Basic of Stock Market:
Table of Contents:
- What is Stock Market?
- What is stocks, shares, or equity?
- How does Stock Market work?
- What is IPO?
- What is Primary market and Secondary market?
- What is stock Exchange?
- What is Nifty and SENSEX?
- Different types of stocks
- What determines the share price?
- Benefits of Stock Market Investment
- a) Investment gains/Capital appreciation
- b) Dividend income
- c) High returns potential
- d) Ownership
- How to get started in Stock market?
- a) Why should I invest in stock market?
- b) Is it good to invest in growth stocks?
- c) Are growth stocks high risk?
- d) Should I invest in dividend or growth stocks?
- e) What are blue-chip stocks?
- f) Is a stock dividend good?
- g) Where can I find Stock related Information?
- h) What Instruments are traded in the stock markets?
- i) Who is Stock Broker?
- j) What is the face value?
- k) What does the stock market do?
- l) Which is the best app for share market
What is stock market?
The stock market is where investors buy and sell shares of companies on an electronics platform. It’s a set of exchanges where companies issue shares and other securities for trading. The place where buy and sell of a company share happens is called Stock Exchange.
In India, two major stock exchange is National stock exchange (NSE) & Bombay stock exchange (BSE).
In practice, the term “stock market” often refers to one of the major stock market indexes, such as the Nifty or Sensex in the case of Indian stock market.
Nifty consists of 50 major companies of Indian economy from different sectors. While Sensex consist of 30 major companies of different industries of Indian economy. These two indexes represent large sections of the stock market. Because it is very hard to track every single company. The performance of the indexes is viewed as representative of the entire stock market
What is Stock?
When a company sells a part of ownership, it come to stock exchange & issues shares to many people to raise money for their growth & expansion. This process of issuing shares to public is called Initial public offering, or IPO. This is one of the processes to raise money.
There are two ways to raise money, Debt or loan and selling part ownership to others in the company. This IPO is also known as Primary market.
In a nutshell, a stock represents an ownership share in a company. When you purchase a public company’s stock, you’re purchasing a small piece of that company. Stocks are nothing but part ownership in the company. Stocks are also called Shares or Equity.
If a company has a total of 100000 shares while company formation and you own 1000 shares of the company, it means you owned 1% of the company.
How does Stock Market work?
When a company want to grow & expands its business, it requires huge amount of capital for these works. To raise such huge amount of money, any company or organization come to stock market to sell its part of ownership to the large public.
The process of issuing share to large public is called Initial Public Offering (IPO). Thus an organization can raise its capital for business needs by the issue of shares for sale in Initial Public Offering(IPO) to the public.
After issuing its shares to the public for the first time, then it is listed in the stock exchange for trading.
What is IPO?
When a company, first time issues its shares to large public is known as Initial public offering (IPO). It is the process through which a private company becomes a public company.
When a company brings an IPO, they offer to sell part of its ownership to large public by issuing shares of their company at a fixed price range. It is a direct contract between company & buyers of the shares.
The IPO process is carried out in Primary markets, where companies directly issue shares to people who want to invest. If there are 100000 shares and 150000 people want company shares, then the lottery is done and shares are allocated. This process of allotting the shares is called book building.
In an IPO, the buyers purchase the shares from the organization directly, but to sell the shares, they must wait till the organization is listed on the stock exchange.
After allotment of shares in IPO, it can be sold only in secondary market after listing of the company in stock exchange.
The buying and selling of shares is done on electronic platform through stock broker. Stock broker takes commission in buying as well as in selling shares. Commission varies from 2 paisa to 50 paisa per Rs 100 rupees trade. All share trading is done in secondary market.
What is Primary Market & Secondary Market?
The primary market is where securities are created, while the secondary market is where those securities are traded by investors. In the primary market, companies sell new stocks and bonds to the public for the first time, such as with an initial public offering (IPO).
In the primary market, the investor purchases shares or bonds directly from a company in a one-time transaction; in the Secondary Market, investors buy and sell the stocks and bonds among themselves, and can do so an infinite number of times.
