What is a Stock Market?
A stock market is a marketplace where buyers and sellers transact in securities of publicly listed companies. The securities that trade in the stock market are equity shares, bonds, derivatives, commodities, etc. The trading of securities happens over the stock exchanges or over the counter (OTC) that operate under certain regulations. Some of the common stock exchanges in India are the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Metropolitan Stock Exchange (MSE), National Commodity and Derivates Exchange, and Multi Commodity Exchange (MCX). Moreover, the Securities and Exchange Board of India (SEBI) regulates the stock market in India.
The term stock market and stock exchange are often used interchangeably. However, there is a slight difference between them. The traders in the stock market buy and sell shares on one or more stock exchanges that are a part of the stock market. Furthermore, the stock market is also referred to as the share market, equity market, or share bazar. Before we proceed to understand how investing takes place, let’s understand the basics of how the stock market works.
Basics of How the Stock Market Works?
A stock market provides a regulated environment for market participants to buy and sell shares and other financial instruments. This market operates under the defined rules stated by the regulator (SEBI). Further, a stock market is classified as a primary and secondary market.
The primary market allows the company to raise funds by issuing shares to the public for the first time through an Initial Public Offering (IPO). After this process, the company is publicly registered, and the shares can be traded among the market participants.
Once the company’s shares lists in the primary market, investors trade them in the secondary market on the stock exchange. In this market, investors get the opportunity to buy and sell shares at the current market prices. Also, investors can opt for day trading or long-term investing in the stock market, depending on their requirements and expertise. Furthermore, it is mandatory for investors to hold a demat and trading account to trade in the stock market.
Read more difference between demat and trading account
The stock exchange acts as the facilitator for the process of capital raising and receives a fee for its services from the company and its financial partners. Also, it helps investors to buy and sell any securities. Furthermore, the stock exchange or the stock market maintains various market-level indicators that provide a measure to track the overall market’s performance.
For instance, BSE uses the SENSEX index to measure the performance of top 30 Indian companies. In contrast, NSE uses the NIFTY index to measure the performance of 50 large Indian companies.
How to Invest in the Stock Market?
Before the advent of the internet, investors had to visit brokers and instruct them for transactions physically. However, with digitalisation, stock brokers provide online platforms through which anyone can invest in stocks with just a few clicks. They are web trading applications, terminal software, and mobile-based apps available for trading online.
The following are the steps to invest in the stock market –
- Firstly, you must open a demat and trading account with a registered stock broker.
- To start your investments, make an initial deposit in the account.
- Then this trading platform allows you to select the security you want to invest in. Select the stock you want to buy or sell and execute the order.
- After executing the order, the broker checks whether the account has sufficient funds.
- The order is executed on the stock exchange if enough funds are in the account. For instance, if you issue a purchase order, it will be matched with a similar sell order.
- The stock exchange confirms the transfer of ownership of shares. Also, you will receive an intimation about the settlement. Finally, the shares will reflect in the demat account after two working days.
Role of SEBI in the Stock Market
The Securities and Exchange Board of India (SEBI) is a watchdog for all market participants in the stock market. The aim is to provide a safe environment for all market investors and other participants. Also, ensuring smooth and efficient working of the stock market.
SEBI has the responsibility to both develop and regulate the market. It regularly comes out with regulatory measures to ensure investors benefit from safe and transparent dealing in the stock market. The primary role SEBI in the stock market is –
- To protect the interest of investors and traders.
- Promote the development of the securities market.
- Regulate the function of the securities market and stock exchanges.
- Any other matters connected to the above.
Basics of Stock Market Investing
The following are some basic tips for stock market investing –
- Understanding the technical terminologies and basics of stock market investing is essential.
- You must avoid making hasty decisions to protect your money.
- You must define your risk tolerance level and investment objectives clearly before investing.
- Analyse, research, and then identify the potential stocks to invest in. Avoid making emotional decisions while investing or trading.
