Stock Market Basics : A Beginners Guide

Stock Market Basics For Beginners.

Stock markets has always been subjected to a lot of fascination, complexity, delimma 'rags to riches' and 'riches to rags' stories.



Whether it's on your television, lining up your eyes through your newspaper, getting a glimpse about the world affairs and updates on any online portal or from any known person you might have definitely came across some sort of information about the stock market or heard the word stock market.

Stock market plays a vital role and it is the pivot of the economy.

So, many times you might have wondered what exactly stock market is? what exactly these stocks/shares and equity are ? What are indices ? How to invest and there are many more terminologies and complex stock market jargons might have poked your mind.

This stock market basics guide for beginners will give you a fair glimpse about stock market.

Stock Market Basics for Beginners
Finomenal Wealth


Stock market


Let me give you a brief account of what stock market is before diving deep into it the detailed explanation.

A stock market/equity market/share market is a place where buyers and sellers  buy or sell securities(shares/stocks/equities, bonds etc). Stock market consists of both primary as well as secondary market.

Now this was just a short definition of stock market.

Before giving more details first let's understand what is the need of having stock market.

What is the need of stock market ?


A company or any kind of business need funds and money for their growth, expansion modernization, monetary needs, availing day to day expenses and for their survival and maintenance.

And in order to meet their financial requirements they need to raise money and the company generally has some ways to raise money like borrowing from friends & family, loan from Bank and financial institutions or from public.
The general and common ways can be categorised into two categories :

•Debt Financing
•Equity financing

Debt financing is a way by which a firm borrows money from financial institutions or individuals as a form of a liability  without giving any kind of ownership rights.

In return for lending the money, individuals and investors become creditors to the company.

The company has to return their money : the principal as well as they have to pay interest to them.

On the other hand when the company raises the capital from public through equity financing like venture capitalist (VC), angel investor or from public. The company neither pays interest nor they have are liable to return the raised amount as a credit.

Now you might be imagining that what the company is actually giving to the investors in return to the amount of investment raised from them So, here comes the word "shares" and the concept of shares.

Shares

So, In equity financing a company generally gives an ownership to the investor a "share" in the company. This ownerships is called are shares or equity. That's why stocks are also known as equities or shares.

Ownership is proportional to the amount invested by the investors.
Now, there is a two way benefit to both the investor as well as the company :

  • Company get the required amount of money from the public in order to sustain and maintain their financial requirements.
  • No burden of paying the debt, principal amount and the interest.

Investors

  •  Investors get shareholding and ownership rights in the company.
  • Investors get returns in the form of dividend and capital appreciation.

In order to raise money from public through stock market, the company has to approach investors through primary market and has to come up with its Initial Public Offering(IPO).

Now let's talk about what an IPO means.


Initial Public Offering (IPO)

As the name itself signifies "Initial Public Offering" or IPO also known as the public issue. IPO is when a company raises fund from the public for the first time. The shares are sold to the individual investors, retail investors and institutional investors in IPO and later the stock is listed on the stock exchange as a listed stock.

In IPO, a private company is transformed into a public company .
There is a direct transaction between the company and the investor in initial public offering. IPO is the first sale of shares to the investors. IPO is used to raise new equity capital for the company concerned. The investors subscribe to IPO and thereby get their allotment of shares.

After the initial public offering IPO, IPO is listed on the stock exchange to be freely traded in the open market and the shares are listed on the stock exchange.

Now here comes this new concept of stock exchange.

Let me give you a glimpse about what are stock exchanges.

For example recently HDFC AMC came with its IPO

Stock Exchange

A stock exchange is a place which facilitates transactions. At the stock exchange stock brokers, traders and the investors can buy or sell securities such as shares/equity/stocks, bonds and other financial instruments.
There are two major stock exchanges in India.

  • Bombay Stock Exchange (BSE).
  • National Stock Exchange (NSE).


There are more than 1600 listed companies on NSE and more than 5500 on BSE.
As there are so many listed companies on the stock exchange BSE as well as NSE.

