Stock markets are a great way to make money. But does its complexity stop you from enjoying all the action? That won’t be the case anymore. We’ve broken down all the bull…(& the bear!) surrounding the stock market, so that next time someone mentions anything about it, you’re no longer clueless:
#1. First things first what is the stock market? A stock market is a place where financial instruments like shares of companies are bought and sold or traded. They are broken into two types:
A. Primary Market: When a private business wants funds to expand they can raise this money from the public by issuing some shares to them and in exchange they give the buyer/investor ownership.
This means your private company is now going ‘public’. The first time this happens it’s called an IPO-Initial Public Offer. After this, any attempt by the company to raise funds from the public is called as an FPO- Further Public Offer.
All this fundraising happens through the primary market, but it’s not as easy as it sounds. To go public a business needs to meet certain criteria, fill in a lot of paperwork and spend a lot of money as well! Once they go public the issued shares are listed on the stock exchange for others to buy and sell them.
B. Secondary Market: Secondary markets are the place for these listed shares to be traded. Secondary markets make it possible for one investor to sell their shares to another. Remember there is no NEW issue of shares through secondary markets.
#2. What are shares? A share means ownership rights to a company. Every company/business starts off with some amount of money called as capital. This capital is then divided further into small units called as shares. Example: Your capital is Rs. 10,000 and you decide to divide it into 1000 parts, each part or share will be equal to Rs. 10.
#3. Are shares and equity the same thing? These are interchangeably used but shares show ownership in terms of a number while equity shows ownership in terms of percentage. This is how it works: The overall capital of a business is called as equity and the one who has more equity means they’ve bought a majority number of shares. Taking the above example if you have 500 shares of the above company you’d have 50% equity in it.
#4. How does one buy shares? You can buy shares from the stock market (a.k.a stock exchange) but you can buy only shares of those companies that are listed there. These listed companies are called as public companies and the ones that are not listed are called as private companies. Just like Flipkart: It has many brands listed on it but not all the brands.
#5. Obviously buying shares from the stock market isn’t as simple as shopping on Flipkart:
- You need to first make your demat account. This can be done with your existing savings or current account. A demat account holds your shares in an electronic form and to open it you’ll need a PAN and AADHAR card. Earlier shares weren’t held in an electronic form but they were held in physical paper form.
- After opening your demat account you’ll have to choose a broker: This person is the middleman between you and the stock markets and is registered with the SEBI (Securities and Exchange Board of India)- A body that supervises the stock exchanges to make sure nothing shady goes on in here! The broker for a fee (called as brokerage commission) will buy and sell shares on your behalf.
You could also select a brokerage firm like Motilal Oswal instead of an individual broker. But whoever you pick make sure you conduct a thorough background check on them. They should be reliable and you should be comfortable with them because by the end of it they’re handling your money and you don’t want to mess with that!
- Once the above two things are sorted you can research on a few companies and when you’re confident about them you can start trading.
Trading has a different language altogether, here are some terms you should brush up on to become a pro-trader:
1. N.S.E & B.S.E: These are the 21 stock exchanges in India with N.S.E (National Stock Exchange) and B.S.E (Bombay Stock Exchange) being the largest ones (and probably the ones you should care about).
2. Index (Pl. Indices): These are market indicators telling you the mood of the market (whether markets are positive or negative, up or down) and it’s made up of few companies showing common characteristics.
Example: An index could be made up of stocks from the healthcare sector telling you about how this sector is performing or it could be made up of the best companies from various sectors telling you about the markets in general. There are many such indices either telling you about a particular sector or markets in general.
After the companies are selected the index value is calculated using a complex math formula that takes into account the current share price of all these companies. So, if one of these companies fall in price it will bring down the index value. Tracking these indices would help you decide when to enter the markets, when to get out or which industries are performing well and which ones aren’t. Think of it like picking a fruit from a fruit seller to test the quality of the other fruits.
Many people buy shares of the companies that make up the index (making it easier for them to track their stocks) while many buy stocks that aren’t on the index. These stocks that AREN’T on the index don’t always follow the same trend as the index. Example: If the index is down and you’ve bought a stock that’s not on it, chances of that stock being up are possible!
The Sensex and Nifty are 2 such indices that you’ve probably heard most often of and are widely used by everyone:
- Sensex: Sensex tells us about the mood of B.S.E and the top 30 leading companies from different sectors listed on the B.S.E. like Reliance, Tata, HDFC bank etc. form this index. The common thing among these companies is that that they all have a large market capitalization.
What’s market capitalization?
Market capitalization is the market value of one share multiplied by the total number of shares held by people (in financial terms that’s called as outstanding shares).
- Nifty: Nifty tells us about N.S.E. and its made up of 50 financially sound companies from 12 different sectors listed on the N.S.E. like Axis Bank, Airtel, etc.
People talk about stock markets in terms of indices that’ s why when people say markets are up they’re talking about markets in terms of Nifty and Sensex.
6. Lastly the Bulls & Bears: When they say markets are up it signifies a bullish movement meaning that most companies are doing well and the index is up. Bulls indicate a buying trend because everyone wants to get a piece of the stock market action. When they say markets are down it indicates a bearish movement and that companies aren’t doing that well and the index is down. Bears indicate a selling trend.
Now that you know how exactly the stock markets work, go ahead and see the factors that affect the stock market here. If you’ve still got any more questions on the stock markets feel free to comment below and we will address your questions right away!