Stock Market – A Guide for Beginners!!

The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions.” – Seth Klarman. 

Typically, people enter the financial markets in order to earn a bit more income. But lack of knowledge of the market terms can be really problematic. So, if you’re considering to start investing but you’re unfamiliar with the terms such as ‘Stock Market’, ‘Share Market’, ‘SENSEX’, ‘NIFTY’ and ‘SEBI’, then this blog is for you! In this post we’ll discuss about the basics of stock market, as understanding the basics is the first step towards investing.

Stock and Stock Market

A stock refers to a financial instrument that represents an ownership share in one or more  companies. Stock market, on the other hand, is a marketplace where investors can purchase and sell ownership of such investible assets. The infrastructure that makes such share buying and selling possible is referred to as a stock exchange. Stock exchanges are the formal organisations that enable businesses to list their shares and make them available for sale to the public.

Stock market includes both primary and secondary markets and is a combination of electronic trading, over the counter trading, and stock exchanges. It is a trading platform that enables companies to raise capital from the public, in order to fund their expansion plans.

Depending on the sentiment of the investors, the stock market can be categorised as bullish or bearish. A bull market is one in which investors are looking to purchase shares in anticipation of future profits. When investors try to sell their holdings in anticipation of a fall in the market, that market is referred to as a bear market.

Share 

A share represents a single unit of ownership of the issuing company and its financial asset. The shareholders are entitled to dividends from whatever profits the company generates. They also cover any losses the business might incur. 

Simply said, if you possess shares in a firm, you have a proportionate share of the ownership of the issuing company based on the quantity of shares you have bought.

Any organisation, as per the Companies Act, can issue the following two types of shares:

• Preference shares: Those who hold the preference have a preferential right over the company’s profits and assets. They get a fixed dividend. When the company is winding up, they are paid before the equity shareholders. The owners of preference shares do not have the voting rights for selecting the management. 
• Equity shares: Those who hold the equity shares are the real owners of the company. However, they do not get a fixed dividend. Instead, they receive a payment only in the case when a company makes a profit. The owners of equity shares have the voting rights for selecting the management. They receive a dividend only after the creditors and the preference shareholders receive their dividends.

Difference between stock market and share market

Despite the fact that these names are interchangeable, their methods of functioning are different. Essentially, a stock market or share market is a place where different kinds of bonds and securities are traded. Any company’s stock prices are decided by its demand and supply.  While a business can issue shares directly, it cannot do the same with stocks. The term “stocks” refers to a collection of shares. Additionally, keep in mind that stocks will always have a large level of value whereas shares may only have a tiny worth. 

Types of Share Markets: 

Primary markets and secondary markets are further divisions that can be made within the stock market.

• Primary Share Markets: 

The primary market is when a firm first registers itself at the stock exchange in order to raise money through shares. Following what is known as an Initial Public Offering (IPO), the company is officially registered and its shares can be sold among market participants.

• Secondary Share Markets:

After being sold in the main market, new shares of a company are exchanged on the secondary share market. At the present market price, investors have the option of buying and selling shares here. Investors typically carry out these transactions through a broker or another form of middlemen.

What Is Traded on the Stock Market?

The four categories of financial instruments traded on the stock market are as follows:

1. Share:

An equity ownership stake in a corporation is represented by a share. Dividends from any earnings the company makes, are owed to the shareholders. They also bear the brunt of any losses the business may sustain.

2. Bonds:

A company requires substantial capital in order to acquire long term and profitable projects. Issuing bonds to the general public is one method of raising capital. These bonds signify a “loan” that the company has taken out. Bondholders receive timely interest payments in the form of coupons and are treated as the company’s creditors. The bondholders view these securities as fixed-income investments, and at the conclusion of the specified period, they receive interest on their investment in addition to the amount they initially invested.

3. Mutual Funds

Mutual funds are well managed investments that combine the capital of many individuals and invest the collective capital into a range of financial securities. You may find mutual funds for a range of financial instruments, including, but not limited to, equities, debt, and hybrid funds. The value of the mutual fund is determined depending on how well the securities perform in which it has invested. In contrast to stock, mutual fund shares don’t give voting rights to their holders. 

4. Derivatives

A security that derives its value from an underlying security is referred to as a derivative. This can include shares, bonds, commodities, and more! Derivatives buyers and sellers enter into a “betting contract” over the price of an asset because they have divergent estimates for how much it will cost in the future.

Why do companies issue shares?

The primary goal of businesses that issue shares is to raise capital. Companies require capital for operation and expansion, and equity shares help in this.

However, the investor who purchases these shares gains partial ownership in the business. With equity shares, the investor also has a voting right in the selection of management.

Equity finance is the process of financing a project using equity shares. For capital raising, the company may also choose to issue bonds or obtain bank loans. These techniques are referred to as debt finance.

What is SEBI? 

SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory agency that was set up by the Indian government in 1992 to control the share market and safeguard the interests of investors who buy shares. Additionally, SEBI controls how the stock market and mutual funds operate.

What is a Stock Market Index?

A Stock market index or stock index acts like a barometer and shows the changes in the financial markets. It provides information about the investor attitude toward a certain stock or group of stocks in an industry.

What are Sensex and Nifty? 

The word SENSEX is short for Sensitivity Index. It was coined by Deepak Mohoni who is an Indian stock market analyst. It is the index for the Bombay Stock Exchange, i.e., it indicates the performance of the Bombay Stock Exchange based on the top 30 companies traded in the Bombay Stock Exchange. 

NIFTY is the index used to measure the performance of National Stock Exchange. It is based on the top 50 companies being traded in the National Stock Exchange. Therefore, top 50 companies being traded on National Stock Exchange makes the word NIFTY. It was introduced in 1996. 

Conclusion

Today, investing in stocks can be seen as one of the best strategies to earn long term wealth. With a comprehensive investment plan, any investor can achieve their long term financial goals. 

Now you’re aware of the basics of the stock market and if you want to know more about how to start investing in shares, then click here.