Everything You Should Know About the Stock Market

What is a stock market? What is traded? How is the market price determined? Get answers to all your questions in this beginner's guide.

Everything You Should Know About the Stock Market

Introduction

Are you someone who is trying to figure out share market buzzwords like Nifty50, Sensex, highs and lows, bullish, bearish, mutual funds, investing vs. trading, and what stock trading is, how to buy shares in India, etc., but don’t know where to start? Don’t worry, we have you covered. This article will help beginners in trading and discuss all you need to make money in the share market.

What Is a Stock Market?

A stock market or share market is a place where shares of a company are bought and sold. When a company wishes to raise money, it goes to the share market to sell part of its ownership in exchange for capital. Often, people confuse a share market with a stock exchange.

A stock exchange is a fundamental marketplace where buyers and sellers can transact in publicly traded shares during market hours. The Bombay Stock Exchange (BSE) and The National Stock Exchange (NSE) are the two central exchanges in India. A stock exchange is only a component of a share market. A share market comprises all stock exchanges in the country, over-the-counter markets, and private markets.

Let’s now get into understanding stock market basics.

What Is the Purpose of the Stock Market?

Stock markets help companies raise money when they are in need of capital. On the flipside, it helps investors channel their savings and investments into avenues that can help them grow their money. A vibrant stock market is essential to keep the financial and economic health of a country in prime shape. A healthy stock market ensures that money flows from those who have excess to those who are in need of funds.

Primary vs. Secondary Markets

The primary market is the period immediately following a firm's initial public offering (IPO). An IPO often serves the objective of getting the shares listed on the stock market. Following listing and purchase, the share begins trading more extensively on the secondary market.

What Is Traded in the Stock Market?

When you wonder about what is traded in the share market, you may think of only stocks or equity. However, a share market comprises many other securities that can be bought and sold. Six types of financial instruments traded on stock exchanges are:

Stocks

A share is an equity ownership stake in a firm. Any gains the company makes that are distributed to shareholders as dividends are their property. They are also responsible for any losses the business may incur.

Derivatives

A derivative is a security whose value is derived from an underlying security. There are many different kinds of this, including shares, bonds, money, commodities, and more! Due to their divergent expectations of the price of an asset, buyers, and sellers of derivatives engage in a "betting contract" regarding the asset's future price.

Suggested read:
A Beginner's Guide to Derivatives Trading

Futures & Options

The two leading stock derivatives traded in a stock market are futures and options. These are contracts signed by two parties for the trading of a stock asset at a fixed price at a later period. These contracts attempt to mitigate the market risks associated with trading in the stock market by fixing the price in advance.

Suggested read:
Futures Trading: Everything You Need To Know
A detailed guide to Options Trading

Mutual Funds

Mutual funds are professionally run investment vehicles that pool the cash of many individuals and place the combined wealth in various financial instruments. Mutual funds are available for a range of financial instruments, including, but not limited to, equities, debt, and hybrid funds.

Each mutual fund scheme issues units with a set value comparable to shares. Investing in these funds makes you a unit holder in the mutual fund scheme. The unit holder receives the revenue generated over time by the instruments included in that mutual fund scheme when it is reflected in the fund's net asset value or dividend payouts.

ETF

Exchange-traded funds are one of the most significant and worthwhile investments made available to ordinary investors in recent years. ETFs are an excellent tool for achieving an investor's investing objectives because they have several advantages and should be used intelligently.

An ETF is a collection of securities you can purchase or sell on a stock exchange through a brokerage company. ETFs are available on almost every imaginable asset class, from conventional investments to supposedly unconventional assets like commodities or currencies. Innovative ETF structures give investors access to leverage, market shorting, and tax-free short-term capital gains.

Suggested read:
Mutual Funds vs. Exchange-Traded Funds: Which one is better?

Bonds

A business needs significant capital to launch long-term, lucrative projects. Bond issuance to the general public is one method of raising finance. These bonds signify a "debt" that the corporation has taken out. Bondholders receive prompt interest payments in the form of coupons and are treated as the company's creditors. The bondholders view these securities as fixed-income investments. After the specified period, they receive interest on their investment and the principal they initially deposited.

What factors influence the Market Price of Shares, and how is it determined?

According to the standard laws of demand and supply, the market decides the share's price. Share prices typically increase when a company expands quickly, makes excellent profit, or receives new business. More investors desire to acquire the stock at higher prices as the stock's demand increases, which is how the price rises.

What Is a Stock Exchange?

The government has granted authority to a stock exchange, where listed companies' securities are traded. You can trade bonds, stocks, and ETPs (exchange-traded products) through a stock exchange. It aids in enabling the trades that allow the transactions to run smoothly.

Suggested read:
Investing in an Index: Difference between Sensex and NIFTY50

List of Exchanges In India

Bombay Stock Exchange (BSE)

The Bombay Stock Exchange, popularly known as BSE, was founded in 1875 and is not just Asia's and India's oldest stock exchange. The largest stock exchange in India is based in Mumbai, Maharashtra.

National Stock Exchange (NSE)

The National Stock Exchange, or NSE, was founded in 1992. Investors now have access to a decentralised electronic trading platform for the first time on an Indian stock exchange. The market capitalization of the NSE was $2.27 trillion, as per the most recent data. The headquarters of both BSE and NSE are in Mumbai, Maharashtra.

