Before starting any new task it is important to learn the basics. That holds for beginners entering the stock market as well. In simple terms, the stock market is a place where buyers and sellers congregate to trade stocks. Before the internet arrived, people would gather at the trading ring to buy and sell stocks. Today, however, all trades are carried out using computer terminals at brokers’ offices. Moreover, the terms ‘share market’ and ‘stock market’ are used interchangeably.
Read along to get better acquainted with how the share market works. Find out about the different types of stock markets, why stock prices fluctuate, how to invest and trade in stocks, and more.
SHARE MARKET BASICS
If you are new to share market investing, learning how the market functions is vital:
- The stock market is a place where the shares of different companies are listed and traded.
- This trading takes place via platforms known as stock exchanges.
- India has stock exchanges like the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Metropolitan Stock Exchange (MSE), National Commodity and Derivates Exchange, and Multi Commodity Exchange (MCX).
- To buy and sell stocks, investors in India are required to open a demat account and a trading account with a registered depository participant (DP).
The stock market is closely regulated by the Securities and Exchange Board of India (SEBI). SEBI imposes regulations on the stock market to govern its working, build transparency, and protect the interest of investors. By doing so, investors are encouraged to participate in the stock market with confidence.
Read more about Share Market Basics
PRIMARY MARKETS AND SECONDARY MARKETS
The share market in India is subdivided into two types of markets: the primary market and the secondary market. Let’s take a look at how each one functions.
When a business entity decides to go public and list on the stock exchange, it issues an initial public offering (IPO). Through the IPO, the entity issues shares to the public for the first time. Investors who wish to subscribe to these shares do so on the primary market. The purpose of the IPO is generally to collect funds to grow or expand the business.
Once the shares issued in the IPO have been fully subscribed and allotted to investors, the newly formed company lists on the stock exchange. Its shares now enter the secondary market. They can be bought and sold freely on the stock exchange at their current market value.
WHY STOCK PRICES FLUCTUATE
Once shares enter the secondary market, their prices are governed by the laws of supply and demand. Let’s consider three basic scenarios:
- 1. A large number of buyers wish to buy the stock, but there are only a few sellers. Given the high demand and low supply, the stock price will appreciate.
- 2. A large number of sellers want to exit the stock, but there are only a few buyers. Here, supply is high but demand is low. So, the stock price declines.
- 3. The number of buyers and sellers is similar. In such a situation, the price level may fluctuate only slightly.
Besides, several other things affect the demand and supply of stocks, and thereby influence the stock prices. Here are some common factors that investors should note:
- Company performance: If the company’s earnings have exceeded expectations, demand for the company’s shares is sure to rise. This will lead the stock price to increase. But if there is a decline in the company’s performance, more stockholders may wish to sell their shares in a market where buyers are few. In such a situation, the stock price could fall.
- Sector performance: You will find that the stock prices of companies in the same sector tend to move in a similar way. If the entire sector is seeing bullish trends, stock prices of companies within the sector are likely to rise. But if the mood is bearish, the stock prices could fall.
- News events: Economic announcements like a change in the repo rate could affect the cost of debt for a company. This could affect its stock prices. Political events like a change in the governance of a country could also affect stock price movements.
SIGNIFICANCE OF STOCK INDICES
A key step for new investors is learning to use stock market indices. A stock market index helps to track the performance of a group of stocks.
Numerous company stocks are listed on the stock exchange. A stock market index selects and groups together a certain number of stocks. The selection of company stocks may be based on aspects like:
- The sector to which the stocks belong
- The size of the company
- The market cap of the company
For example, the NSE’s benchmark index Nifty comprises 50 stocks while the BSE’s Sensex is comprised of 30 stocks. Some popular sectoral indices include Bank Nifty, Nifty Pharma, Nifty Metals, and BSE Midcap.
Stock market indices can mirror the performance of the entire market or a particular segment. This makes it easier for the investor to compare specific stocks, and see if these are moving with or against a particular index. Stock market indices can also provide a sense of the current investor sentiment, which can be handy for traders and investors in the market.
EQUITIES AND DERIVATIVES
The stock markets comprise two types of products: equities and derivatives.
- The equity market deals with the stocks of the companies. When you buy a company’s stock, you gain part-ownership of the company.
