We have heard about the stock market from different sources or through people in our surroundings. But do we exactly know what the stock market actually is, and how does it work? So here we are with “Stock Market for beginners” to brief you about the stock market basics like – what is a share? From where can we purchase this? Overall, we will tell you about all the basic and simple things, which a beginner needs to know to enter the stock market.
A Guide to Stock Market for Beginners
As a beginner, you should be familiar with certain key terms which are widely used in the stock market. Like financing, IPO, stock exchange, Demat account, BSE, NSE, and a lot more. So, let me give a guide to the stock market for beginners.
What is financing?
For the growth and expansion of the business, funds are required. There are different ways of raising funds like from Bank loan, Angel Investors or Venture capitals, Stock Market, etc. The raising of these funds are further divided into two categories-
- Debt Financing, and
- Equity Financing
Debt, in a simple word, is a Loan. In debt financing, the raised money has to be returned by the company to the firm with interest. The best example of debt financing is bank loans. As when any company has taken a bank loan they have to return the same amount with interest to the bank, in a given time period.
Equity financing is simply defined as raising fund from the Stock Market. There is no need for returning the money or interest to the investors in Equity Financing. The company provides stake to the investor in their company in return of funds.
What is the Stock Market?
While talking about the Stock Market for Beginners, we need to talk about what the stock market actually is. The stock market is simply a platform for investors where anyone whether rich or poor can buy and sell shares of the company and become a part of the company. A stock market is a place for the company where it can raise funds from the public. The companies which raise funds from the public by providing them stake in the company are known as Public Companies. There are mainly two ways through which a company can raise funds- IPO & Stock Exchange.
Initial Public Offering ( IPO )
When the company raises funds for the very first time from the public it is called Initial Public Offering. In IPO there is a direct transaction between companies and investors as the company raises fund from the investors and provide stake to the investors in their companies. For example, in March 2017, The Avenue Supermarket which is a parent company of D-Mart issued its IPO. In the IPO, Avenue Supermart raised an amount of Rs. 1870 crore from the investors and provided them with a 10% stake.
We get the same stake in the company as the number of shares purchased by us. In an IPO, companies along with the Investment Banks decide the price band, that is, the price of the share. An IPO is open for three to ten days. Usually, it opens for 3 days after which there is an allotment of shares to the investors. We can only purchase shares in an IPO and not sell them. To sell them we have to wait for the listing of those stocks at the stock exchange. After the stock listing, interested investors can purchase shares from the stock exchange and become a stakeholder in the company. When we sell shares the ownership in the company is also transferred to the investors who purchase the shares. Likewise, the shares purchased in IPO are exchanged in the stock market.
A stock exchange is a facility where stock brokers and traders can buy and sell securities, such as shares and bonds and other financial instruments. The stock exchanges often function as “continuous auction” markets with buyers and sellers in a trading platform.
A stock exchange is often the most important component of a stock market. It is a meet up of stock buyer and sellers and there is give and take of shares by seller and buyer. This is an online process, you can buy and sell shares online from anywhere through the website. Stock exchange uses the Automatic Order Matching System method, so when the order of buyer and seller matches, the transaction is completed.
We can purchase a share from an IPO or stock market with the help of a Demat Account. For investing in the stock market its compulsory to have a Demat account. The Stock Brokerage Firms are the mediators through which we can buy or sell the shares for which we have to pay some service charges to them.
A Demat account is the same as a Bank savings account. For example, like we keep money in bank saving accounts similarly we keep shares in Demat account. We usually open a Trading account with the Demat account which helps us to buy and sell shares. And to keep the purchased shares we use the Demat account. To open a Demat A/c we require basic documents like:-
- PAN Card
- Address Proof – like Aadhar Card, Voter ID, etc
- Bank Details – like a copy of bank passbook or canceled cheque.
After the opening of a Demat A/C, there are three ways to trade shares, by
- any Stock Brokerage Firm or its mobile application
- the website of Stock Brokerage Firm or its software
- directly calling the Stock Brokerage Firm
Some stock brokerage firms do not require us to maintain a minimum balance in the account. So, from small savings, we can easily trade in the stock market. Always open Demat A/C in those firms whose service charges are low and also match our requirements. We can easily buy or sell shares in trading time of stock market i.e 9:15 AM to 3:30 PM with the help of Trading Account.
Introduction To The Indian Stock Market
There are two kinds of investors in India: those who know about the investment opportunities in India and those who don’t. Upon closer inspection, you will find the things you would expect from any promising market. Here we’ll provide an overview of the Indian stock market and how interested investors can gain exposure.
The BSE and NSE
Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875 and has more than 1600 listed companies. The NSE, on the other hand, was founded in 1992 and started trading in 1994. It has more than 5500 listed firms.
However, both BSE and NSE follow the same trading mechanism, trading hours, settlement process, etc. There are Indices in the stock market for the tracking of stock exchanges and update of the stock market.
Sensex = Senstivity + Index
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the main index of BSE. It comes from the collaboration of two words Sensitivity + Index. Sensex is made from the 30 well-established firms of the different sectors and the movement of Sensex depends upon the performance of these 30 companies.
Nifty = National + Fifty
Another Index is Nifty of NSE. It is made from the combination of National + Fifty. Fifty signifies the 50 firms which are involved in Nifty. These two indices cover different sectors like Pharma, IT, Energy, Telecom, Financial services, etc. So the performance of the indices provides the performance of the stock market.
Nifty and Sensex combined covers all sectors in the market. That’s why the performance of Nifty and Sensex is considered as the performance of the stock market. People directly know the status of the stock market from Nifty and Sensex. There is no need for individual tracking of companies. So we can conclude that when Sensex and Nifty rise the performance of the stock market is good and when both fall we can say the stock market is performing badly.
Profit Return to Investors Through Stock Market
Everyone invests in the stock market for more return. Basically, there are 2 types of benefits of investing in the stock market which is Dividend & Capital Appreciation.
When a company distributes a share of the profit to the shareholders then it called Dividend. It is not compulsory to provide a dividend to equity shareholders, it totally depends on the decision of the Board of Directors of the companies.
Capital appreciation means the increase in the investment value because of an increase in the share price. Suppose 2 years ago, you invested in any company and bought a share of Rs 1000 and now the share price of the share is Rs.1600. This increment of Rs 600 in investment value is called Capital Appreciation. This is the main source to earn money from the stock market.
In the long term, share price follows the growth of the company, so when the company performs good and grow day by day then the market value of stock increases. The main focus of investor is to achieve more and more profit through capital appreciation. For which we need to do the market analysis.
This was our guide to the stock market for beginners. We tried to clear your basics. If you have any doubt or query then shoot them in the comments below.