BASICS OF STOCK MARKET
What is stock market?
The stock market refers to the collection of markets and exchanges where regular activities of buying, selling and issuance of shares of publicly held companies take place. The Indian stock market includes primary and secondary market:
Primary market: this is the market where companies register themselves. Companies enter the primary market to raise funds by offering their stocks. When a company registers itself in the primary market and offers to sell its shares for the first time, it is known as Initial Public Offering (IPO).
Secondary market: the actual trading of a company’s shares occurs in the secondary market. After a company’s share is listed on a stock exchange, investors can engage in trading. You can trade in shares in the secondary market only through a broker.
Stock Markets in India
There are two major stock exchanges in India:
NSE – National Stock Exchange
BSE – Bombay Stock Exchange
How stock market works?
Any company that wants to raise capital and decides to go public or offer a few of its shares to the stock exchange. Once the company gets listed in the stock exchange, people start buying and selling that company’s shares regularly. There are two types of people in the stock market:
First, a trader is someone who is constantly alert during the market hours, always looks at the patterns and stays updated with the new, spotted opportunity and buys the shares and sells them. Second, are investors. Their objective is to find good companies that right now have low share prices because of market fluctuations, then making a buy.
How to invest in stock market for beginners?
One can invest money in stocks publicly listed on the market. For this, the following requirements are necessary:
- Documents required for investing in stocks
- Your PAN card
- Your Aadhaar card
- Your name on a cancelled cheque from your active bank account
- A proof of your residence based on a list of documents that have been accepted by your broker, depository participant or bank
- Documents detailing that you earn an income
- Passport sized photographs
- Demat account
A demat account is that which will hold one’s shares in the name of the account holder. A demat account serves as an electronic house for your shares. It is opened online with the help of a depository participant. Many banks also offer Demat account services to their investors.
- Trading account
A demat account and trading account go hand in hand. Demat refers to ‘dematerialized’ which indicates that it is a storehouse for your shares. A trading account, on the other hand, is the account with which you buy and sell securities that you wish to trade on the stock market.
- Linked bank account
As you are choosing to invest in stocks, you will be buying and selling them over time. For this, you will require a bank account that is linked to your trading account. This ensures that money flows in and out of your account seamlessly while you trade.
The investment process
The following will cover the investment process for investing in both types of markets: both primary and secondary.
- Investing in the primary market
When one chooses to invest in the primary share market, they can do so through an initial public offering or IPO. To do so one will require a Demat account to hold electronic copies of their shares as well as a trading account so they can apply online. In some cases, one can also apply through their bank account. Based on the market’s response to the IPO, a select number of shares will be allotted to you. Once all the IPO applications are received and counted by the company, those shares are allotted based on demand and availability. It is quite simple to apply for an IPO through your net banking account via a process that is known as Application Supported by Blocked Amount (ASBA). In this process, assuming you have applied for shares that are worth 1 lakh, this amount will be blocked into your bank account instead of being sent directly to the company. Once your shares are allotted, the exact amount is then debited. Once shares are allotted, they are listed on the stock exchange and you can begin trading them within one week.
- Investing in the secondary market
The secondary market is what is typically referred to as a stock market. This is the market where all the action among investors of buying and selling stocks takes place. To invest in the secondary market,
- you require a Demat account and trading account which should be linked to your bank account
- the next step is to log into that trading account
- then go ahead and choose the shares that you wish to sell or buy
- ensure that you have the requisite amount of funds in your account that can help you buy the shares. If you wish to sell, make sure you have the right amount of shares before you choose to sell
- decide the price at which you want to buy a share or sell it
- wait for the buyer or seller to reciprocate to that request
- complete your stock market transaction by transferring the money/shares and you will receive money/shares
Who regulates stock markets in India?
Securities and Exchange Board of India (SEBI), constituted in 1992 under the SEBI Act, regulates and monitors stock market in India. Along with the overall administrative control of stock markets, SEBI is also entrusted with the role of conducting inspections and formulating rules for stock markets.
Who are stockbrokers?
