Stock Market Basics | Complete Guide For Beginners

What is Share Market?

The share market, also called the stock market, is a place where people buy and sell shares of companies that are available for the public to trade. It is regulated by an organization called the Securities and Exchange Board of India (SEBI), which makes sure that stock exchanges operate properly and that companies follow rules and requirements for sharing information.

When we talk about shares, we mean a part of ownership in a company. For example, if a company has issued 100 shares and you own 1 share, you own 1% of the company. The share market is where these shares from different companies are bought and sold.

Stock Market For Beginners

The stock market may seem scary to beginners, but it’s an important part of the economy and offers chances to create wealth. It’s a place where companies that are listed for the public can sell shares to people who want to invest. When you buy a share, you become a part-owner of that company. This means you have the potential to make money if the company grows and earns profits. You can do this through the value of your shares increasing (capital appreciation) or receiving a portion of the company’s profits (dividends).

Difference Between Primary Markets and Secondary Markets

When a company decides to offer its shares to the public for the first time, it is called an initial public offering (IPO), and this happens in the primary market. The main goal of an IPO is to get the company’s stock listed on the share market. After the shares are listed and purchased by investors, they can be traded further in what is known as the secondary market.

How are Shares Priced in the Market and Who Determines the Price?

The price of a share is determined by the market based on the usual principles of supply and demand. Typically, when a company is experiencing rapid growth, earning good profits, or receiving new orders, the share prices tend to increase. This happens because as more investors become interested in buying the stock at higher prices, the demand for the stock rises, causing the price to go up.

When companies need funds for big projects, they raise money by issuing bonds. Bonds are a type of financial instrument where multiple investors lend money to the company. The profits earned from the project are used to repay the bondholders.

What are Stock Indices?

In the stock exchanges, some companies are grouped together to create an index. This index is formed based on similarities among the stocks, such as company size, industry, market capitalization, or other categories. One example of an index is the Sensex, which is the oldest and consists of shares from 30 companies. The Sensex represents around 45% of the total market value of freely tradable shares. Another index is the Nifty, which includes 50 companies and represents about 62% of the free-float market capitalization. There are also other indices like the Bankex, which focuses on the banking sector, and market capitalization indices such as the BSE Midcap or the BSE Small cap, among others.

What is Offline Trading and What is Online Trading?

Online trading involves the process of buying and selling shares through the internet, conveniently from your office or home. All you need to do is log into your trading account, and you can easily buy or sell shares. On the other hand, offline trading refers to the traditional method of trading, which involves physically visiting your broker’s office or contacting them via telephone to carry out the trading activities.

What is the Role of a Broker in the Share Market?

The broker assists you in executing your buying and selling transactions. Brokers usually connect buyers with sellers and vice versa. Additionally, many brokers offer guidance on which stocks to buy or sell and provide investment advice for beginners in the share market. In return for these services, the broker charges a fee called brokerage.

Can Anybody Buy and Sell Shares in the Share Market?

Anyone who is capable of entering into a contract can purchase and sell shares in the market. To do so, you must first open a trading account with a broker. Once your trading account is set up, you will be able to buy and sell shares in the stock market.

Trading Account vs Demat Account?

There is a significant distinction between the two. A trading account is where you carry out your buying and selling transactions. On the other hand, a demat account is where your shares are securely held. When you purchase shares in your trading account, the funds are deducted from your bank account, and the shares are credited to your demat account. Conversely, when you sell shares, the process is reversed: the shares are debited from your demat account, and the funds are credited to your bank account.

What is Meant by Trading and Investment?

The main difference lies in the time horizon and approach. Trading involves buying and selling shares in the short term, while investment focuses on holding shares for the long term. Traders aim to make quick transactions based on short-term events and market fluctuations, while investors aim to select good stocks in the share market and patiently wait for their prices to increase over time.

What is Rolling Settlements?

Every transaction that takes place in the share market must go through a settlement process. This means that buyers receive the shares they purchased, while sellers receive the proceeds from their sales. Settlement refers to the procedure where buyers acquire their shares and sellers receive their payments. In a rolling settlement, all trades need to be settled by the end of the day. This means that buyers must pay for their purchases, and sellers must deliver the sold shares within one day in the share market. In Indian share markets, the T+2 settlement system is followed, which means that transactions are completed on the first day, and the settlement for these trades must be finalized within two working days from the first day. However, there is a gradual shift towards adopting T+1 settlement in phases.

What is SEBI?

SEBI stands for the Securities and Exchange Board of India. Since stock exchanges involve certain risks, it is important to have a regulatory body. SEBI is empowered with this authority and its main role is to develop and regulate the markets. Its key objectives include safeguarding the interests of investors, promoting the growth of the share market, and overseeing its functioning.

Share Market Basics For Beginners

Are the Equity Market and the Derivative Market One and the Same?

The overall stock market includes both the equity market and the derivative market. The key distinction lies in the types of products that are traded. In the equity market, the focus is on buying and selling shares and stocks. On the other hand, the derivative market deals with futures and options (F&O). These F&O contracts are based on an underlying asset, such as equity shares.

What is Fundamental and Technical analysis?

Fundamental analysis involves studying and evaluating various aspects of a company’s business, such as its growth potential, profitability, and debt. On the other hand, technical analysis concentrates on charts and patterns to identify past trends that can be applied to predict future market movements. Investors tend to rely more on fundamental analysis, while traders often rely more on technical analysis.

Minimum investment in the Share Market

There is no specific minimum investment required in the stock market, as you can even buy just one share of a company. For example, if a stock is priced at Rs. 100 per share, you would only need to invest Rs. 100 to purchase one share. However, it’s important to note that brokerage charges and statutory charges will be additional expenses.

Statutory charges such as GST (Goods and Services Tax), stamp duty, and STT (Securities Transaction Tax) are levied by either the central or state government. The broker does not retain these payments. Instead, the broker collects these charges on your behalf and subsequently deposits them with the government.

Why do Companies opt for listing?

  1. Ease of raising funds
  2. Brand Image improves
  3. Easier to liquidate existing shares
  4. Enforces efficiency via transparency and regulatory oversight
  5. Liquidity increases as well as credit worthiness

How are the market weights for stock indices calculated?

Step 1: Determine the total market value of each stock in the index

To find a company’s total free-float market value, multiply the share price by the total number of shares available for public trading.

Step 2: Calculate the overall market value of all the stocks

To calculate the total market value of the index, add up the market values of all the companies included in the index.

Step 3: Compute individual market weights

Calculating individual market weights is important to understand the impact of each company’s stock on the index’s value.

To determine the individual market weight, divide the free-float market value of a particular stock by the total market value of the index. Generally, a higher market weight means that changes in the stock price of that company will have a greater influence on the overall value of the index.

Here are few point to know about the traditional mechanism of share market in India:

Trading Mechanism

In India, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the main platforms for trading. Both exchanges utilize an online electronic limit order book for trading, which means that buy and sell orders are matched electronically by trading computers. This order-driven system ensures that buyers and sellers remain anonymous, promoting transparency for all investors. To participate in trading, investors place orders through brokers, many of whom now offer online share trading services for retail investors.

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