Everyone wants to be rich wants to achieve their life goals so they decide to make investments some invests in gold, some invests in real estate and some decides to enter in stock market. But you know what entering in stock market without any knowledge may results in losses. Some people enters into the market without getting any knowledge and when they bear losses they use to defame stock market and call it gambling. So if you want to enter in stock market or you are a beginner then today's article is for you. I know if you are a beginner then there are many questions occurring in your mind like what is stock market and how does it work?... how to invest in stock market, what is demat account, what is BSE and NSE, what is nifty and sensex and many more questions. So in this article we are going to find the answers of almost all the questions which occurs in beginners mind. If you know everything about the market and already investing you can skip here or if still want to read then you can.
Contents;
- What is stock/share?
- Why companies list in stock market?
- What is Ipo?
- What is SEBI?
- What is stock exchange?
- What is Nifty and Sensex?
- What are stock brokers?
- What is demat account?
- How the price of stocks decides?
- How the stock market works?
- What is intraday and equity delivery?
- What is bear market and bull market?
1. What is stock/share?
A stock is a certificate form of an ownership of a company. On the other hand a share is the unit of stocks which describes a little partnership in a company. Let's say you have bought 10 shares of xyz company then you become a shareholder or a little partner of that company. The stocks of the companies are use to buy or sell on stock exchanges through the stock brokers. Don't panic we will study about stock exchanges and stock brokers further in the article.
2. Why companies list in stock market?
I know this question may definitely occurred in your mind at least once that why companies list in the stock market? Lets understand this by an example lets say you have opened up a company and you need funds to expand your business. Where will you go to arrange the funds? If you go to the banks to ask the loans then you have to give that funds back to the banks with the interest. So in simple words companies list in stock market arrange the funds to expand their business. They arrange the funds from public by give them a little partnership of their company.
Let's say company xyz needs 1 lac's dollars to expand their business so the company issues 1000 shares at a price of 100 dollars per share and collect funds by selling them to public. Now, that 1000 shares of that company will be bought and sold between the investors, the company doesn't have any role in buying or selling of the shares after that.
3. What is IPO?
IPO (Initial Public Offering), is type of launch through which a company offer their shares to the investors whether they are institutional or retail investors.
The company which issues IPO in stock market sell a particular percentage of partnership to the investors to raise the capital. The reason of capital raising could be anything like if company want to expand their business, decrease their debt, increase their products varieties it could be anything.
Lets understand by the example, Ujjivan Small Finance Bank Limited incorporated in 2017 launched their IPO in dec. 2019. The no. of shares they sold from IPO is around 20.8 crores shares and raised the capital approx. rs. 750 crores to expand their business. I like this stock also and I also have this in my portfolio.
4. What is SEBI?
SEBI (Securities and Exchange Board of India) founded in 1992, Just like the IRDAI (Insurance Regulatory and Development Authority of India) regulates whole insurance industry, the SEBI regulates the whole securities and exchange market of India. The mutual funds, stock market, stocks exchanges, Stockbrokers, all related to the securities works under the regulations of SEBI.
The main purpose of SEBI is to regulate and monitor the activities of the market if that happening in the systematic manner or not or if there are any fraud or scam exists. The another function of SEBI is also to protect the interests of investors in the securities in market.
Also, SEBI has the power to pass the judgment against the frauds and scams happening in the market. SEBI has the power to examine the Book of accounts and identify if any regulatory violation is happening and it can pass the judgment against them.
5. What is stock exchange?
Suppose you want to buy some groceries for your home then where would you go to buy? Of course on a general store retailer. stock exchange is the place where the shares of a company, commodities, bonds traded by stock brokers and traders during the specific trading hours . If you want to buy or sell a stock you have to inform your stock broker that you want to buy or sell this particular stock then your stock broker puts an order of buy or sell on the stock exchange on your call. And if there any order has been placed at the same price then the transaction will take place.
