stock market | basics of stock market

 

stock market

What is stock market?

Let’s suppose you wanted to do a business or grow an established business, the first and the most important thing you require is capital or money. You can borrow money from your family or friends. If you need a little more, you can get loans from banks. But if you need a very huge amount such as around 10,000 crores. Now, bank won’t give you such a huge amount nor friends or relatives. So, in this case, who will give you this much money? The public will give you this money. This means you will tell people about your business model that, this is my plan and I am going to do this work, either it may be establishing an factory, or an automobile industry, providing any particular product or services, etc. Now, those who will trust you will give you money and in return, you will get them partnership in your company. That partnership will be called as “shares”.

Suppose, your company has 100,000 shares and a person X buys 1000 of them, it means that person X owns 1% of your company.

Now, let’s suppose after 2 days of buying shares, the person X requires money and wanted to sell the shares. So, in this case the same company will not buy the shares again. The person X has to sell it to someone else. So, for this, there is a market, where you can sell that share to someone else and this market is called “share market” or “stock market”.

A stock market or share market is the accumulation of buyers or sellers of stock, which represents a small part of ownership in a financial asset or business entity.

Basically, the company divides its total capital into small parts of equal value i.e., share, which is used to raise the money for business and the people who buy these shares of a company are called as “shareholders”.

The meeting place of stock buyers and sellers is called “stock exchange”. Stock exchange facilitates stock brokers to trade company stocks and other securities. India’s top stock exchange are Bombay Stock Exchange and National Stock Exchange.

Benefits of Investing in stock market

There are many reasons to invest in stock market in today’s world as inflation is very high. Some of the major reasons to invest in stock market are: -

Capital Growth – The price of a stock will go up or down over time. When it goes up, the shareholders can choose to sell their shares at a profit.

Stake in Profitable Business – When you buy a stock of a company, you are purchasing a stake in an existing business, which has huge advantage. These companies already have an infrastructure in place and are already up and running, one can earn from this business without getting involved in its operation.

Dividend – Each year, the list companies share the growth or profits in the form of dividend. These dividends can be given to you in the form of additional shares or as certain amount per share. For e.g., the company you invested announces dividends at Rs.12 per share and if you have 1000 such shares, you will receive Rs.12,000 in the form of dividend.

Higher Liquidity – The shares can be bought and sold more quickly and easily than other investment such as real estate, jewellery. The investors can buy or sell their investment for cash with relative ease.

Acquire Ownership and Right to Vote – Even if an investor acquires single share in company, he acquires a portion of ownership in the company. Because of this the investor gets the right to vote and offer his contribution in the strategic contribution of the business.

Convenience in Investment and trading – Today all the investments and trading are executed on an electronic platform. The first and the most important step to invest in stock market is to open a demat account (where you can hold or keep your stocks in an electronic form) has become way easier than before. It is easy to track and monitor the performance.

What are the Different Types of Stocks

Blue Chips Stocks – These types of stocks are issued by a typically large, well-established, financially sound and reliable companies. The term “blue chip” was first used to describe high-priced stocks in 1923, when Oliver Gingold, an employee at Dow Jones, observed certain stocks trading at $200 or more per share. Blue Chip Stock don’t necessarily refer to stocks with high price tag, but more accurately to stocks of high-quality companies.

Income Stocks – Income stocks are the stocks that offer regularly and steady income, usually in the form of dividends, over a period of time with low exposure to risk. Though income stocks can arise from any industry, they are commonly found in real estate, utility and energy industries.

Growth Stocks – Growth stocks represents the companies that are often over valued and pay little or no dividends, but can rise very quickly. The companies that have demonstrated better than average gains in earnings and are expected to continue high profit growth. Purchasing a growth stock is ideal for risk prone individuals looking to gain massive returns on their total investment amount.

Cyclical Stocks – The prices of these stocks can go down during recessionary periods and grow during economy is doing well. Basically, these stocks are highly vulnerable to economic downturns and slowdowns, while other type of stocks may be profitable in any economic circumstances. Some of the popular cyclical stocks in India involve companies like automakers such Maruti Suzuki India, Tata Motors, and banks such as HDFC Ltd.

Defensive Stocks – Defensive stocks are the stocks which provide constant returns in the form of dividends regardless of fluctuations in stock market. Well established companies such as Procter & Gamble, Johnson & Johnson, Philip Morris International and Coca-Cola are considered defensive stocks.

How to Invest in stock market

To invest in stock market, there are basically two options i.e., primary stock market and secondary stock market. Let’s discuss both of them:

Investing in primary stock market – A primary stock market is made through an initial public offering (IPO). Once all applications for the IPO are received and counted by the company in consideration, the shares are allotted to investors based on demand and availability.

Once your shares are allotted, the exact amount is then debited with the balance being released. All IPO applications have to compulsorily follow this procedure. Once the shares are allotted, they are listed on the stock exchange and you can begin trading within one week.

Investing in secondary stock market - The secondary stock market is where buying and selling of stocks occurs between investors.

Steps to invest in secondary stock market are as follows:

·       Open a Demat and trading account using your linked banking account.

·       Log into that trading account.

·       Select the shares that you wish to buy or sell.

·       Ensure that you have requisite amount of funds in your account to buy the shares.

·       Now, decide the price at which you want to buy or sell a particular share.

·       Wait for the buyer or seller to reciprocate that request.

·       Complete your stock market transactions by paying for and receiving shares or transferring the shares and receiving the money.

Today investment process in stock market is really simple, as all the process happens electronically and in very less time. Its just that you need to be aware and very clear about your investment horizon i.e., how long you are willing to hold portfolio and your financial goals.

As Benjamin Franklin says “An investment in knowledge pays the best interest”.

When it comes to investing, nothing will pay off more than educate yourself. Do necessary research and analysis before making any investment decision.