This article is the part 1 of the Basics section of our Stock Market Learning series created by SMJ. It provides a clear and simple introduction to the stock market, explaining what it is, how it works, the role of stock exchanges, factors affecting stock prices, and how to start investing. Our goal is to help beginners understand these concepts and feel more confident about trading/investing.
The stock market is a place where people buy and sell shares of companies. Think of it like a marketplace, but instead of goods, you’re trading parts of businesses. Companies sell shares to raise money for growth, and investors buy these shares hoping to make a profit. The stock market is important because it helps businesses get the funds they need while allowing investors to increase their wealth.
Understanding Stocks
Stocks, also called shares or equities, represent ownership in a company. When you buy a stock, you become a part-owner of that company. This ownership means you have a claim on part of the company’s assets and earnings.
Why Companies Sell Stocks
Companies issue stocks to raise money for various purposes like expanding their operations, launching new products, or paying off debt. By selling shares, they can gather the funds needed without having to take out loans.
Why Investors Buy Stocks
Investors buy stocks for two main reasons: to make money through stock price appreciation and to earn dividends.
Stock Price Appreciation – If the company performs well and grows, the value of its stocks typically increases. Investors can then sell these stocks at a higher price than they bought them, making a profit.
Dividends – Some companies distribute a portion of their profits to shareholders in the form of dividends. This provides investors with a steady income in addition to the potential for stock price growth.
Types of Stocks
Common Stocks – These are the most common type and give shareholders voting rights at the company’s annual meetings. Common stockholders may receive dividends, but these are not guaranteed.
Preferred Stocks – These stocks do not usually come with voting rights but offer a higher claim on assets and earnings than common stocks. Preferred stockholders receive dividends before common stockholders often at a fixed rate.
Stock Market Terminology
Here are some common terminologies in the Stock Market, by understanding these basic concepts, you can begin to grasp how the stock market works and why it plays such a crucial role in the economy.
Bull Market – A period when stock prices are rising.
Bear Market – A period when stock prices are falling.
IPO (Initial Public Offering) – The first time a company sells its shares to the public.
Dividends – Payments made by a company to its shareholders from its profits.
How the Stock Market Works
The stock market operates as a network of exchanges where investors buy and sell stocks. Here’s a step-by-step look at how it functions.
1. Company Lists Shares – A company lists its shares on a stock exchange through an Initial Public Offering (IPO). This process allows the public to buy shares for the first time.
2. Investors Buy and Sell Once listed, shares can be bought and sold by investors on the stock exchange. Investors can trade stocks through brokers or online trading platforms.
3. Role of Brokers – Brokers act as intermediaries between buyers and sellers. They execute trades on behalf of investors for a commission or fee. Online trading platforms now make it easier for individual investors to trade directly.
4. Order Types
Market Order – A buy or sell order to be executed immediately at the current market price.
Limit Order – An order to buy or sell a stock at a specific price or better.
Stop Order – An order to trigger a trade once it reaches a specified price, known as the stop price.
(You can find many other advanced order types on your broker or trading platforms. We will discuss them as we progress through this series).
5. Price Determination – Stock prices are determined by supply and demand. If more people want to buy a stock than sell it, the price goes up. Conversely, if more people want to sell a stock than buy it, the price goes down.
6. Trading Sessions – The stock market operates in trading sessions. In India, regular trading hours for NSE and BSE are from 9:15 AM to 3:30 PM, Monday to Friday. There are also pre-market and post-market sessions.
7. Settlement Process – After a trade is executed, it goes through a settlement process. In India, the settlement cycle is typically T+2, meaning the trade is settled two business days after the transaction.
8. Regulation and Oversight – Regulatory bodies like the Securities and Exchange Board of India (SEBI) oversee the stock market to ensure fair practices and protect investors. They set rules and regulations to maintain market integrity and transparency.
What is a Stock Exchange?
