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Basics Of Stock Market
In our investing journey Stock Market plays the Important Role because these inflation rate is very high and most of the investment products doesn’t beat the inflation in long run thats why investing in Stock Market becomes important. In long run stock market not only beat Inflation but it also gives you good return. But stock market is not easy as it looks, So Before investing, it is always wise to learn the Basics
of Stock Market.
Why one should invest?
One needs to invest : –
➢ To achieve their financial goals & objectives
➢ To better deal with the unavoidable – rising living costs, known as inflation.
➢ To create wealth for the future.
Where to Invest?
The following are the asset classes in which one can invest: –
➢ Fixed Income Securities: – Fixed income securities are a type of debt instrument that pays fixed interest payments and repays the principal amount when it matures.
➢ Equity: -Investment in equity involves purchasing stocks of publicly listed companies.
➢ Real Estate: -Investment involves buying and selling of properties.
➢ Commodity: -Investment in commodity refers to investment in an agricultural product such as grains,
coffee, wool, metals like gold, silver, or aluminum, and energy sources such as oil or coal.
What is the stock market?
A stock market is a place where investors can buy and sell Stocks, market forces dictate the price at which each buying and selling transaction takes place. In simple terms, it is a marketplace where shares of public listed companies are traded.
Two kinds of the market: –
➢ Primary Market: – A primary market is a place where companies sell new shares to the public to raise
money for long-term expenditures like expanding existing businesses or buying a new one.
Offering in the primary market includes offers for sale, public issues(IPO), right issues.
➢ Secondary Market: – The secondary market is the place where investors and traders trade in securities. This is done after the IPO is over and the shares are sold in the primary market.
| Primary market | Secondary market | |
| Also called as | New Issue Market (NIM) | After Issue Market (AIM) |
| Role of the market | Market where stocks are issued for the first time | Market where stocks are traded once issued |
| Intermediaries | Investment banks | Brokers |
| Sale of securities | Directly by companies to investors | Sold and purchased amongst investors and traders |
| Price of shares | Fixed at par value | Changes depending on the supply and demand of shares |
Stock Market Participants: –
➢ Security Exchange Board of India: – The security exchange board of India often known as SEBI is the
regulator of the stock market of India. SEBI establishes and enforces standards to encourage the growth of stock exchanges, safeguard the interests of individual investors, and control the operations of market
participants and financial intermediaries.
➢ Stock Exchanges: – In India there are two Stock Exchanges.
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
➢ Stock Brokers: -A broker is a middleman that executes buy and sell orders for investors in return for a fee or a commission.
➢ Retail Participants: – Individual investors that buy stock or invest in mutual funds, exchange-traded funds, and other types of securities are known as retail investors.
➢ NRIs: – These are Indians who live and work outside of India but buy stock or invest in mutual funds, exchange-traded funds, and other types of securities in the Indian market.
➢ Domestic Institutional Investors: – DIIs are institutions that are based in India.
➢ Foreign Institutional Investor: – A FII is a non-Indian institution or fund house. They are registered with SEBI and invest in Indian securities
Intermediaries in Stock Market: –
➢ Depository: – A depository is similar to a bank that holds securities. It is a financial intermediary that
provides Demat account services. The National Securities Depository Ltd (NSDL) and the Central
Depository Services Ltd (CDSL) are depositories in India.
➢ Depository Participants: – Depository participants act as intermediaries between the investor and
depository. You must work with a Depository Participant to open a DEMAT account (DP). A DP can
assist you in opening a DEMAT account with a Depository. The DP is registered with the SEBI.
➢ Banks: – Banks helps in transferring fund from your bank account to your trading account.
➢ NSCCL and ICCL: – National Security Clearing Corporation Ltd and Indian Clearing Corporation are
wholly owned subsidiaries of the National Stock Exchange and Bombay Stock Exchange. The clearing
corporation assures that neither the buyers nor the seller default. They ensure that stock exchange
transactions are settled promptly.
How to trade in the stock market?
Stocks issued by firms can be exchanged in the secondary market once they have been listed on stock exchanges.
➢ Open a Demat Account: – The first step for beginners in stock market trading is to open a Demat account.
➢ Understand the Stock: -Understand the technical aspects of the stock the last traded price of the stock, percentage change, previous day close of stock, OHLC (open high low close) of stock, and no of shares traded at that point of time.
➢ Learn about Bid and ask price: -Understand the bid and ask price A trader’s bid price is the price at which he can sell his stock. The asking price, on the other hand, is the price at which a trader can purchase any stock.
➢ Learn How to place orders: – Stock market newcomers must learn how to place stock orders. To put it
another way, novice traders must understand how to place buy and sell orders.
➢ Learn to use stop loss: – share trading for beginners is new. As a result, they must learn how to safeguard their profits. A trailing stop loss is one approach to safeguard stock earnings. A stop-loss order protects you from a market downturn after you’ve opened a position.
➢ Trade-In safe shares: – Avoiding low-quality equities is a golden rule for novice stock market traders. Any trade should be avoided if the company’s stock has bad management, fraud claims, or any other
misconduct associated with it. However, such stocks have extremely volatile movements that are ideal for
trading, but amateurs might easily become trapped in them. Trading in high-quality stocks is, in fact, the
finest strategy for traders.
What happens after you buy a stock?
➢ Day 1 Trade Day: – The day one buys the share is referred to as the trade date and is represented as T Day. By the end of the day, the amount of the transaction and applicable charges are debited from your account. The broker creates a “contract note” and delivers a copy the same day. A contract note is similar to a bill that details every transaction you performed. This is a crucial document that should be saved for future use. A contract note usually includes a breakdown of all transactions completed that day, as well as the trade reference number. It also indicates how the broker’s fees are broken out.
➢ Day 2 Trade Day + 1(T + 1 day): – The T+1 day is the day after you completed the transaction. Even if
you don’t have the shares in your account, you can use the Buy-Today-Sell-Tomorrow (BTST) deal to sell
the ones you acquired yesterday. This is a high-risk transaction that is typically avoided by newcomers.
➢ Day 3 Trade Day +2(T+2 day): – On the third day, or T+2, shares are debited from the person who sold
you the shares and credited to the brokerage with whom you are trading, who will credit it to your
DEMAT account at the end of the day. Money that was deducted from your account is credited to the
person who sold the shares.
How to select stocks to trade?
➢ Companies Management: -This is critical to a company’s development and prospects. Discover the
company’s important individuals and promoters, as well as its management techniques.
➢ Financial Position of the company: -What does the balance sheet of the company look like? Have profits and revenues increased in recent years? What is the total amount of debt? Is it boosting productivity?
➢ Dividends: -Is the company paying dividends? What is the frequency of dividend payments?
➢ Stocks should not be purchased based on rumors: When buying stocks, emotion should not be a factor. Do not make any investment decisions based on rumors
➢ Debt to equity ratio: – The debt-to-equity ratio of a company shows how much money is financed by banks and shareholders. Investors usually prefer a company with a lower debt-to-equity ratio since it is thought to be more stable than one with a high ratio. As a result, before investing, this ratio must also be evaluated.
➢ Liquidity: Liquidity refers to equities with sufficient trading volume to allow traders to easily enter and exit positions.
➢ Levels of innovation: What new items or expansion plans are in the works? How does it compare to
competitors in terms of customer satisfaction? Is it in a good position to pivot and respond to new market demands?
I hope after reading this article you have understand the basics of Stock Market. If you have any queries you can watch our videos related to stock market on our Youtube Channel. Click Here to watch the Videos.
By Jaskirat Singh Gujral (Founder – Financial Adda) Whats app – 9910653412