To operate, every company needs money. Sometimes the revenue generated by selling goods or services is insufficient to cover the costs of working capital. In order to run their business effectively, firms encourage regular people like you and me to participate in it. In exchange, investors receive a piece of the company’s profits.
Understanding this is the first step in learning the fundamentals of the stock market. Let’s investigate this in greater detail.
What are Stocks?
Stocks are just one investing strategy for increasing wealth. Purchasing shares in a firm entitles you to ownership of that company’s common stock.
One option to invest in some of the most prosperous businesses is through stock investments.
Additionally, there are several stock types available on the market for trading or investing. Based on the following characteristics, these stocks are categorised:
- Market capitalization
- Ownership
- Fundamentals
- Price votality
- Profit sharing
- Economic trends
How Does the Stock Market Work?
Companies offer ownership holdings to investors in order to raise capital on the stock market. Shares of stock are the name for these equity investments.
Companies can get the money they need to run and grow their operations without taking on debt by listing shares for sale on the stock exchanges that make up the stock market. By swapping their funds for shares on the stock market, investors gain.
As businesses use that money to develop and expand, investors profit because their stock shares appreciate in value over time, resulting in capital gains. As their revenues increase, businesses also distribute dividends to their shareholders.
Individual stock performance over time varies greatly, but the stock market as a whole historically has given investors average annual returns of about 10%, making it one of the most dependable methods to increase your money.
Stock Market Basics – Important Terms
The terminologies that are frequently used when discussing the stock market are listed below. This can serve as a vocabulary that you can consult whenever you wish to learn.
| Term | Description |
| Sensex | Sensex is a collection of the top 30 stocks listed on BSE by way of market capitalisation. |
| SEBI | Securities and Exchange Board of India (Sebi) is the securities market regulator to oversee any fraudulent transactions and activities made by any of the parties: companies, investors, traders, brokers and the likes. |
| Demat | Demat, or dematerialised account, is a form of an online portfolio that holds a customer’s shares and other securities in an electronic (dematerialised) format. |
| Trading | It is the process of buying or selling of shares in a company. |
| Stock Index | A stock index or stock market index is a statistical source that measures financial market fluctuations. They are performance indicators that indicate the performance of a certain market segment or the market as a whole. |
| Portfolio | It is a collection of a wide range of assets that are owned by investors. Portfolio can also include valuables ranging from gold, stocks, funds, derivatives, property, cash equivalents, bonds, etc. |
| Bull Market | In a bull market, companies tend to generate more revenue, and as the economy grows, consumers are more likely to spend. |
| Bear Market | Bear markets refers to a slowdown in the economy, which may make consumers less likely to spend and, in turn, lower the GDP. |
| Nifty50 | Nifty 50 is a collection of the top 50 companies listed on National Stock Exchange (NSE). |
| Stock Market Broker | A stock broker is an investment advisor who execute transactions such as the buying and selling of stocks on behalf of their clients. |
| Bid Price | Bid price is the highest price a buyer will pay to buy a specified number of shares of a stock at any given time. |
| Ask Price | Ask price in stock market refers to the lowest price at which a seller will sell the stock. |
| IPO | Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. |
| Equity | Equity is the value that would be received by the shareholder if all of the company’s assets were liquidated and all of the company’s debts were paid off. |
| Dividend | Dividend refers to cash or reward that a company provides to its shareholders. It can be issued in various forms, such as cash payment, stocks or any other form. |
| BSE | Bombay Stock Exchange (BSE) is the largest and first securities exchange market in India. It was established in 1875 as the Native Share and Stock Brokers’ Association. It is also the first stock exchange in India and provides an equities trading platform for small-and-medium enterprises. |
| NSE | National Stock Exchange was the first to implement screen-based or electronic trading in India. It is the fourth largest stock exchange in the world in terms of equity trading volume as per the World Federation of Exchanges (WFE). |
Types of Stock Market?
