Ever wondered what are shares or stocks and the share market is all about? Well, let’s learn some basics of it.
In simple words, a stock market is a place where sellers and buyers come together to trade various stocks. Before the internet era, people used to gather at the trading ring to trade stocks.
Today, all the trades are carried out using computer terminals at share market and broker’s offices. Besides, the terms ‘stock market’ and ‘share market’ are used interchangeably.
BASICS OF SHARE MARKET:
- A share market is a place where the share of various firms/organizations are listed and traded.
- The trading of the shares takes place through a dedicated platform known as stock exchanges.
- India has its stock exchange platforms such as the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), National Commodity and Derivatives Exchange, Metropolitan Stock Exchange (MSE), and Multi Commodity Exchange (MCX).
- To trade in shared it is mandatory to open a Demat account and a trading account with a registered depository participant (DP) in India.
- In India SEBI (Securities and Exchange Board of India) regulates and controls the stock market closely. SEBI has the power to impose regulations on the stock market to administer its work, protect the interest of investors, and build transparency. This encourages the investors to participate in the share market with confidence.
TYPES OF MARKET AVAILABLE:
In India, the share market is subdivided into two types of markets. One is the primary market and another one is a secondary market.
- Primary Market: When a business unit decides to go public and get listed on the stock exchange, it first issues IPO (initial public offering). Through this, the entity can issue its shares to the public, and investors who wish to condone their shares do so on the primary market. The main purpose of an IPO is usually to collect funds to expand or grow the business.
- Secondary Market: After the shares issued in the IPO are completely subscribed and allocated to investors, the newly formed company gets listed on the stock exchange. This makes its shares now enter the secondary market where they can be bought and sold freely at their current market value via stock exchange platforms.
Fluctuation of STOCK PRICES
Once the share enters the secondary market, its prices are regulated by the laws of demand and supply. Let’s consider three basic situations:
- A huge number of buyers want to buy the stock, although there are hardly few sellers. In this case, there is high demand and low supply, so this will appreciate the stock price.
- A huge number of sellers want to sell the stock, but there are very few buyers. In this case, supply is high but demand is low. Hence the stock price will decline.
- The number of buyers and sellers is comparable. In this case, the price level may fluctuate marginally.
Furthermore, many other factors affect the demand and supply of stocks and thus influence the stock prices. Here are some common factors you must note:
- Company performance: If the company’s revenues have exceeded expectations, its share demand is sure to rise and thereby increase the stock price. Vice versa, if the revenues decline, many stockholders may wish to sell their shares where buyers are few. In such a case, the stock price could fall.
- Sector performance: As per the market study the stock prices of firms in the same sector generally move similarly. Suppose if the entire sector is seeing upbeat trends, stock prices of companies within the segment are likely to rise. But if the sector is not doing so well, the share prices could fall.
- News events: Monetary announcements like a change in the repo rate, policies, or any big financial event could influence the cost of debt for a company. Thereby it could affect its stock prices.
- Political events like a change in the government of a country/ state could also influence the stock price activities.
STOCK MARKET INDICES
It is a key step to learn how to use stock market indices for any new investors. A stock market index helpful in tracking the performance of a group of stocks.
Stock market index picks and groups a specific number of stocks. The selection may be based on aspects like, the sector to which the stocks belong, size of the company and market cap of the company, etc. For example, the NSE’s standard index Nifty comprises 50 stocks whereas the BSE’s Sensex consists of 30 stocks.
Stock market indices can exactly reflect the performance of a particular segment or the entire market. With this, the investor can easily compare specific stocks, get a sense of the current investor sentiment.
EQUITIES AND DERIVATIVES
There are two types of products in stock markets: Equities and Derivatives.
- Equity Market: It deals with the stocks of the companies. If you buy a company’s stock, you obtain the part-ownership of the company.
- Derivative Market: It deals in F&O (futures and options). These are monetary contracts that derive their value from certain fundamental assets, such as commodities, shares, and currencies. So in the stock derivatives market, equities are the underlying assets.
WAYS OF DOING TRADING
Stock trading has now become very easy and can be done online as well as offline.
- Online trading: In this option, you can do trading or invest in stocks through the internet. There are multiple platforms available such as smartphone apps, broker’s websites, and many more. This option facilitates you to engage in online trading from the comfort of your home from anywhere across the globe.
- Offline trading: In this option, you have to deal offline through a broker and for that, you can either visit the broker’s office or provide him the order instructions over the cell phone.
Note:There are various online courses as well as training available on the internet today. These training and courses could help an induvial to gain the step by step knowledge of stock market trading.
DEMAT ACCOUNT AND TRADING ACCOUNT
A Demat account is like a bank account but is the one that holds your financial securities such as shares, bonds, mutual funds, government securities, and other asset classes in electronic form. This account facilitates you to hold and monitor all your securities at a single online place. Whereas, a trading account helps you to perform buy or sell a share in the market,
TRADING VS. INVESTMENT
The key difference between trading and investment refers to the period of stockholding.
- Trading: Here, when a trader buys shares, they aim to gain regular profit in a short term. They may hold the stocks just for few hours or a few days or weeks, or months and then sell it.
- Investment: On the other hand, an investor buys stocks that will appreciate at price over the long term. So, the goal here is to make long-term capital gains by waiting for several years for the stock prices to go up.
Note: However, to decide which stock to trade and which one to invest in, traders do thorough research and analysis using two basic approaches one is fundamental analysis and the other one is technical analysis.
By now you have quite a better idea of how stock market trading for beginners happens. To learn it efficiently, simply jump in and commence your stock market journey. However do the due diligence, before you jump. Do a little fundamental analysis study and shortlist the stocks you want to buy. A well-organized approach and detailed analysis will help you to gain most of the lucrative opportunities in the stock market.