Share Market Basics: Your Complete Guide to Start Investing
The share market is really important for a country's economy. It's where companies, big and small, offer parts of their business to people who want to invest. It's not just about the famous Bombay Stock Exchange; anyone can get involved. This article will break down the complications of the Indian share market so that you can confidently explore the world of investing.
What Is a Share Market?
A stock market, which is also sometimes called a share market, is like a big money place where people trade different things, like stocks, bonds, mutual funds, and more. The main difference between them is what you can trade. In a stock market, you can trade lots of different financial stuff, making it a big hub for investments. It's a place where regular people and big organisations can buy and sell parts of companies, government bonds, and other money-related things to help with investing and moving money around in the economy.
But when we talk about a share market, we're talking about a smaller part of the stock market. In a share market, it's all about buying and selling parts of companies, which we call shares or stocks. These shares represent a piece of a company, and people can buy or sell them to have a share in that company's money and profits. So, while we sometimes use the words "stock market" and "share market" the real difference is that a stock market has more things to trade, while a share market is all about trading pieces of companies.
How Does a Share Market Work?
The share market is a network of exchanges, clearing companies, and brokerage firms. The share market works in two main parts. They are as follows:
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Primary Market: It is the marketplace where the companies issue their shares for the first time. This process is called as the IPO (Initial public offering). The companies enter the share market when they launch the IPO and list themselves on the stock exchanges.
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Secondary Market: It is the marketplace where investors buy and sell shares of the companies listed on stock exchanges via IPOs. Stock exchanges are platforms that facilitate the buying and selling of financial securities.
The working process of the share market involves the following process.
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First, the companies issue the shares in the primary market. The interested investors can apply for the IPO and buy the shares. The company receives the funds generated from the sale of shares. After the IPO, these shares are listed on the stock exchanges.
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The listed shares are now available in the secondary market, where trading takes place. The investors who purchased the shares in the IPO can sell the shares in the secondary market.
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Brokerage firms are financial institutions that facilitate the buying and selling of shares. They work with the stock exchanges to offer these services. The broker receives the buy or sell order placed by an individual. Then he will find a suitable match for the order.
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Once the right match is available, the broker executes the transaction. The broker provides the necessary information regarding the transaction to the stock exchange, buyer, and the seller. Nowadays, the entire process is carried out electronically.
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The stock exchange authorises and completes the transaction. The buyer shall receive the shares of the stock he purchased. The seller receives due funds equal to the present market value of the shares.
In this way, the process continues in the share market. The share market keeps working to facilitate the trading of shares.
Why Invest in the Share Market?
We buy shares in companies to help our money grow over time. Some people worry that investing in shares is risky, but lots of research has proved that if you pick the right shares and hang on to them for a while, like five to ten years, they can make your money grow even faster than avenues like real estate or gold, and they can beat the rising cost of living (inflation). So, investing in the right shares for the long run can be a smart way to make your money grow.
Stockbrokers used to congregate around Banyan trees to make stock dealings. They had no choice but to move from one location to another as the number of brokers grew. Finally, in 1854, they moved to Dalal Street, which is now home to Asia's oldest stock market, the Bombay Stock Exchange (BSE). It is India's first stock exchange and has played a significant role in the Indian financial markets since then. Even today, the BSE Sensex is one of the benchmarks used to assess the strength of the Indian economy and financial system.
The National Stock Exchange, or NSE, was founded in 1993. Trading on both exchanges - NSE and BSE - evolved from an open outcry system to an automated trading environment within a few years.
This demonstrates that Indian stock markets have a long and illustrious history. Yet, on the surface, especially when considering investing in the stock market, it might appear to be a maze. However, once you get started, you'll see that the investment principles aren't that difficult. One of the basics of investment fundamentals is financial planning.
Read more: Overview and Importance of Financial Planning
Important Stock Market Terms
| Term | Definition |
|---|---|
Sensex | Sensex includes the top 30 listed stocks on the BSE in terms of market capitalisation. |
Demat account | A Demat account is an online repository of shares and other securities. |
SEBI | Securities and Exchange Board of India (SEBI) is the market regulator. It is responsible for monitoring all the transactions and other activities of the all market participants. |
Trading | It refers to the process of buying and selling stocks. |
Stock Exchange | It is a platform where the buying and selling of securities takes place. |
Index | A stock index is a collection of selected stocks. It is used to track the performance of the whole market or a particular market segment. |
Portfolio | A collection of various assets of an investor. It includes various assets like gold, equities, funds, derivatives, real estate, cash equivalents, bonds, etc. |
Bull market | A bull market is the condition of a share market in which prices keep rising. |
Bear market | A bear market is a long andng, continuous period where asset prices fall sharply. |
Nifty50 | It is a collection of the top 50 firms listed on the National Stock Exchange (NSE). |
Stock market broker | A SEBI-registered individual or firm that handles transactions, including buying and selling stocks, on behalf of their customers. |
Bid price | The bid price is the maximum amount a buyer will pay to purchase a specific number of shares. |
Ask price | The lowest price at which a seller wants to sell his shares is the ask price. |
IPO | Initial public offering, or IPO, refers to selling securities to the public for the first time. |
Equity | Equity is the amount a shareholder would get when a company is liquidated. |
Dividend | A dividend is a cash or another benefit that a company gives its shareholders. It can be distributed in a number of ways, like cash, stocks, or another kind of payment. |
BSE | Bombay Stock Exchange (BSE) is India's largest and oldest stock exchange. It was founded in 1875. |
NSE | The National Stock Exchange is the fourth largest stock exchange globally in terms of trading volume. It introduced electronic trading in India. |
Call put option | An investor may acquire the underlying securities by using a call option. They may sell shares of the underlying security by using a put option. |
Ask and close | Ask price is the minimum price a seller would accept for the stock. The closing price refers to the final price at which a stock trades in a trading session. |
Moving average | It is a stock indicator frequently used in technical analysis to provide an average price that is updated continuously. A rising moving average suggests an uptrend. A descending moving average suggests a downward trend. |
How to Start Investing in the Share Market?