There are two stock exchange in India BSE (Bombay stock exchange) and NSE (National Stock Exchange).
The Bombay stock exchange is the oldest in India it was established in 1875. The no. of companies which are listed on BSE is around 6000 also it is one of the largest stock exchange in the world along with the Nasdaq, London stock exchange group, New york stock exchange. The performance of Bombay stock exchange is determined by sensex.
The National stock exchange was founded in 1992. There are around 1952 companies are listed on National stock exchange. The performance of National stock exchange is determined by Nifty 50.
6. What is Nifty and Sensex?
Suppose you want to know a student whether he is good in studies or not then how would you determine ? By his annually report card right. So Nifty and Sensex works as a report card of the Indian stock market. You can find out the performance of the market as compare to yesterday, one month ago, or the specific time period you want using these indices.
Nifty shows the performance of the companies listed on National stock exchange. Nifty includes the top 50 companies listed on National stock exchange. It shows the average performance of those 50 companies compare to one day ago. You can make a guess of performance of the whole stock market by seeing the performance of Nifty.
Sensex shows the performance of the companies listed on Bombay Stock Exchange. The top 30 companies from the companies which are listed on Bombay stock exchange includes in sensex. Sensex shows the the average performance of that 30 companies as compare to one day ago and it is used to guess the performance of all the companies listed on BSE.
7. What are stockbrokers?
See you cannot trade stocks directly on stock exchanges as it is not allowed. So the purpose of the stockbrokers is trade stocks on stock exchanges on the investor's call by charging a little trading fee called brokerage. Stockbrokers may be a licensed individual or an organization but most of the time they are organisations. Some famous stock brokers in India are Angel broking, Zerodha, 5 paisa etc. If you want to invest or trade in stock market you need to open up a trading account along with a demat account at the stockbrokers. If you want to buy a particular stock at a specific price you need to place your order to the stock broker then the stock broker will find the sell order at the same specific price and will buy the shares for you and credit to your demat account.
8. What is demat account?
You need an account if you want to store anything whether it is money or stocks. If you want to store your money you opens a savings accounts and if you want to store financial securities like stocks or bonds you need to open a demat account. The stocks or bonds will be stored in demat account in the electronic form. The full form of demat account is dematerialised account. Earlier when the demat account didn't exist the selling or buying process were too long as it is a totally an offline process and you get the share documents in certificate form. Now what the demat does is it convert the physical form into the electronic form and you can trade the securities online you don't need to go through an offline process. And also there is no chances of frauds if your stock broker bankrupted still the stocks will be stored in your demat account. You can shift to the another stock broker.
9. How the price of stocks decided?
We usually see that a stock which was close at a different price yesterday opens at slightly different price the next day and also the price of stocks changes during the whole day until the market opens. So why this happens? The answer is simple, see its all depends on demand and supply as like in gold. If the demand of a particular thing increase the price of that particular thing will also increase. Whenever the buyer will be more than the sellers the price of that particular thing will increase because the demand is high and supply is less. Soever when the demand is less than the supply the price of that particular thing will be decreased.
We usually see when a bad news comes in a company the prices of the stock of that company starts to decrease rapidly because at that time no one wants to buy the stocks of that company and if it is a good news then the price of the stock increases in unexpected way.
Lets understand by an example, recently in june 2020 when the Glenmark pharmaceutical Ltd. gets approval for the drug manufacturing for the treatment of the patients having mild symptoms of coronavirus the price of the stock of the company went up by 40% because it was the first company at that time which got approval for the coronavirus anti drug and demand for the stock increases.
click here to read the article about gold investments.
10. How does stock market works?
First of all you need a saving account and then you will need a demat and trading account to invest or trade in market. The saving account will directly be connected to your trading account and your trading account will be directly connected to your demat account. Then if you want to trade in stock market you need to transfer the funds from your saving account to your trading account then when you place an order of buying or selling to your stock broker they go to the stock exchange and find same order at the same specific price and when the transaction will be completed funds will be debited from your trading account and stocks will be credited to your demat account.
