- Posted by: admin
- Category: English
Let me commence the article with a brief discussion on basics of the share market for beginners.
There are a lot of articles everywhere on the performance of the stock market and how the Nifty and Sensex are moving and a plethora of other information.
You know what I’ve noticed, though?
Nobody ever talks about share market basics such as what a stock is or what a share market is. All the news articles seem to take it for granted that the reader has at least an intermediate knowledge of the functioning of the share market. The basics are always skipped over.
So, I’ve decided to dedicate this article to the basic questions.
What is a stock or a share?
In today’s world of financial markets, the word stock and share are generally used in the same meaning. They refer to the document that indicates ownership in a particular corporate organization, known as a stock certificate.
I’ll bet most of the people who use these words so casually do not know exactly what they mean or what they stand for.
Theoretically speaking, there lies a thin line of difference between these two jargons. The word stock is used to indicate the ownership certificate of any company, in general. However, a share refers to the certificate of ownership of a specific company.
A share or stock, also known as equity, is a unit of investment in an individual company. A share has a nominal value which is also known face value. As you can see in the image below that the price of the Infosys’ share is Rs. 946 & its face value is Rs. 5 only.
The issued share capital in a company’s balance sheet represents the product of nominal value per share and the number of shares issued. The nominal value has no significance except the fact that it is used in the computation of issued share capital of the issuer company and dividends.
Company issues dividend on the face value. Let’s take the above example of Infosys. If Infosys declares 200% dividend on a share, then it means that 200% dividend will be calculated on the face value. That is 200% of Rs. 5 which is equal to Rs.10. I would like to add one more thing, dividends are tax free in investor’s hands.
The market price of a share is of tremendous importance whose rise or fall depends upon the laws of supply and demand. The market price of an equity share is determined by the war that takes place in the stock market between the bulls and the bears.
Now the question is,
what are bulls and bears and what they have to do with the stock market?
Bull market means rising market and bear market means falling market.
Do you know where people buy and sell stocks and shares?
I mean, you can’t just walk into a shopping mall and buy retail, can you?
That is where the stock market comes in.
There is a conceptual difference between a share market and a stock market. A stock market facilitates in the trading of all types financial instruments including shares of listed companies. Whereas a share market only allows in the issue and trading of shares. A stock or share can be traded only if it is listed on a stock exchange. A stock exchange is the place for the stock buyers and stock sellers to meet.
Let me give you a brief overview of the stock market.
A Stock market is a place of trading of stocks, bonds, futures, options, commodities and currencies. The buyers and the sellers trade together via computerized platforms that a stock exchange provides them with.
How stock market works:
We have explained it in this video.
People who are willing to participate in the stock markets are required to have their own trading and Demat account with stock brokers.
I should also tell you about the timings of the stock market. Even if an idea strikes you in the middle of the night, you’ll have to be patient and wait for standard market hours.
Trading in the Indian stock markets are carried out during particular hours from Monday to Friday.
Timing of the Indian stock market is divided into 3 sessions:
- Pre-opening session: 09:00 AM to 09:15 AM
- Normal Session: 09:15 AM to 03:30 PM
- Closing session: 03:40 PM to 04:00 PM
You can read more about stock market here: Timing of Indian stock market
Generally, people think that the share market in India is a place of trading of shares and which is a truth.
The functioning of a stock market is completely a different ball game and an individual requires in-depth analysis to get to the bottom of what is really going on in the market. A stock market , also known as equity market, is not only flooded with speculators but there are hedgers and arbitrageurs playing significant roles as well.
Sometimes there is a small difference between the price of a share on NSE and BSE. Arbitragers buy at one stock exchange and sell at another and thus reduce the price gap.
The big players exercise significant influence on the prices and volumes of securities traded in a stock market irrespective of the fact that the retail far more in number.
Let’s move on.
Next basic question.
Why do people buy stocks?
I mean, there’s got to be some point to all this share trading, right?
Stocks or shares help in the creation of wealth for the investors in the following ways.
- Earning income from equity investments in the form of dividends.
- Enjoying the growth in the value of shares held and eventually sell them to earn a profit as a result of capital appreciation.
Now that I’ve covered the basics of stocks and the stock market, let me tell you about the different ways in which an investor can buy or sell shares.
To invest in the stock market, one has to open a Demat account and trading account with a share broker.
What is Demat account & how it works:
Our short video explains everything about Demat account:
Demat account enables a person to participate in the stock market to trade or invest in shares of various listed companies.
You can also buy shares in the primary market where a company comes out with IPO (Initial Public Offering) or FPO (Further Public Offering).
You can also acquire shares in an unlisted public company or a private company through a private placement.
If you have a trading account with a broker, you can also trade in the derivative segment of the equity market i.e., taking trades in the futures and options market. In order to trade in the derivate segment of equity, you need to keep an amount with the stock broker as margin and can take trades of a larger amount.
What is derivative market:
If you have a Demat account, you can hold a share purchased by you for any duration. Through trading and investing in the stock market, a person can meet his/her financial goals and objectives.
A share can be a very profitable asset class to an individual if he/she develops the skill and knowledge of the financial markets. One can apply fundamental analysis or technical analysis or an adequate combination of both in order to trade or invest profitably in the stock market.
Let us take an example of a chart showing the comparison between percentage movement of the share price of IDEA and that of Sensex.
As you can see from the graph, the prices keep fluctuating all the time, sometimes more, sometimes less. So, the trick is to buy the share when the price is low and sell it when the price is high. One can use the technical analysis in conjunction with the fundamental analysis in order to take a trade in the next day in the share of IDEA.
Companies issue shares frequently in order to raise financial resources for operational and strategic needs. The trading of shares of listed companies takes place on regulated stock exchanges, where investors and traders can place their orders.
Shares are an essential component of the economy of a country because they are a core component of majority of investment portfolios. Investors can either own shares directly or they can indirectly invest in them through mutual funds.
The stock market provides a platform to the buyers and sellers to carry out transactions of the shares and securities. It is an indicator of the good or bad health of the economy of the country. If the prices of the instruments are rising it means that the economy of the country is running on the path of development.
If you figure out how to analyze the movement of the share prices of different companies, it is very easy to make capital gains from share trading. What you need to do for that, is copious amounts of research and analysis. So start studying, and then start investing. These share market basics for beginners will surely help you in your financial journey.
If you have any question related to the share market, please ask in the comment box below.