- Diversifying investments across different sectors can help you reduce the risk in the portfolio. If one sector does not perform well, the other sector can help to cover losses.
- While investing in stocks, it is crucial to keep continuous track of them. You should not forget your investments.
- Using strategic tools like stop loss to plan the entry and exit points in the market. Stop loss helps to prevent further losses in the stock. Also, you can know these points in advance to estimate the profits and losses.
- If you are an investor and not a trader, you must have patience and not panic about short-term market volatility.
- The basics of stock market investing is not to follow tips from friends or online sources blindly. However, you can take advice or services from registered brokers or professionals. Always do your own research and then invest in the stock market.
Basic Stock Market Jargons
Following are some stock market jargons that help you understand the basics better:
- Primary Market – It is a market where a company raises money by issuing shares to the public for the first time through Initial Public Offering.
- Secondary Market – It is the market where shares are listed on the stock exchange, and investors trade among themselves at the prevailing market prices.
- Stock Exchange – It is a centralized marketplace where the financial securities issued by companies are bought and sold.
- Initial Public Offering – It is the process of offering shares of a private company to the public for the first time.
- Nifty – It is a benchmark index of NSE tracking the performance of the top 50 companies listed on the exchange.
- Sensex – It is a benchmark index of BSE tracking the performance of 30 large and most actively traded companies on the exchange.
- Demat Account – A short-form dematerialized account that holds shares and securities electronically.
- Trading Account – After having a demat account, one requires a trading account to buy/sell shares in the stock market.
- Bull Market – It is a market condition where the prices of securities rise or are expected to rise, leading to company and economic growth.
- Bear Market – It is a market condition where the prices of securities fall, leading to less consumer spending and lower GDP.
- Trading Hours – The regular trading hours for the stock market are from 9:15 AM to 3:30 PM.
- Ask/Offer – The price at which the seller is willing to sell the stock/security.
- Bid – The maximum price the buyer is willing to pay for the stock/security.
- Spread – The difference between the bid and ask price is called as spread which measures the liquidity of that security.
- Volatility – The speed or degree at which the stock price changes (either up or down) is called volatility.
- Volume – It indicates the total number of shares traded during a specific time period. A high trading volume for a share indicates buying pressure and vice versa.
- Close Price – The final price at which the stock trades during the regular market trading hours on a given day.
- Face Value – The original value of a share declared on the share certificate, which is fixed when the company issues shares through IPO.
- 52 Week High/ Low – The highest and the lowest price of the share recorded over a period of 52 weeks (equates to one year)
- All Time High/ Low – The highest and the lowest price of the share recorded in the open market since its inception.
- Upper Circuit/ Lower Circuit – The maximum/minimum price level beyond which the stock cannot move in a particular trading session.
- Broker – An individual or firm that acts as an intermediary between the stock exchange and investor executing trades for a fee or commission.
Frequently Asked Questions
The financial instruments that are traded on the stock market are stocks/shares, bonds, derivatives, commodities and mutual funds.
There is no minimum investment in the share market. The amount of investment depends on the share price and quantity. Also, the stock prices range between INR 1 to 95000.
The gains from the stock market are taxed under the head ‘Capital gains’ based on the holding period. If the holding period is less than 12 months, then short-term capital gains (STCG) are applicable, which are taxable at a flat 15%. If the holding period is more than 12 months, then long-term capital gains (LTCG) are applicable where no tax is applicable for gains up to INR 1 lakh. Gains above INR 1 lakh are taxable at 10% without indexation benefit.
The alternative to stock investments is investing in mutual funds. Mutual funds are professionally managed funds that invest collective capital into different financial securities like stocks, bonds, etc.
The most common sites where one can find stock-related information are NSE India, BSE India, MoneyControl, Economic Times, Livemint, Investing, Bloomberg, etc.
There are various types of stocks in the stock market based on different categorisations. However, the two main types of stocks are common stock and preferred stock.