I know its quite confusing lets understand by an example, lets say you want to buy 100 shares of ABC company and the price is 10$ per share. So the price of the 100 shares will be 1000 $. Now you need to transfer 1000$ from your savings account to the trading account first and then you will have to place the order of buying to your stock broker. Your stock broker will go to the stock exchange and will try to find the same order of selling 100 shares at the price of 10$ and if the shares are found at your desired price the broker will bought it for you, 1000$ will be debited from your trading account and the 100 shares of that particular company will be credited to your demat account. But the stock broker will charge some amount as transaction fee called brokerage. But these days many stock brokers came into the market at discount brokerage like zerodha, upstox, 5 paisa. I personally use Zerodha because it doesn't charge any brokerage on buying in delivery.
11. What is intraday and equity delivery?
There are two types of players in the market, the purpose of both the player is just to make profit but their strategies are different. One is try to make profit by holding the shares for long term and another is try to make profit by holding the shares for short term buying at low and selling at high. When you place an order at your stock broker you need to inform them that whether you are buying in intraday or in delivery.
The strategy in the intraday is to buy the shares in same day at low price and sell it at high price. In intraday strategy you cannot hold the shares to another day you need to sell it whether you are in loss or profit. If you won't sell it will automatically be sold by the stock broker just before the market about to close. For intraday you need a very high knowledge of charts and technicals. Most of the people loose their money in this strategy. I will strongly suggest you to stay away form this strategy.
In equity delivery strategy you hold the shares of a company for more than one day and try to earn profit by buying at low prices and selling it to high. The great investors hold a stock for many years and earn through the dividend, capital gain, bonuses.
12. What is bear market and bull market?
Bear market- When market is going down continuously for years then it is said to bear market. Now the question is at how much fall the market will be considered as bear market?.... When the market will be fell down 20% from the point at which it is currently then it will be considered as bear market.
Bull market- When the market will going up continuously for the years it is said to be the bull market. Similarly as bear market if it will be going up by 20% from the current point it will be considered as bull market.
But have you ever think why this happens for years??? See when a person make profits in a bull market he will invest more and will suggest to others also and the demand increases automatically because many new investors enters into the market by seeing the returns in the bull market. Whereas in bear market many investors starting loose their capital and exits from the market for short term even many investors do not enters in the market again. And the new investors which are thinking to enter into the market do not enters because of bearish market. So once market start to fall down it fall for a long time. But always there is an big opportunity in the bearish market because many strong fundamentals stocks are available at the discounted price. Even Warren Buffet has said
"It is wise to be fearful when others are greedy and greedy when others are fearful."
Means it is always dangerous to invest in bullish market because once it start to fall it will be fall in unexpected way and there is always an opportunity in the bearish market because many strong fundamental stocks are available at very discounted price.
If you want to learn investing and how to analyse a stock like the experts you can read the book "The Intelligent Investors" by benjamin Graham. Even the master mind of the market Warren Buffet has suggested the book to the beginners. The name of the book includes link you will be redirected to the amazon by clicking it and can buy it from there. If you buy the book from this link I will get a little commission the price of the book will be same whether you buy it from my link or directly from amazon.
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Summary
Share market is a place where companies goes to arrange funds from the investors by selling a little ownership of the company in the form of shares.
Company sell the partnership by launching IPO (Initial Public Offering)
BSE and NSE are the two stock exchanges in India.
Nifty and Sensex are the indices which is used to determined the stock market.
You need a demat account to trade in the stock market.
Final say...
I have shared with you almost all the things which a beginner should know about the stock market before enters into it. But still you are not ready for investing in stock market if you want an article on how to invest money in stock market as a beginner then comment down. If you think anything is left in the article you can comment down I will cover that in the next article.
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