stock market basics

Stock Market Basics: How Stock Market Works: 2024 for Free

Learn Stock Market Basics for 2024 to Earn Big & Live Big!!

Stock Market is not a “Big Deal”; trust me it is made for common men like you and me only. No, matter what is your school back ground weather it’s Science, Commerce or Arts, you will get all stock market basics on this single page. Don’t worry no, serious math is required to start stock trading and apps and calculators are always there to help.

If you have a thought in your mind to invest in share market but don’t know anything about it, then you are at the right place. We will give you all necessary stock market basics like; Terms, Stock Exchanges, BSE, Nifty, How it works and much more. We will do bigger things later and in-depth.

Stock Market is a place where common people and organizations do the trading (sale and purchase) of some percentage of shares which are issued by companies listed under stock exchanges like BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). {BSE, NSE; further explained, see FAQs in the end of this post}

What is a Stock Market?

Companies sell their share for raising the funds so that they can expand their businesses. When people or other organizations buy these share they become the part-owner of those companies. The money collected by selling the share helps these companies to grow bigger. It also shows the country’s economic performance and keeps the investors confident.

Let’s make it simpler:

Share Market: It’s also called Equity Market or Share Bazaar, everything is same don’t get confused with the big terms they sound technical but the meaning is same, If you own a “Share” of some company it mean you became the owner of that company according to your share percentage, for an example; if the companies total or worth value is Rs.100/- and you have purchased Rs.2/- shares of that company than at that point of time you becomes the owner of 2% (sometimes this 2% makes you a game changer in that company). Stock, Equity or Share simply means the ownership.

However it doesn’t mean that if you buy a few shares of some company then you became the full owner. No, the owner is one who has the biggest share of that company, he is the decision making authority.

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Listing the business:

Suppose there is a “XYZ Pizza Private limited Company”, which is a local based company in a small town like “Shimla” and they are doing good. Now they want to expend there business to PAN (whole) India. They want to start there 100 outlets in 20 different big cities but for that this company needs more money what they don’t have so, they will go to “Stock Exchange” and ask them that they want money and in return they will give their company’s share to the public (share buyers) and they will get the ownership of the company according to their share percentage.

IPO:

When any company does the exchange of shares against money for the first time it is called IPO-Initial Public Offering.

Why companies issues IPO instead of taking loan from Bank:

  1. IPO gives freedom to the company raise large funds by selling their shares what bank might not.
  2. Bank loan has to be paid with interest but in IPO there is no compulsion for interest because the ownership remains with the company.
  3. Bank loan can increase the debt burden of the company but in IPO capital is divided among the share holders because buyers are part-owner of profit and loss.
  4. Entering the market with an IPO can increase the reputation and credibility of the company and make it more visible and trustworthy in eyes of investors and partners.

Categories of Investors in stock market:

Retail Participation: Retail participants are amateur investors. A huge number of them are part-time investors so generally they invest smaller amounts so; they are called “Retail Participants”. Mostly is common public who doesn’t want to take big risks. Because of small trading capacity sometimes retail investors pay high fees and brokerage however there are a few online brokering companies which charge nominal fees sometimes less than 1%.

HNI – High Net Worth Individuals : They are the professional Investors they invest higher amounts between INR 5 lakh to INR 5 crores.

VHNWI -Very High Net Worth Individuals: The name tells everything, they start their investments from INR 5 crores, it means they are very high value investors who invest between INR 5 crores to INR 25 crores.

QIB – Qualified Institutional Buyers: They are seasoned investors known for their financial capability in the capital market. As per the DIP Guidelines (Disclosure and Investor Protection), QIBs cover various bodies like public financial institutions, scheduled commercial banks, mutual funds, registered foreign institutional investors with SEBI, and more.

Some prominent Indian QIBs include LIC (Life Insurance Corporation of India), SBI (State Bank of India), HDFC Mutual Fund, and registered foreign institutional investors operating in India. These bodies, along with others mentioned in the DIP Guidelines are considered as QIBs. This recognition allows them to participate in the initial provision processes without needing additional SEBI registration.

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How Does the Indian Stock Market Work?

To enter and start trading it’s important to understand stock market basics. Below is the step-by-step explanation how it actually works.