A stock exchange is a centralized platform where stocks and other securities are bought and sold. It provides a structured environment for trading, ensuring transparency, liquidity, and fair pricing. The primary functions of a stock exchange include listing companies, facilitating the buying and selling of shares, and regulating the market to protect investors.
Major Indian Stock Exchanges
- Bombay Stock Exchange (BSE) – Established in 1875, it’s one of the oldest stock exchanges in Asia.
- National Stock Exchange (NSE) – Founded in 1992, it’s the largest stock exchange in India by trading volume.
Connection Between Stock Exchanges and Brokers
Brokers act as intermediaries between investors and the stock exchanges. They execute buy and sell orders on behalf of investors, providing access to the stock market.
- Investor Places an Order – The investor decides to buy or sell shares and places an order through a broker.
- Broker Executes the Order -The broker submits the order to the stock exchange where it gets matched with a corresponding buy or sell order.
- Transaction Completion – Once the order is matched, the transaction is completed, and the shares are transferred between parties.
Brokers play a crucial role in the stock market by facilitating transactions, offering investment advice, and providing market insights to investors. Their connection to stock exchanges ensures that trading is efficient, transparent, and accessible to all participants.
Factors Affecting Stock Prices
Stock prices fluctuate due to various factors, reflecting the dynamic nature of the market.
1. Supply and Demand – The basic economic principle where high demand for a stock raises its price, while excess supply lowers it.
2. Company Performance – Earnings reports, profit margins, and business growth impact investor confidence and stock prices.
3. Economic Indicators – Interest rates, inflation, and economic growth rates affect market sentiment and stock valuations.
4. Market Sentiment – Investor perceptions and emotions, often driven by news, rumours, and market trends, can cause price volatility.
5. Global Events – Political stability, international trade relations, and global economic conditions influence investor behavior and stock prices.
6. Industry Trends – Changes within specific industries, such as technological advancements or regulatory changes, can impact stock prices of companies within that sector.
Participants in the Stock Market
1. Individual Investors – Ordinary people who buy and sell stocks to achieve personal financial goals, such as saving for retirement or generating additional income.
2. Institutional Investors – Large entities like mutual funds, pension funds, insurance companies, and hedge funds that invest substantial amounts of money in the stock market. They often have significant influence on stock prices due to their large volume trades.
3. Brokers and Dealers – Intermediaries who facilitate the buying and selling of stocks. Brokers execute trades on behalf of clients, while dealers trade for their own accounts.
4. Market Makers – Firms or individuals that provide liquidity to the market by being ready to buy and sell stocks at publicly quoted prices, ensuring smoother trading and reducing price volatility.
5. Regulators – Government agencies like the Securities and Exchange Board of India (SEBI) oversee the market to ensure fairness, transparency, and protection for investors. They set and enforce rules to maintain market integrity.
How to Get Start On the Stock Market
- Set Your Goals – Determine why you want to invest. Are you saving for retirement, a major purchase, or building wealth over time?
- Choose a Broker – Select a brokerage firm where you can open an account. Many online brokers offer easy-to-use platforms for beginners.
- Open an Account – Fill out the necessary forms to open a brokerage account. This usually involves providing some personal information and choosing your account type.
- Deposit Funds – Transfer money into your brokerage account. Most brokers allow you to link your bank account for easy transfers.
- Research and Pick Stocks – Start by researching different stocks. Look for investments that align with your goals and risk tolerance.
- Make Your First Trade – Use your brokerage platform to buy your first investment. Start small and gradually build your portfolio as you become more comfortable.
- Monitor and Adjust – Keep an eye on your investments and make adjustments as needed. Stay informed about market trends and company performance.
Remember, investing is a long-term journey. Start with small, manageable steps, and continue learning as you go.
This article is a very basic step in understanding the stock market. You may not grasp all the terminology or points mentioned. Follow the entire series to gain a comprehensive understanding and become a knowledgeable trader or investor. We do not recommend any specific stocks or encourage jumping into the stock market without thorough research and understanding.