A primary market is also known as the New Issue Market (NIM) because securities are sold for the first time here. During an IPO, the company sells its shares directly to primary market investors. Underwriting refers to the entire process of raising investment capital by selling new stock to investors through an IPO
Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.
Secondary markets are primarily of two types – Stock exchanges and over-the-counter markets. Stock exchanges are centralized platforms where securities trading take place, sans any contact between the buyer and the seller. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are examples of such platforms
What is stock Exchange?
Stock exchange is place where investors & traders buy and sell different financial instruments like stocks, bonds, commodities etc. Buying & selling done on business working day generally from Monday to Friday.
The prices of such instruments are determined according to the demand and supply rules. Anyone can trade only in listed companies which is listed on stock exchange. In India, there are two major stock exchanges.
National Stock Exchange (NSE) – It was established in 1992 in Mumbai
Bombay Stock Exchange (BSE) – It was established in 1875 in Mumbai at Dalal street.
What is Nifty and SENSEX?
Nifty is a stock market index that measures the performance of the 50 most actively traded stocks on the National Stock Exchange (NSE). The Sensex is an Indian stock market index that comprises of 30 companies listed on the Bombay Stock Exchange (BSE).
The NIFTY 50 & SENSEX indexes have been historically correlated with each other, meaning that when one goes up, so does the other. However, over recent months there has been divergence between them – while the SENSEX has generally seen higher levels than the NIFTY 50, this trend recently reversed. So, what could explain this change?
There are several possible explanations for this discrepancy: Firstly, investors may be more focused on picking winners rather than diversifying their portfolio across multiple stocks within an index like the NIFTY 50.
This increased focus can lead to bubbles as strong performers continue to rise even though their underlying businesses may not be worth as much because demand from buyers outstrips supply. Secondly, greater foreign participation in Indian markets could cause disruptive price swings due to wider bid-ask spreads and larger liquidity events.
Last but not least, corporates’ issuing activities–such as M&A deals and bond issues–could also impact share prices indirectly through changes in company earnings or cash flows. In short – it’s still too early to tell which way things will go for both indices going forward!
Both indices are considered to be important indicators of overall stock market conditions in India.
Different types of stocks:
There are different types of stocks but major classification is Common Shares & Preferred Stocks.
Common shares may be classified as Growth stocks, Cyclical stock, Non-cyclical stocks, Value stocks, Dividend stocks, Income stocks, Undervalued stocks, Overvalued stocks, Fundamental stocks, Technical stocks, Large-cap stocks, Midcap stocks, Small-cap stocks, Penny stocks, Bluechip stocks etc.
Most stocks that people buy and sell is common stocks. It represents partial ownership in the company. This stock has unlimited potential to upside but with very high risk. If any company fails, it will loss everything. Means after liquidation of the company, they will get whatever left in the last after distributing asset to creditors, bondholders & preferred shareholders. Common shareholders also get dividends in the last.
Preferred shares work differently, as it gives shareholders a preference over common shareholders to get back a certain amount of money if the company dissolves. Preferred shareholders also have the right to receive dividend payments before common shareholders do. The net result is that preferred stock as an investment often more closely resembles fixed-income bond investments than regular common stocks. Often, a company will offer only common stock.
The company has the right to purchase the shares from shareholders for any reason at any time. Some people consider the preferred stock as a debt rather than equity.
Common stock can receive variable dividends and have voting rights as most stocks are issued as common.
Preferred stock costs more to buy, but the dividend is fixed forever with higher lender rights than the common shareowner.
Large-cap stocks, Mid-cap stocks & Small-cap stocks:
Stocks also get categorized by the total worth of all their shares, which is called market capitalization. Companies with the biggest market capitalizations are called large-cap stocks, with mid-cap and small-cap stocks representing successively smaller companies.
There’s no precise line that separates these categories from each other. However, one often-used rule is that stocks with market capitalizations of Rs.10000 Cr or more are treated as large-caps, with stocks having market caps between Rs.5000 Cr to Rs.10000 Cr qualifying as mid-caps and stocks with market caps below Rs.5000 Cr.