  1. Stock Market:

Stock Market is a place where investors buy and sell their shares of the publically listed companies.

  • Stock Exchange:

Stock exchange is a platform where trading is done. There are two major stock exchanges

NSE (National Stock Exchange) and BSE (Bombay Stock Exchange)

  • Brokerage Account:

This account allows you to start trading in share market, this account works as a mediator between buyers and sellers generally handled by your trusted broker registered with SEBI.

  • Research for Selection of companies:

Research the companies carefully because this is the decision making time for purchase of shares, if you are new to share bazaar then take your broker’s advice. Always appoint a reputed and experienced broker who knows the companies strength, performance, current news, upcoming market trends and can do calculative predictions.

  • Purchase of Share:

Once you have decided to chose a share call your trusted broker, ask him the number of shares you want buy. This can be done online as well; there are few top trustworthy, top rated apps available. Please use your intellect while choosing online broking company apps or website.

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  • Business Execution :

When you place an order to buy, the exchange matches it with some other investor’s selling their shares. If both agree on a price, the trade goes on, and congratulations, you’re now a shareholder in that company!! This practice is like a marketplace where buyers meet up sellers, and when they agree on price, the deal is completed, making you a part-owner of the company you invested in.

  • Stay Alert about your Investments:  Share prices can change due to market trends depending upon that how well the company is doing? Always check the news and other external factors affecting company’s report. Make your mind up on selling based on what you want to achieve with your investments. Keep a close watch on your investments, making changes when necessary to support among your financial purpose.
  • Selling Shares: when you are ready ask your broker to sell the shares, when the sell order matches the buy order trade happens. Always keep in mind, investing involves risks, so do your research work and take advice from financial experts.

Most important terms to learn before you enter share bazaar…

Common Indian Stock Market Terms

M.Cap: Market capitalization (M.Cap) stands as the entire value of a company’s shares available in the stock market. Calculating it involves multiplying the current share price by the total count of shares issued by the company. This provides valuable insight into a company’s market standing and value, showing a clear evaluation of its position in the market.

How To Calculate M.Cap: Suppose some company has 1,00,000 shares and it releases an IPO on Rs.100/- than the M.Cap becomes 1Cr. Explanation : 1,00,000 shares x Rs.100/- = 1cr M.Cap.

Valuation: It refers to the analytical process of evaluating the current or expected value of an asset or company. This analysis involves different methods. When evaluating a company, an analyst considers aspects such as its management, capital structure, potential earnings in the future, and the value of its assets in the market, among other essential factors.

Dilution: Dilution in the stock market occurs when a company issues more shares, which can lower the ownership percentage for existing shareholders. For example, imagine owning 5 out of 50 shares in a company, giving you 10% ownership. If the company decides to release 25 more shares, making a total of 75 shares, your ownership might decrease, even if you still have 5 shares. Your ownership percentage might drop to 6.7% (5 out of 75) because there are more shares available overall, spreading the ownership thinner among shareholders. This dilution often happens when companies issue new shares to gather funds, impacting existing shareholder’s ownership stakes.

Bid: The “bid” signifies the maximum price a buyer is keen to pay for a particular quantity of shares of a stock at a given moment.

Ask or Offer: In the Indian stock market, “ask” means the minimum price at which a seller is willing to sell a stock, while “bid” means the maximum price a buyer is ready to pay. When buying, you pay the ask price, and when selling, you receive the bid price. Normally, the ask price tends to be a little higher than the bid price.

SEBI: SEBI (Securities and Exchange Board of India) stands as the regulatory authority of Indian Stock Market. It’s the protector ensuring fairness, transparency, and investor protection in the securities area. Its primary focus is on investor’s welfare, fair market practices, and the orderly conduct of stock exchanges; SEBI makes regulations, monitors stock exchanges, and supervises key market players like brokers and merchant bankers. This regulatory authority plays a very important role in boosting confidence among investors and nurturing a secure, transparent, and trustworthy stock market environment throughout India.

Sensex: Sensex is shows the market index of popular 30 companies that are listed under Bombay Stock Exchange. It shows the up to date stats and figures of trading stock index of the leading companies of India listed in this index at present. It is a mixture of two words “Sensitive” and “Index”.