Calcutta Stock Exchange (CSE)

The Calcutta Stock Exchange, or CSE, was founded in 1908. Kolkata, West Bengal, serves as its headquarters. The Indian Securities and Exchange Board (SEBI) has requested that the CSE leave. However, the Calcutta High Court is currently hearing the case.

India International Exchange (India INX)

India International Exchange, also known as India INX, was established in 2017. It is the first global stock exchange in India. It is a subsidiary of BSE and is based in Gujarat International Finance Tec-City.

Metropolitan Stock Exchange (MSE)

The Metropolitan Stock Exchange, or MSE, was established in 2008. A contemporary clearing house created the MSE to handle the clearing and settlement of contracts involving many asset types. The company is based in Mumbai, Maharashtra.

NSE IFSC Ltd (NSE International Exchange)

In 2016, the NSE IFSC Limited (NSE International Exchange) rose to prominence. A division of the NSE, it. Gujarat International Finance Tec-City serves as its base of operations.

Entities In the Stock Market Ecosystem

Exchange/AMC/MF

Asset Management Companies design, roll out and manage various mutual fund systems. Different AMCs offer mutual fund plans that are similar in purpose but may differ in terms of fees, fund management style, etc., such as HDFC Mutual Fund or Reliance Mutual Fund.

Brokers

Brokers could be individuals or entities who may place orders on behalf of clients, enabling them to trade, who are members of stock exchanges (often employed by brokerages).

Depository

They are private entities that handle electronic instruments (also known as Demat or dematerialised) on behalf of investors registered with the regulator.

Advisors RIA/RA

They possess the necessary SEBI registration to offer financial planning and investing advice on stocks and other capital market securities. All RIAs are capable of carrying out RA duties.

PMS/AIF

They are permitted by SEBI to manage comprehensively, i.e., have entire legal control over a client's portfolio to manage it on their behalf fully. These could be people or businesses (e.g., AMCs offering mutual funds, firms with Portfolio Management Services, etc.). All PMs are capable of carrying out RIA tasks.

FII/FPI/DII

Foreign Institutional Investors (FIIs) are those entities that combine funds from various sources and invest them in the financial markets of other nations. For instance, American hedge funds are considered FIIs on the Indian stock market when they invest in Indian stocks.

Domestic Institutional Investors (DIIs) are entities that obtain funds from various sources and invest a sizable portion of that sum in the financial markets of their nation. For instance, Indian mutual funds are DIIs for the Indian stock market when they invest in the equity of an Indian company.

A foreign portfolio investment (FPI) entails the investor's acquisition of overseas financial assets. It involves a variety of financial assets, including mutual funds, stocks, and fixed deposit accounts. The investors passively hold their investments. "Foreign Portfolio Investors" refers to investors who invest in foreign portfolios.

Regulator - SEBI

The acronym SEBI refers to the Securities and Exchange Board of India, which is the primary stock market regulator. A market regulator is necessary because bourses have built-in hazards. The SEBI is given this authority and is responsible for developing and regulating the markets. The three main goals are protecting investor interests, expanding the stock market, and regulating its operations.

What Is the Role of SEBI?

Stock market investment carries risk. So, to safeguard investors, stock markets must be regulated. Since 1988, when the Government of India created it as the regulatory body of stock markets, the Security and Exchange Board of India (SEBI) has been tasked with regulating both the secondary and primary markets in India. Through the SEBI Act of 1992, SEBI quickly became an independent organisation.

Market growth and regulation are both SEBI's responsibilities. It frequently publishes thorough regulatory measures designed to guarantee that end investors profit from secure and open securities transactions.

SEBI main goals are:

  • Safeguarding stock investors' interests.
  • Encouraging the growth of the stock market
  • Regulating stock market trading.

Offline vs. Online Trading

Online trading is the act of purchasing and selling shares while seated at a computer at your home or workplace. You can purchase and sell shares simply by logging in to your trading account. Offline trading refers to trading done in person or over the phone with your broker.

Short-term vs. Long-term Investing

Finding the ideal trade to invest in is a constant goal for people. This is especially true for both short-term and long-term trading. However, each person will choose differently. The trader should select a style of trading that best matches his or her personality.

Brief-term trading is defined as when there is a short window of time between purchasing and selling, usually a few days to a few weeks, whereas long-term trading is defined as trading that lasts several months to several years between buys and sells.

Taxes are one of the benefits of long-term trading. Most short-term traders must pay between 20% and 30%, while long-term trading activities only incur fees of 5% to 15%.

Suggested read:
Intraday Trading vs. Delivery Trading - Understanding the Difference

Summary

  • A share market is a place where shares of a company are bought and sold.
  • A stock exchange is a fundamental marketplace where buyers and sellers can transact in publicly traded shares during market hours.
  • The primary market is where shares are sold for the first time. The secondary market is where shares are traded after listing.
  • The Bombay Stock Exchange is the oldest stock exchange in India. The National Stock Exchange is the country’s most trusted exchange. Both these are the primary exchanges in India.
  • The Securities and Exchange Board of India (SEBI) regulates stock market activities in India.

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