Large-cap stocks are generally considered safer and more conservative as investments, while mid-caps and small caps have greater capacity for future growth but are riskier. However, just because two companies fall into the same category here doesn’t mean they have anything else in common as investments or that they’ll perform in similar ways in the future.
Growth stocks are shares of companies that are expected to grow at a significantly faster rate than the rest of the market. Growth stocks usually do not pay dividends as the growth strategy requires reinvestments of profits in the business to generate higher returns. Sometimes, even just a growth slowdown is enough to send prices sharply lower, as investors fear that long-term growth potential is waning.
Cyclical and Non-cyclical stocks:
National economies tend to follow cycles of expansion and contraction, with periods of prosperity and recession. Certain businesses have greater exposure to broad business cycles, and investors therefore refer to them as cyclical stocks.
Cyclical stocks include shares of companies in industries like manufacturing, travel, and luxury goods, because an economic downturn can take away customers’ ability to make major purchases quickly. When economies are strong, however, a rush of demand can make these companies rebound sharply. E.g Metal Stocks, Auto Stocks, Cement stocks , Capital goods stocks etc.
By contrast, non-cyclical stocks, also known as secular or defensive stocks, don’t have those big swings in demand. An example of non-cyclical stocks would be grocery store chains, because no matter how good or bad the economy is, people still have to eat. Non-cyclical stocks tend to perform better during market downturns, while cyclical stocks often outperform during strong bull markets. E.g FMCG stocks, Pharma stocks etc.
Value stocks on the other hand, are seen as being more conservative investments. They’re often mature, well-known companies that have already grown into industry leaders and therefore don’t have as much room left to expand further. Yet with reliable business models that have stood the test of time, they can be good choices for those seeking more price stability while still getting some of the positives of exposure to stocks.
Safe Stocks/Defensive Stocks:
Safe stocks are stock whose share prices make relatively small movements up and down compared with the overall stock market. Also known as low-volatility stocks, safe stocks typically operate in industries that aren’t as sensitive to changing economic conditions. They often pay dividends as well, and that income can offset falling share prices during tough times. Example of such stocks are Infoys, Wipro, ITC, HUL, Cipla, Dr. Reddy, Sunpharma, BEL, Marico etc.
A dividend stock is a publicly traded company that regularly shares profits with shareholders through dividends. These companies tend to be both consistently profitable and committed to paying dividends for the foreseeable future. Generally low growth stocks pay high dividends.
What determines the share price?
The company news, industry news, sector news & overall market sentiment influence the company price in short term. As result of news, stock prices go up or down because of supply and demand. Supply demand fully depend on positive & negative news of about the stock on great extent. When a stock is considered as desirable due to the recent success of the company, a strong industry sector, or just investor sentiments, then its price goes up.
The most important factor in determining the price of any stock is the future earnings and profits that the company is going to generate.
If a company is expected to do well and earn more profits, investors will ultimately benefit from higher profits in the form of higher dividends.
If investors are hesitating to buy a stock due to the company faltering, a weak industry sector or the price is simply too high, that lack of demand will cause the price to drop.
The price will move low and then reach a point when investors are willing to buy again , and the cycle will start all over again.
Most of the successful investors buy the avoided stocks that still have strong earnings and a good future for a low price and wait for the price to rise.
Benefits of Stock Market Investment
The stock market is one of the most potential & rewarding places to invest your money. As investing in the stock market is risky; you can either draw huge gains and losses.
a) Investment gains/Capital appreciation
Investments in solid companies that are capable of growing can help investors to make profits. If you invest in different stocks, you build your wealth by leveraging growth in different sectors of the economy.
It results in a profit even if some of your individual stocks value losses.
b) Dividend income
Some of the stocks provide income in the form of a dividend and deliver annual returns to investors. There are many companies which are giving dividend yield as much as 12-15% annually.
c) High returns potential
There are hundreds of stocks in stock markets that have generated even 10 to 100 times returns for investors over the long term say 12-15 yrs.
