other benefits of investing in mutual funds are:
- MFs are regulated by the Securities and Exchange Board of India (SEBI), which aims to protect investors
- It is very easy to invest in MFs. In fact, now you even have the option of investing in MFs through various mobile applications
- A Mutual Fund usually offers a high return on investment (ROI) and a positive capital gain
- It is very easy to sell MFs and therefore you do not have to worry about your funds being locked
Also read: How to Calculate Return of a Stock?
Understanding the Stock Market: Types
We have already discussed the stock market basics. The stock market is basically regarded as the facilitator of purchasing and selling stocks between individual investors, institutional investors, and companies.
Just like any other market, the prices of stocks are also determined by the factors of demand and supply. If the demand for a particular stock increases, the stock prices will rise. Whereas, if many traders are trying to sell stocks of a particular company, the stock price is bound to tumble.
With that settled, let us now move on to understanding share market basics. It is important to note that there are two types of share markets and you must know the purpose of each of these markets.
Primary Stock Market
When a corporation has to offer stocks and bonds to the public for the first time (with the sole purpose of raising money), it is done on the primary stock or share market. The company issues a pre-decided amount of stocks in order to raise funds.
You might have recently heard a lot about PayTM IPO. Do you know what is meant by the term IPO? When the companies sell shares or other securities in a primary stock market for the very first time, it is known as an initial public offering or IPO.
In this market, a person purchases a company’s stock directly from the company. Thus, it offers high chances for even an average investor to exchange-traded funds in the Secondary market to book short-term capital gains.
Secondary Stock Market
As soon as the stock trades in the primary market finish, the financial instruments enter the secondary market, where the assets are sold by stock traders and online brokers. Trading in the secondary market is done among brokers and investors at the prevailing stock prices in the market.
Decoding the Basic Terminology Used in Entire Stock Market
When it comes to stock trading, understanding stocksis easy but there are numerous terms that can confuse anyone. So, we have explained a few of the most prominent terms used in the stock market for your reference:
Bull Market: Be it the share market or the securities market, any market is considered to be a bull market if there is a gain of more than 20% in the market. When individual stocks rise more than 20%, their charts show a bullish trend.
Bear Market: When the market observes a drop of more than 20%, it becomes a bear market. When individual stocks show a dip of 20% or more in the current market price; their charts show a bearish trend.
Stock Market Correction: A stock market correction is basically a profound term to refer to a dip of 10% to 20% in the major market index. Usually, expert investment decisions are made after considering the correction factor.
Stock Market Crash: When there is a steep decline in the main indexes of the market, the phenomenon is termed a crash.
Stock Market Volatility: When the buyers and sellers are opposing each other, the prices in the market fluctuate more than usual. In this case, the market is termed volatile.
Stock Traders: When people use investment vehicles to buy and sell equity shares and other financial instruments in the market, it is called stock trading. The people who do it are known as stock traders.
Portfolio: You can consider your portfolio as an imaginary bag in which you keep all your investments. You might have often heard that one of the leading share market basics is to maintain a diversified portfolio and it means that you should diversify your financial investments.
Dividends: A dividend is an amount that all the companies pay their shareholders from the profits.
Indian Stock Market Exchanges
The Indian stock market works on the same principles as any other stock market in the world. There are mainly two stock exchanges in India. They are:
BSE (Bombay Stock Exchange)
Established in 1875, BSE Limited, or the Bombay Stock Exchange is the oldest exchange in Asia and is located on Dalal Street in Mumbai. BSE also holds the reputation of being the fastest exchange in the world.
NSE (National Stock Exchange)
Established in 1992, NSE was the first exchange in India with a fully automated screen-based electronic trading system. Located in Mumbai, NSE became a leading stock exchange of the nation because of its advanced features and the convenience offered to the investors.
Types of Stock
There are different types of stocks offered by corporations. Some of them are listed below:
- Common stock: ordinary shares or equity shares that give the right of of dividends, assets, voting, etc.
- Growth stock: a stock that keeps increasing in capital value
- Penny stock: any stock that is valued at less than $1
- Blue-chip stock: reputed stocks that are generally profitable
- IPO: the stock that is listed for the very first time in the market
- Cyclical stock: stock that is easily manipulated to change it the economy
- Restricted stock: non-transferable stocks that are issued to corporate affiliates
- Large-cap stocks: shares of companies with a market capitalization of over Rs. 20,000 crores
- Mid-cap stocks: shares of companies with market capitalization between Rs. 5,000 to 20,000 crores
- Small-cap stocks: shares of companies with market capitalization under Rs. 5,000 crores
- Income stocks: stocks offering regular and steady income
- Safe stocks: low-risk stocks
How to Buy Stocks?
Follow the steps mentioned below to buy stocks:
- Open a Demat account and trading account
- Do your research to decide which stock should you invest your money in. You can also consult an investment advisor to be on the safe side
- Decide how many shares you want to buy
- Place the order after choosing your order type.
If you do not have much experience we suggest practicing through paper trade and availing yourself of brokerage services through online brokers in the initial phase until you become comfortable.
You are responsible for your personal finance, and therefore you must do your research before making any financial decisions. If you are still wondering how to understand stocks, feel free to get in touch with us.