- The derivatives markets deals in futures and options (F&O). These are financial contracts that derive their value from certain underlying assets, such as shares, commodities, and currencies. In the stock derivatives market, the underlying assets are equities.
The stock markets comprise two types of products: equities and derivatives.
HOW TO TRADE OR INVEST IN STOCKS
Stock trading for beginners and seasoned investors can be done through online and offline trading.
- Online trading: This refers to trading or investing in stocks via the internet. Nowadays, investors and traders can use multiple platforms as well—such as the broker’s website, smartphone apps, and more. One can engage in online trading from anywhere across the globe.
- Offline trading: In this mode, you can either visit the broker’s office or provide order instructions over the phone.
Read the difference between Futures and Options
WHAT IS DEMAT ACCOUNT?
A demat account holds your financial securities in electronic form. It is like a bank account but for your financial securities, including shares, bonds, government securities, mutual funds, and other asset classes. With a demat account, you can hold and monitor all your investments at a single online location.
Read more about Demat account
HOW TO OPEN DEMAT ACCOUNT
The procedure to open a demat account is simple. Here’s what you need to do:
- Visit the office or website of the DP and fill the account opening form.
- To open a demat account, you must submit copies of your PAN card, Aadhaar card, identity proof, and address proof, along with your passport-sized photographs.
- Read through the documents containing the term and conditions.
- The next step is the in-person verification. The DP will usually send a representative to your home. However, some DPs may allow you to complete the verification online via Aadhaar.
- Once the formalities are complete, you will receive a client ID, a demat account number, and a password. You can now log in and start investing.
However, the demat account is only the first step. If you wish to trade in the stock market, you will also need to open a trading account. This too can be opened with the same DP.
DIFFERENCE BETWEEN TRADING ACCOUNT AND DEMAT ACCOUNT
A trading account helps you to execute buy or sell orders in the market, whereas the demat account simply stores the stocks you purchase through the trading account. Let’s consider how it works:
- Say, you purchase shares through your trading account. Your trading account balance will get debited and the digital share certificates will be credited to your demat account.
- And what happens when you sell shares? The share certificates will be removed from your demat account and the sale proceeds will be credited to your trading account.
ROLE OF DP
Once you have opened a demat and trading account with your DP, they will help you to buy and sell stocks. Your DP or broker acts as a middleman between you and the exchange. Remember, there are innumerable buyers and sellers in the stock market. So, finding the best deal is no easy task. This is where the DP can play an important role by enabling buyers to find sellers and sellers to find buyers.
For beginners in the stock market, it helps to open an account with a full-service broker like Kotak Securities. Such DPs also provide a range of educational resources, timely research reports, and stock recommendations. Plus, they offer multiple trading platforms and charting tools. Taken together, all of this can help you to zero in on lucrative trading opportunities in the stock market.
TRADING VS. INVESTMENT
The main difference between trading and investment pertains to the period of stockholding.
- When a trader buys shares, they usually aim to profit from changes in the stock price in the short term. They may hold the stocks for just a few hours or for a few days, weeks, or months. The goal is to make regular gains.
- An investor, on the other hand, looks for stocks that will appreciate in value over the long term. The aim is to make long-term capital gains by waiting for the stock prices to go up over several years.
HOW TO PICK STOCKS FOR INVESTMENT OR TRADING
Investors and traders carry out thorough research and analysis before shortlisting any stocks. But they use two different approaches: fundamental analysis and technical analysis.
This form of analysis consists in studying the fundamentals of the company. Here are some of the things one must do:
- Go through the company’s balance sheet
- Examine its growth prospects
- Check if it is likely to be profitable in future
- Analyse its debt structure, etc.
Fundamental analysis reveals the overall health of the company. It is useful for investors in determining whether the stock of the company is suitable for investment in the long-term.
In technical analysis, one must study price and volume charts of the stock. This may reveal patterns and could help one to predict future price movements. Technical analysis is useful for short-term investors or traders who wish to profit on the basis of price movements.
By now you have a better idea of how the stock market functions. If you want to learn stock market trading and investing, simply dive in and begin your stock market journey. But before you start, do the due diligence. Shortlist the stocks you wish to buy, check up on their fundamentals, view the technical charts for price patterns, and so on. A disciplined approach and thorough analysis will help you to make the most of lucrative opportunities on the stock market.