Companies like Infosys, TCS, ITC etc are examples wherein the long term, investors have been rewarded heavily. Such reward is not possible with any other asset classes like GOLD, Property, BOND etc.
d) Ownership in the comapny
Stock Market Investment also produces benefits to become a part of one of the business owners. Shareholders vote on corporate board members and certain business decisions.
They also get annual reports which help to learn more about the company. If you own stock in the company you work, it can be a way to show loyalty and balance your personal finances to the success of the business.
How to get started in Stock market?
Once you have decided to step into stock markets, the first step is to open a Demat and trading account. Finding best trading account and Demat account is mandatory to buy and sell shares of any companies. You can open a Demat account with India’s largest discount stockbroker Zerodha or Upstox or Angelone
The next step would be to start learning about how to select good companies for investing in stock markets. You can also go for buying mutual funds instead of directly buying shares if you want to start safely.
Why Should I invest in Stocks?
Following are the benefits of investing in stocks
a) Safety of the principal sum invested in long term
b) Regular dividends
c) Liquidity i.e Any time you can sell it
d) Capital appreciation in the form of bonus issues, Right issues, High market prices
e) Remain always ahead of inflation.
f) There is not other asset class which can give you return of 15-17% in long term say 10-12 yrs period.
Buying stocks from fundamentally strong companies can help you to get better profits over a period of time. Some companies offer dividends regularly.
Is it good to invest in growth stocks?
Why Should You Invest in Growth Stocks? Investment in best growth stocks is undertaken to ensure wealth accumulation through large scale capital gains. Such companies exhibit a higher expansion rate than the underlying industry it is operating in, thereby ensuring larger revenue generated.
Are growth stocks high risk?
Investment in growth stocks can be risky. Because they typically do not offer dividends, the only opportunity an investor has to earn money on their investment is, when they eventually sell their shares. If the company does not do well, investors take a loss on the stock when it’s time to sell.
Should I invest in dividend or growth stocks?
If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you
What are blue chip stocks?
A blue chip stock is a huge company with an excellent reputation. These are typically large, well-established, and financially sound companies that have operated for many years and that have dependable earnings, often paying dividends to investors.
Is a stock dividend good?
Dividend investing can be a great investment strategy. High Dividend stocks have historically outperformed the Nifty 500 with less volatility. That’s because dividend stocks provide two sources of return: regular income from dividend payments and capital appreciation of the stock price. This total return can add up over time.
Where can I find Stock related Information?
There are various platforms available to get stock information. They are the internet, business news channels, and media.
You could alternatively access the moneycontrol.com, google finance, investing.com, economic times websites to get all the information that you wanted to select the best-performing stocks within a matter of seconds.
What Instruments are traded in the stock markets?
There are different types of instruments traded in the stock market. They are stocks (Equity), Commodities, currencies, ETF, IPOs, Mutual Funds, Futures, and Options. As of now, there are many stock market apps available in India for stock research.
Who is Stock Broker?
A stockbroker is a mediator between a buyer and a seller. He also gives financial advice to its customers as to how and where to invest their capital.
In the stock exchange, the stockbroker is a member, who is allowed to make equity trades there. A stockbroker is an authorized member of the stock exchange and is registered with SEBI.
What is the face value?
Face value is an initial value of the shares decided by the issuer to analyze the growth and needs on the balance sheets.
For example, if a company needs Rs 100 lakh, it can determine the face value of the shares at Rs 10 and issue 10 lakh shares to raise funds. With the company’s growth, the share value will increase or decrease significantly.
What does the stock market do?
Generally, Companies need money for growth, so they think, Why should we try to get capital from the public by offering them shares of the company? So they will start issuing shares.
So people who buy shares from that company will become a shareholder of the company. You are not the only owner of the company like you lakhs of people will buy shares from the same company and become part-owners of the company.
So how do you get this share called “stock”? There’s a market for them, just like your grocery market. It’s called the stock market.
Which is the best app & website for share market?
Here are the list of best stock market app in india. You can find their websites also on the internet.