There are 2 types of stock market:
1.Primary Market: It serves as a venue for companies to list new stock options and bonds for purchase by the general public while also creating securities.
2.Secondary Market: With the aid of brokers, investors trade securities here without involving the original corporations that issued them.
Rules of Investment:
1.Invest early
2.Invest regularly
3.Invest for long term and not for short term
Therefore, the investor should always be mindful of these guidelines while making investments—not just in the stock market but also in other types of investments.
How to Tackle risk involved in Stock Market?
It has been observed that the average individual is not willing to engage in the stock market because of the risk involved; they believe that their hard-earned money would be lost in the market as a result of market fluctuations.
However, the only way to handle the situation is for a person to invest their money in a diversified portfolio, which means they shouldn’t put all of their money into a single security but rather spread it across a variety of securities so that any losses from one security are offset by gains from other securities.
A balanced fund is a very good product on the market that invests a proportionate amount of capital in risky assets (stocks and shares) and the remaining capital in safe assets (debt securities). The percentage of this investment is chosen in such a way that the investor seldom experiences any loss.
Key Financial Instruments To Trade In The Stock Market
- Bonds
- Shares
- Derivatives
- Mutual Fund
1.Bonds
For projects, businesses require money. The money they have made from the enterprise is then used to repay them. Bonds are one method of raising money. A loan is what a business obtains from a bank in exchange for recurrent interest payments. Similar to this, a bond is what a business issues when it borrows money from numerous investors in return for periodic interest payments.
Consider starting a project that will begin to generate revenue in two years. You will require an initial sum of money to start the project. You borrow the money from a buddy and then write on the receipt, “I owe you Rs. 1 lakh and will repay you the principal loan amount by five years, and I will pay a 5% interest per year until then.” If your acquaintance is holding this receipt, it signifies he recently purchased a bond by making a loan to your business. You commit to paying the 5% interest each year at the end and the Rs. 1 lakh principal at the end of the fifth year.
Consequently, a bond is a way to invest money by making loans to other people. It is called a debt instrument for this reason. When investing in bonds, you will see the face value, which is the amount of money being borrowed, the coupon rate or yield, which is the interest rate the borrower must pay, the coupon payments, and the maturity date, which is the date by which the money must be repaid.
2.Shares
Consequently, a bond is a way to invest money by making loans to other people. It is called a debt instrument for this reason. When investing in bonds, you will see the face value, which is the amount of money being borrowed, the coupon rate or yield, which is the interest rate the borrower must pay, the coupon payments, and the maturity date, which is the date by which the money must be repaid.
You just agreed to pay your brother Rs 50,000 to sell him half of your business. You document this deal in writing: “One hundred shares of stock will be issued by my new company.” For Rs. 50,000, my brother will purchase 50 shares. As a result, your brother recently purchased 50% of the stock in your company. He currently owns shares. Let’s say your brother requires Rs 50,000 right away. He can get the money by selling the stake on the secondary market. Given that the share price could change, this could be greater than or less than Rs 50,000. It is viewed as a riskier instrument as a result.
Thus, shares serve as a record of a corporation’s ownership. As a result, as a stockholder, you share in both potential profits and potential losses that the firm may experience. Your equities’ value will rise if the business performs better, increasing the return on your investment.
3.Mutual Funds
These are financial entities that let you make covert investments in bonds or the stock market. It collects funds from a number of investors and invests the whole amount in financial instruments. The professional fund manager is in charge of this.
Every scheme issues units, each of which has a fixed value similar to a share. This means that when you invest, you become a unit-holder. As a unit holder, your investment’s value rises when the securities in which the MF scheme invests gain money.
Either the value of the units increases, or money is distributed to all unit holders in the form of dividends.
4.Derivatives
Financial instruments like shares constantly fluctuate in value. Therefore, it is challenging to set a certain price. Here, derivatives instruments are useful. These are tools that enable you to trade in the future at a fixed price today. You just engage into a contract to purchase or sell a share or other financial instrument at a predetermined set price.
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