Stock market is the back bone of any country and its economy, many economists and financial experts gage a countries growth with it. To define stock market, it is the place where companies list the shares of their Companies and offer them to institutional investors and general public.
There are two types of markets for shares in India, Primary and Secondary market. Companies first issue their shares on primary market through an open public offering also known as Initial public offering (IPO).
Selling of Shares is first done in primary market to the investors, after which they are open for trade in secondary market which is stock exchange. Where the buying and selling between the investors take place. Shares exchange hands at the prevailing market price or at the price that both the buyer and seller agree upon.
Functionalities of Stock market for beginners: –
The stock market in India is manage by the regulatory authority Security and Exchange Board of India (SEBI), both the primary and secondary markets are under its control.
Only the shares of the companies that are register on the exchange can trade in stock market.
Stock market in India is divided in two exchanges, The Bombay Stock Exchange (BSE) and The National Stock Exchange. Where The Bombay Stock Exchange (BSE) came in existence in 1875,
The National Stock Exchange (NSE) established in 1992. Both the exchanges have same trading mechanism, settlement process and trade timing.
Among both the exchange NSE has more liquidity. Though the BSE is the older market yet NSE is the bigger market in terms of volume. Both exchanges have high competition for the order flow, which helps in reducing costs and brings efficiency in the market. Prices on Both the stock exchange is in tight range coz of the arbitrageurs present in the market.
How does Stock market work for beginners?
The basic function of stock market is to facilitate a safer environment for investors by making sure there is no malpractice, enough liquidity, price transparency and fair dealing. Stock market also helps investors in buying and selling the shares of the company they wish too, they match the prices of both buyer and seller to execute an order.
What is Equity
Equity is the most common form of financial instrument in today’s capital market. Equity or also know as stock or share is a unit of ownership in the company. The person who buys or owns the share is know as Shareholder, shareholders do receive dividends and voting rights.
Thought the term Equity, stock and share sounds similar but there is some difference between them
1.Equity: – The total ownership stake of a company is “Equity”.
For e.g.: – Suppose there are 5000 shares of a company and someone owns 1000 shares then we can say that he/she owns 20% equity stake in the company.
2. Stock: – When you hold shares or units of different companies then it called “Stock”. For example, you can say you own stock of Reliance and Hdfc bank.
3.Share: – One unit of ownership in a company is “Share”
Example: – when you buy 5 shares of Reliance, you can say you own 5 shares of it.
Understanding Future & Options :-
Apart from the traditional way of buying and selling Shares a new segment was introduced in the stock market called as Derivatives market, which in general is used for Hedging, speculating and arbitrage.
Future & Option or derivative market was introduced in 2000, it has grown aggressively in India. Derivatives are those financial instrument that “Derive” its value for an underlaying security eg:- commodity, currency, bonds and stocks.
When you buy or sell a derivative, it is like entering into a contract with the opposite party. The unity that you buy or sell is a called “Lot” and they are of different size. Trading in derivative is very risk and one must do it with proper understanding of market and risk involved.
How to start trading?
Anyone above the age of 18 can start trading in Indian stock market. To start buying and selling of shares you would need a bank account, a trading account and a demat account.
1.Demat or Dematerialised account: –
Demat account help you in converting your physical share certificate in a digital form which is much safer and easier to access from anywhere. It is like a bank account where the shares you buy are stored and when you sell them, they get debited from it. Demat can be opened with the help of any depository participant or broker who is authorized.
Demat accounts are regulated and maintained by National Securities Depository Limited (Nsdl) and Central Depository Services Limited (Csdl) which are two Depository organisation.
Trading account: –
Trading account is where you place your buy or sell order. Few of the famous brokerage firms for trading account are Zerodha, ICICI Direct, Upstox and Angel broking.
Once you’ve opened all the three accounts you can start participating in the market, but before you do you would need a basic knowledge of whys and how’s of the market.
Basic points to note for beginners: –
2.Understanding how and why price movie
Movement in Stock prices depend on variety of factors, but the most important driving factor is supply and demand. Other factors that drive stock prices are more fundamental like company’s earnings and profitability. Apart from this there are few technical reasons too like price history, momentum, short term news etc…
3.Getting basic knowledge of stocks/ company: –
Share is not just some instrument but the face value of a company, the valuation of a share widely depends upon the companies order book, profitability and creditability of the management. So, one should check this before investing in a company.
What should you choose: Investing or Trading in Stock market for beginners?
Traders buy shares for a short term. The buying and selling process is very quick to gain big profits. One misses the opportunity to buy at the right time. Traders just have a glance on the company’s current good output and take the profits home for a short time.
While, Investors put money into for a long period of time by doing thorough analysis of the company’s growth. one has to be very patient for holding it for a long term.
In very simple words, trading is like one day cricket batting while investing is batting in a test match.