Dividend: It is a small part of profit shared by the company with their investors. This amount can vary according to the performance of the company. It is kind of bonus amount for the investors to keep them motivated.

NIFTY: NIFTY stands for an index monitoring the top 50 companies listed on India’s National Stock Exchange (NSE). This is kind of scoreboard displaying the performance of these leading companies in form of stats and numbers. NIFTY acts as a compass, showing investors the overall market trend by reflecting how these key companies are performing. It’s a critical index used to evaluate the market’s situation and serves as a foundation for financial products such as index funds and futures contracts.

Bank Nifty: The Bank Nifty is an index within India’s stock market that specifically monitors the performance of banking sector stocks listed on the National Stock Exchange (NSE). It includes major banking and financial institutions. This index acts as an indicator offering investors a picture of how the banking industry is performing within the stock market. Movements in the Bank Nifty index reflect shifts in the financial sector. This impacts the decision making of investors and strategies specifically concerning banking stocks.

Bull Market: In Indian stock market, a “bull market” represents a positive view where investors forecast or witness a flow in stock prices. It signifies a positive outlook and an expectation of market expansion. When an investor adopts a “bullish” stance, it reflects their positive expectation of higher prices, prompting increased buying activity. A “bull market” in India indicates a constant period of rising stock prices, representing economic growth and higher investor confidence.

Bear Market: A “bear market” in the stock market means a time when stock prices keep dropping for a while. It’s like a phase of negativity where investors expect or see the market going down. A “bearish” investor feels negative, thinking prices will fall more and often sells stocks. During this period the market is slower and lower investor confidence because of a belief that the prices will keep going down.

Risk and Rewards: Entering the Indian stock market brings both risks and rewards. For beginners, market ups and downs and limited experience can lead to uncertain and potential financial losses. But by researching well and spreading investments, beginners can reduce these risks. Despite challenges, the market offers chances for financial growth. If one can handle these risks smartly then he can find rewarding opportunities.

Conclusion

In this article we focused on stock market basics, we’ve prepared beginners with important and helpful information. Exploring fundamental concepts, basic terms, and the details of share price fluctuations, we have also provided a step-by-step guidance from the initial purchase to the eventual sale of shares. This resource serves as an essential starting point for individuals entering into stock market investments.

Never leave the FAQs! you are almost done, keep reading…

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FAQs

  1. Difference between Brokerage Account and Trading Account?

Answer: In the stock market, a brokerage account is your core account for managing investments, where funds and securities are managed. On the other hand, a trading account is the actual trade doing platform for buying and selling stocks or securities. The brokerage account serves as the storage area, while the trading account handles transactions in the stock market. Both work together to help investors in their trading activities.

  • What is a Demat Account?

Answer: Demat account (Dematerialized Account) is a digital safe for securities and shares. It converts physical certificates into electronic form; it simplifies the storage and management of investments. Like a digital vault, it securely holds various securities such as stocks, bonds, and mutual funds in an electronic format. This account simplifies trading, transfer, and keep the investments safe, ensuring a hassle-free and secure process for stock market transactions in India.

  • Difference between BSE and NSE?

Answer: BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) stand as India’s top stock markets:

BSE was established earlier then NSE, well-known for the Sensex index, uses a blend of electronic and open manual trading market.

NSE was founded later; it is renowned for the Nifty 50 index, conducts trading entirely electronically.

Both serve the investors in their best way, both implements SEBI regulations but their methods of trading are in some way different.

Among these, the NSE is significantly larger, handling more than 90% of cash trades in the country’s stock market. Essentially, it highlights the dominance of the NSE in terms of trading volume compared to the BSE.

  • What factors affecting stock prices and market ups and downs?

Answer: Stock prices can fluctuate due to multiple factors, depending upon company performance, economic indicators, market trends, geopolitical changes, and investor sentiment. Favorable news or developments often push prices upwards, whereas adverse events or situations might cause declines in stock values.

  • How can beginners reduce risks while investing in the Indian stock market?

Answer: As a beginner one can start by investing across diverse sectors or assets. See your comfort with calculative risk is the key. Do a thorough research and learn the stock market basics before investing, especially in companies.

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