It becomes very tough and tedious work to evaluate and track the performance of every company listed on these stock exchange in order to know how the stock markets is performing and to ease this work we have indices or index.

Indices

A stock market index is a measurement or can be considered as a barometer to measure the ups and down in the market.

The index of BSE is sensex.

Sensex : Sensex is the stock market index of 30 well established and financially sound companies listed on Bombay Stock Exchange(BSE).

The index of NSE is Nifty.

Nifty : Nifty is the stock market index of 50 well established and financially sound companies listed on National Stock Exchange(NSE).

Sensex and Nifty both have companies generally being leader in their respective sector like automobiles, banking and financial services, pharmaceuticals, aviation, IT and many other sectors.

This index works as a barometer to track the performance of the share market.

The performance of sensex and nifty is considered to be the performance of the stock market and with the help of sensex and nifty anyone can track the performance of the stock market without evaluating the performance of every company listed.

So, when Sensex and nifty are up with positive numbers, we can say that the market is performing well and good and when the sensex and nifty is down with negative numbers we can say that the market is badly performing.

What does an investor need to invest in stock market.


To invest in stock market and to buy and sell shares, one of the prerequisite requirement is that an investor needs to open a Demat A/C with any registered brokerage firm.

Stock brokerage firm or Brokers.


Stock brokerage firm or brokers are the mediators with whose help you can buy or sell shares. Investors pay a brokerage fees to avail their services for doing the transactions on investors behalf.

There is one more account needed with the Demat A/C and that's Trading A/C.

You can open both the accounts simultaneously with any brokerage firm.

Demat A/C is compulsory and it is just like a bank saving account as in bank savings account you keep your money so in Demat account you keep the shares and trading account helps you to buy or sell shares while Demat A/C works as a store for shares you buy.

How to buy or sell shares.


There are generally two ways to buy or sell shares

  • Online : you can buy or sell shares online with help of your brokerage firm's Mobile App or on their website.

  • Call service : you can contact your broker through call and can buy or sell shares.

Why investors invest in the stock market and what do they get ?


Equity investing returns
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Every investor who invests in any asset class invest in expectation to get returns and share market is no different case. Returns and profits are the wholesome aim of any investment.

Let's talk about it more

When an investor invest in the stock market he/she gets :

  • Dividends
  • Capital appreciation


Whether investor will get dividend or not depends on the discretion of the board of directors.

But capital appreciation is main source of making money through investing .

Capital appreciation simply means when the price of share increases investor gain or benefit from it as his/her invested amount increases with respect to the increase in share price.

Let me give you an example :

If Mr. A bought 1000 shares of XYZ company at the price of 100 rupees.
He invested an amount of 100000 rupees in the market.
And if the share prices after 2 years rise to 160.
So, Mr. X investment amount of 100000 rupees of Mr X invested in XYZ company rise to 160000 so the difference of 60000 is the gain or the capital appreciation from the investment.

Capital appreciation is directly proportional to its share price and share price is proportional to the demand and supply scenario and to the growth of the company.

So when a company performance is good and it grows it prices increases and thereby creates demand for its shares among investors. Hence it share prices increases.

Investors should always approach capital appreciation as the main source of the profit from investing and must invest in fundamentally strong and sound companies with great growth potential to benefit from it.

Conclusion


So after reading this guide, you must have got a lot about the basics of stock market  as a novice. You have got what actually the stock market is and what are these stock exchanges, indices and where to invest and many more.

Remember to become a successful stock market investor you need to have strong skills and sound knowledge to scale up excellence and in order to do that you need to feed your brain with knowledge.

So invest in your mind with knowledge, cognizance and learning
Legendary billionaire investor Warren Buffet said, "The most important investment you can make is in yourself."

So invest in yourself as much as you can because your mind is the biggest asset.

Happy investing 

Authored by :

Prashant Kumar Mishra 

Founder of Finomenal Wealth

















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