Ready to Ride the Bull? Understanding Stock Market Basics for Beginners

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.

Primary market

The primary capital market is where a company sells new bonds and stocks to the public for the first time. The initial public offerings /IPOs – take place in the primary market. 

Secondary market

If a primary market creates securities, a secondary market is where the securities’ trading occurs. Popularly known as the stock market, the secondary market includes the BSE, NSE, NYSE, NASDAQ, and all stock exchanges around the world.

The stock exchange or broker acts as an intermediary in the secondary market.

If you buy and sell a share on the same day, the transaction is called intraday trading. At the end of the day, the trader books either a profit or a loss.

The working process of the share market involves the following process.

• 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.

• 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.

• 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.

• 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.

• The stock exchange authorizes 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.

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 things like houses 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.

   Basic terms of stock Markets 

• Stock: A stock is a collection of shares of a company or a group of companies. 

• Share: Buying a share makes you a shareholder, which means you own a small fraction of the company and are entitled to a portion of its profits and Assets.

• Dividend – Dividend is defined as the payable amount that has been formulated and designated by a company’s Board of Directors for the purpose of distribution among the holders of outstanding shares. For the segment of shareholders who qualify as preference shareholders, the dividend is fixed, while for equity shareholders, dividend yield varies as per the company’s profits. 

• Bear Market :This term is used to define a situation where the market prices decline continuously. Also called Bear Phase, this is defined as a phase during which prices of stocks decline and the general investors are reluctant to invest their funds in the market options.

• Bull market : This term is used to define a situation where the market prices increase continuously. Also called Bull Phase, this is defined as a phase during which prices of stocks increase and the general investors are enthusiastic to invest their funds in the market options. This phase is the opposite of a Bear Market.

• Index: An index groups together stocks representing a section of the stock market or economy and shows how these stocks perform. For example, the Nifty 50 includes the 50 biggest companies on the NSE. The Sensex covers the 30 largest companies on the BSE, and the Nifty Bank comprises the 12 largest banks on the NSE.

• IPO: Initial Public Offering is the process of a private company going public by offering shares to the general public.

• Demat Account: An account used to hold securities in electronic form. A Demat account is required to buy and sell stocks in India.

• Securities and Exchange Board of India (SEBI): The regulatory body that oversees the Indian stock market.

 Example: SEBI is responsible for ensuring transparency and fairness in the stock market.

• Candlestick Patterns: Patterns formed by the movement of a stock’s price on a candlestick chart, used to predict future price movements.

Example: The bullish engulfing pattern, where a small red candlestick is followed by a large green candlestick that completely engulfs the previous candle, indicating a potential reversal in price.

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FAQs on Stock Market

What is the stock market?

The stock market is a place where investors buy and sell shares of publicly traded companies. It provides a platform for companies to raise capital by selling ownership stakes (stocks), and for investors to potentially profit from the growth of those companies.

How does the stock market work?

The stock market operates through exchanges where buyers and sellers come together to trade shares. Stock prices are determined by supply and demand: if more people want to buy a stock, its price goes up; if more people want to sell, its price goes down.

What are stocks?

Stocks, also known as shares or equities, represent ownership in a company. When you buy a stock, you are buying a small portion of ownership in that company.

Why do companies issue stocks?

Companies issue stocks as a way to raise capital for various purposes, such as expanding operations, investing in research and development, or paying off debt. By selling shares of ownership, companies can raise funds from investors without incurring debt.

What are the different types of stocks?

Common stocks and preferred stocks are the two main types. Common stocks represent ownership in a company and usually come with voting rights at shareholder meetings. Preferred stocks typically don't offer voting rights but may have priority over common stocks in terms of dividend payments and asset distribution in the event of liquidation.

What factors affect stock prices?

Stock prices can be influenced by a variety of factors, including company performance, economic conditions, industry trends, investor sentiment, and geopolitical events. Changes in any of these factors can impact supply and demand for a stock, thus affecting its price.

How can I buy stocks?

To buy stocks, you typically need to open a brokerage account with a brokerage firm. Once your account is set up, you can place orders to buy or sell stocks through the brokerage's trading platform.

What is the difference between the stock market and the economy?

The stock market is a part of the broader economy but does not represent the entire economy. While the stock market can be influenced by economic indicators such as GDP growth, unemployment rates, and inflation, it also reacts to company-specific factors and investor sentiment.

What is the role of stock exchanges?

Stock exchanges facilitate the buying and selling of stocks by providing a centralized marketplace where investors can trade securities. Examples of stock exchanges include the NSE and BSE.

What is NSE and BSE?

Established in the year 1992, NSE is a leading stock exchange in India which is located in Mumbai. Trading in NSE was initiated by the year 1994 along with the launch of the wholesale debt market and cash market segment. It was the first dematerialized electronic exchange in India. 

BSE stands for Bombay Stock Exchange. It is the oldest stock exchange which was established in the year 1875. This electronic stock exchange is also known as the tenth oldest stock exchange in the world.

Which securities are listed on the NSE?

Equity

Derivatives 

Indices

Exchange traded funds(ETF’s)

Bonds 

Mutual Funds

Which securities are listed on the BSE?

Stocks

Stock futures

Stock options

Index futures

Index options

Weekly options