Investing in the share market can be a rewarding way to build wealth, but it is important to understand the share market basics before getting started. Here is a step-by-step guide for beginners:
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Understand the stock market: Learn about stocks, the types of shares, and how the stock market works. This is the foundation of stock market basics.
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Select a brokerage account: Choose a brokerage that fits your needs. They act as intermediaries between you and the stock exchanges.
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Fund your account: Deposit money into your brokerage account to begin buying stocks.
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Set your strategy: Decide if you want to invest long-term or trade frequently. Stock market basics for beginners emphasise a clear strategy.
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Start small: It is best to begin with small investments and diversify your portfolio to reduce risk.
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Consider ETFs: Exchange-traded funds (ETFs) offer a diversified investment option.
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Do thorough research: Understanding the basics of trading in stocks and market trends is crucial before making any investment decisions.
Considerations Before Beginning Share Market Investing
Before diving into the stock market, there are several considerations to keep in mind to ensure you make informed decisions. Here’s a checklist:
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Assess your financial goals: Understand if you are investing for long-term growth, short-term gains, or income generation through dividends.
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Understand your risk tolerance: Determine your risk appetite and time horizon. This will guide the types of stocks and investment strategies that suit you.
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Choose a reliable brokerage: Research brokers based on their fees, services, and educational tools. A platform with solid educational resources will help you understand the share market and enhance your trading knowledge.
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Diversify your portfolio: Spread investments across various sectors to minimise risks. Diversification protects you from market volatility in a single industry.
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Understand market factors: Keep in mind the impact of inflation, market cycles, and geopolitical events, which can affect stock performance.
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Focus on the basics of trading stocks: A solid understanding of stock market is crucial for making informed decisions. Regularly stay updated on market trends and developments.
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Start small: Start with smaller investments to assess the market conditions and understand the associated risks before committing larger amounts.
Common Pitfalls to Avoid
When investing in the share market, beginners often make common mistakes that can hinder their success. Here is a list of pitfalls to avoid:
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Chasing short-term profits: Impulsive decisions driven by market fluctuations, rather than following a strategic plan, can be detrimental. Understanding stock market basics helps prevent this.
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Lack of diversification: Failing to diversify your portfolio increases the risk of significant losses. Stock market basics for beginners highlight the importance of spreading investments across sectors.
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Neglecting research: Relying on tips from unreliable sources without conducting your own research can lead to poor decisions. Master the basics of trading stocks for better results.
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Emotional investing: Panic selling during market downturns or getting swayed by emotions can lead to poor decisions. Stay calm and stick to your strategy.
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Overtrading: Excessive buying and selling lead to unnecessary fees and taxes, which can erode your returns. Focus on long-term goals instead.
Conclusion
Understanding the basics of stock market investment may seem daunting at first, but it will empower you to make informed choices. Additionally, stock exchanges like the BSE and NSE have played critical roles in global finance throughout history. Over the long term, stocks can provide inflation-beating returns, making them a more attractive investment than real estate or gold.
However, determining the size and type of investments requires taking into account factors such as financial goals, age, and risk tolerance. Moreover, you can invest effectively in the stock market by conducting thorough research, staying current on market trends, and avoiding short-term thinking. Also, by leveraging the expertise and services of Kotak Securities, you can navigate the stock market with confidence and work towards securing your financial future.
Read more: How To Trade Stocks: A Beginner's Guide
FAQs on stock market basics
What is stock market trading?
Stock market trading refers to the buying and selling of securities in the stock market.
How can I learn about the share market?
Understanding the share market takes time and effort. It’s always a good idea to do ample research and understand the risks involved before investing money. Here are some ways that will help you understand the share market better:
- Online resources: Refer to free online courses and tutorials about the share market.
- Books: There are plenty of beginner’s guides available in the form of published books, if you are a bookworm.
- Professional advice: Consult a financial broker or advisor for guidance.
What is Sensex and Nifty?
The S&P BSE SENSEX (also known as the BSE 30 or simply the SENSEX) is a stock market index that comprises of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE) in India. It is considered as a barometer of the Indian economy and is the most widely tracked equity index in India.
Nifty 50 is an index of 50 companies listed on the National Stock Exchange (NSE) of India. It is a market capitalisation weighted index, which means that the weight of each company in the index is proportional to its market capitalisation. The Nifty 50 index is considered as a benchmark index for the Indian stock market and is widely used to measure the performance of the Indian stock market.
What are the 4 types of share markets?
The 4 types of share markets in India are primary share market, secondary market, equity market, and derivative market.
How many shares of stocks should I buy?
You need to consider certain factors while deciding how many shares of stocks you should buy. These include the availability of capital, diversification and analysing whether you need more shares or not.
Which share is the best for beginners?
Beginners must buy shares of blue-chip companies that are dominant players in their segment.
What is the difference between stocks and shares?
Essentially, they are the same. Both represent your ownership of a company. However, ‘stock’ refers to part-ownership in one or more companies and ‘share’ refers to the unit of ownership in a single company.
How would you choose a stock for your portfolio?
Choose stock basis profitability, risk, valuation, etc. You can find these analytics on a trading website.
What instruments are traded in stock markets?
Equity shares of listed companies are traded in stock markets and other instruments like index futures, stock futures, VIX futures, etc.
What is the bear and bull market?
When stock prices rise, and there is an uptrend, it is called a bull market. Conversely, if stock prices fall and there is a downtrend, it is called a bear market.
