Stock market for beginners 2

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Before starting any new task it is important to learn the basics. That holds for beginners entering the stock market as well. In simple terms, the stock market is a place where buyers and sellers congregate to trade stocks. Before the internet arrived, people would gather at the trading ring to buy and sell stocks. Today, however, all trades are carried out using computer terminals at brokers’ offices. Moreover, the terms ‘share market’ and ‘stock market’ are used interchangeably.

Read along to get better acquainted with how the share market works. Find out about the different types of stock markets, why stock prices fluctuate, how to invest and trade in stocks, and more.

SHARE MARKET BASICS

If you are new to share market investing, learning how the market functions is vital:

  • The stock market is a place where the shares of different companies are listed and traded.
  • This trading takes place via platforms known as stock exchanges.
  • India has stock exchanges like the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Metropolitan Stock Exchange (MSE), National Commodity and Derivates Exchange, and Multi Commodity Exchange (MCX).
  • To buy and sell stocks, investors in India are required to open a demat account and a trading account with a registered depository participant (DP).

The stock market is closely regulated by the Securities and Exchange Board of India (SEBI). SEBI imposes regulations on the stock market to govern its working, build transparency, and protect the interest of investors. By doing so, investors are encouraged to participate in the stock market with confidence.

PRIMARY MARKETS AND SECONDARY MARKETS

The share market in India is subdivided into two types of markets: the primary market and the secondary market. Let’s take a look at how each one functions.

Primary Market

When a business entity decides to go public and list on the stock exchange, it issues an initial public offering (IPO). Through the IPO, the entity issues shares to the public for the first time. Investors who wish to subscribe to these shares do so on the primary market. The purpose of the IPO is generally to collect funds to grow or expand the business.

Secondary Market

Once the shares issued in the IPO have been fully subscribed and allotted to investors, the newly formed company lists on the stock exchange. Its shares now enter the secondary market. They can be bought and sold freely on the stock exchange at their current market value.

WHY STOCK PRICES FLUCTUATE

Once shares enter the secondary market, their prices are governed by the laws of supply and demand. Let’s consider three basic scenarios:

  1. 1. A large number of buyers wish to buy the stock, but there are only a few sellers. Given the high demand and low supply, the stock price will appreciate.
  2. 2. A large number of sellers want to exit the stock, but there are only a few buyers. Here, supply is high but demand is low. So, the stock price declines.
  3. 3. The number of buyers and sellers is similar. In such a situation, the price level may fluctuate only slightly.

Besides, several other things affect the demand and supply of stocks, and thereby influence the stock prices. Here are some common factors that investors should note:

  • Company performance: If the company’s earnings have exceeded expectations, demand for the company’s shares is sure to rise. This will lead the stock price to increase. But if there is a decline in the company’s performance, more stockholders may wish to sell their shares in a market where buyers are few. In such a situation, the stock price could fall.
  • Sector performance: You will find that the stock prices of companies in the same sector tend to move in a similar way. If the entire sector is seeing bullish trends, stock prices of companies within the sector are likely to rise. But if the mood is bearish, the stock prices could fall.
  • News events: Economic announcements like a change in the repo rate could affect the cost of debt for a company. This could affect its stock prices. Political events like a change in the governance of a country could also affect stock price movements.

SIGNIFICANCE OF STOCK INDICES

A key step for new investors is learning to use stock market indices. A stock market index helps to track the performance of a group of stocks.

Numerous company stocks are listed on the stock exchange. A stock market index selects and groups together a certain number of stocks. The selection of company stocks may be based on aspects like:

  • The sector to which the stocks belong
  • The size of the company
  • The market cap of the company

For example, the NSE’s benchmark index Nifty comprises 50 stocks while the BSE’s Sensex is comprised of 30 stocks. Some popular sectoral indices include Bank Nifty, Nifty Pharma, Nifty Metals, and BSE Midcap.

Stock market indices can mirror the performance of the entire market or a particular segment. This makes it easier for the investor to compare specific stocks, and see if these are moving with or against a particular index. Stock market indices can also provide a sense of the current investor sentiment, which can be handy for traders and investors in the market.

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