Stockbrokers are financial intermediaries, who enable you to trade while charging brokerage fees for their services. Stockbrokers are registered with SEBI and act as a link between the investor and stock markets.
How can you trade in the stock market?
Before the advent of the internet, you were required to physically visit brokers, and instruct them for transactions. But now stockbrokers provide digital trading platforms, where you can trade through:
- web trading applications
- terminal software
- mobile based apps
How to evaluate a stock before investing?
You can evaluate stocks through:
- Technical analysis: this involves a minute examination of the market for intraday trading. Here you have to analyze a slide of factors like movement average, Regarding Strength Index (RSI), etc. You can use the trends, patterns, analysis and reports provided by stockbroking companies to analyze the stock movements.
- Fundamental analysis: you can yourself study some key factors like Returns on equity, Earnings yield, GP margin, Dept to Equity Ratio, Interest Cover Ratio, Market capitalization, etc. This will provide you with greater clarity regarding stock prices.
Basic terminologies of stock market
- Stock: stock is a general term used to refer to a certificate indicating ownership in a company
- Share: a share is a stock certificate
- Bull market: when stock prices in a market are generally rising
- Bear market: when stock prices in a market generally falling
- Order: it is a show of intent to buy or sell shares in a given price range
- Bid: your bid is the amount that you are willing to pay for a share
- Market order: an order to sell/buy shares at the market price
- Limit order: an order to sell shares above a set price or buy shares below a set price
- Day order: an order that is good only till the end of the trading day
- Agent: a brokerage firm is said to be an agent when it acts on behalf of the client in buying or purchasing of shares
- Ask/offer: the lowest price an owner is willing to sell the stocks
- Assets: everything the company owns on its name, including the cash, equipments, land, technology etc. which shows the total wealth of the company
- Liquidity: liquidity refers to how easily a stock can be sold off
- Leverage: leverage in the stock market means borrowing capital to invest in more shares than one is financially capable of buying with the singular motive to boost profits
- Trading volume: the number of shares being traded on a given day
- Market capitalization: market capitalization is simply the value of the company as per the stock market
- Margin: a margin account allows the investor to borrow money from the broker to buy additional securities
- Index: a benchmark that is used by investors and portfolio managers to measure market performance. Nifty and Sensex are such benchmarks
- Portfolio: portfolio is simply the collection of all the investments an investor has made
- Intraday trading: intraday trading is about buying and selling stocks on the same day so that all positions are closed before trading hours are over on that day
- Dividend: dividend is a part of the profit distributed by a corporation among its shareholders
- Broker: a registered securities firm are called broker. Broker’s acts as an advisor for purchase and sell of listed stocks
- Business day : Monday to Friday, excluding public holidays
- Call option: an option that is given to investor the right buy a particular stock at a specified price within a specified time period
- Put option: an option that is given to investor the right to sell a particular stock at a stated price within a specified time period
- Close price: the final price at which the stock is traded on a given particular trading day
- Equity: common and preferred stocks, which represents shares in the ownership of a company
- Face value: it is the cash denomination or the amount of money the holder of the individual security going to earn from the issuer at the time of maturity
- Position limit: maximum number of futures and options contract that any individual investor can hold at any given point of time
- Pre-opening session: the pre-open session is for duration of 15 minutes from 9:00 AM to 9:15 AM. In pre-open session order entry, modification and cancellation takes place
- Trading session: the period of time from 9:15 AM to 3:30 PM is open for trading for both sellers and buyers, within this time frame all the orders of the day must be placed
- Price Earnings (P/E) Ratio: a valuation of companies last traded share price to its latest reported 12 months earnings per share
- Risk: risk is usually measured by calculating the standard deviation of the historical price returns
- Absolute return: it is simply the rate of return on investment attained over a specified period
- Securities: a transferable certificate of ownership of investment in products such as stocks, bonds, future contracts and options which an individual holds
- Strike price: the price at which the holder of an option can buy or sell the securities they hold when the option is executed
- Stock split: an attempt to increase the number of outstanding shares of a company by splitting the existing shares