Basics of Stock Market: How to Make Money in the Stock Market?
Basics of Stock Market: Introduction
When a company starts its operation, they raise capital from private equity firms and venture capitalists but when they reach the stage of a growth phase, they need large capital to run its business. That's when a company comes with an IPO (initial public offering) that allows investors like you and me to invest in their business. when you own shares of a company, you own a part of ownership in the company and are eligible to get a share of the profit they make. In this article, we are going to learn about the basics of the stock market, how to learn stock market, learn stock market trading, and the role of stock exchanges.
Basics of Stock Market
A share market is a place where shares of the company are bought and sold during the market hour/trading hour. companies can raise capital by issuing shares through an IPO (initial public offering) and then after the IPO, it will be listed on stock exchanges. The two most popular stock exchanges in India are NSE (national stock exchange) and BSE (Bombay stock exchange). stock exchanges facilitate buying and selling of stocks and act as a bridge between buyers and sellers.
What are stocks and how do they work?
Stocks are financial securities that you can own by buying the stocks of the company. Owning a company's stock represents that you own a part of ownership in the company. Let's say a company has 10,000,00 shares and you bought 1000 shares of the company, you own 0.1% shares in the company and hence you are eligible for voting rights, to receive dividends and earn from the company’s profit.
Companies issue stocks to grow their business, pay off loans, or expand their business to different market segments. A company can issue stocks by initiating an IPO (initial public offering). An IPO enables a company to go public from a private company and allows investors to buy stocks firsthand. After the IPO, stocks are available to trade on the stock exchange where traders can buy and sell shares during the trading hour.
Investors buy stocks to earn profit from the stock market. Let's say, you buy a stock at Rs. 100 and when the price of the stock increases to Rs. 120, you sell the stock. Here, you made a profit of 20%. Another way to earn a profit is to buy dividend-paying stocks. When you invest in a dividend-paying stock, you become eligible to receive dividends in the form of cash or extra shares. The dividends can be paid quarterly or annually.
How to buy stocks?
The first thing to do is to open a Demat and trading account to buy stocks. There are two types of stockbrokers available to trade in the stock market.
- Full-service broker: Full-service brokers provide a full range of services that includes investment advice, personal consultation, insurance, tax planning, retirement planning, and everything related to managing your finances. Full-service brokers charge a substantial fee and that can be worth it for those who are beginners and don't have experience in the stock market.
- Discount broker: Discount brokers execute buy and sell orders at lower brokerage charges than a full-service broker. Unlike a full-service broker, they do not provide any services like investment advice, financial planning, retirement planning, and tax planning. If you are a beginner in stock market investing, opting for a discount broker might not be a great platform.
What are Indices in the stock market?
A stock market index is formed by grouping a few familiar stocks based on the size of the company, industry type, or market capitalization that are listed on the stock exchange. Any change in the value of these underlying securities influences the value of the index and hence it shows the changing trends in the market. If the prices of underlying securities rise, the overall value of the index will rise and vice versa.
Nifty and Sensex are the two most popular indices in the Indian stock market and these indices are used as a benchmark indexes to measure the overall performance of the share market.
Nifty is a pool of the top fifty companies that are listed on the National stock exchange (NSE) and Sensex is the pool of the top thirty companies that are listed on the Bombay stock exchange (BSE). The direction of these two indices represents the direction of the overall market and affects the country’s economy. If you are investing in Nifty 50 or Sensex, you are contributing to the country’s economy.
Basics of Stock Market: Role of SEBI
The Securities and Exchange Board of India (SEBI) plays a vital role in regulating the stock market. SEBI is a regulatory body in India that protects the interest of the investors and imposes various rules and regulations to prohibit unfair trade practices or any kind of fraud in the stock market. They also focus on educating investors on the intermediaries of the stock market and ensuring that the market is efficient at all times.
Where can you invest?
Everybody wants to make money in the stock market but very few have the proper knowledge and strategy to invest. As an investor you must be aware of different types of securities that are available to trade in the stock market and based on your risk profile, you can invest in these securities. There are various financial instruments available to trade in the stock market such as stocks, bonds, derivatives, commodity markets, and currency markets.
Firstly one can obtain stock market basic knowledge on these financial instruments and then think of investing in them as investing in financial instruments associated with risk.
Few terminologies of the stock market:
- Market hour: Trading hours in the stock market in India starts from 9:15 AM to 3:30 PM.
- Working days: The stock exchanges in India are open from Monday to Friday.
- Dividend: Dividend is paid to the shareholders of the company in the form of cash or extra shares. The dividends are paid from the profit made by the company.
- Portfolio: A portfolio is the collection of financial securities that the investors had invested in it.
How can you make money in the stock market?
There are two ways by which you can make money in the stock market and they are:
- Long-term investors: Long-term investors intend to hold their stocks for a long time (5-10 years). When you invest for the long term, the returns are compounded year on year and hence, one can earn a return that beats inflation. Long-term investors are most likely to invest in large-cap stocks and value stocks. One can find all these stocks in the groww stocks list to invest in.
- Short-term traders: Short-term traders are most likely to buy and sell within the same day and sometimes within a week. If you want to become a short-term trader, you need to learn stock market trading and that will also improve your share market knowledge. Trading in the stock market involves learning about technical analysis, trading charts, patterns, and indicators like moving average, RSI, or Bollinger bands.
To conclude, investing in the stock market is considered the best way to generate wealth over time but one should also be aware of the risk associated with it. understand yourself, risk tolerance, investment goals, and the time horizon of your investment. One should invest in the stock market only after learning about the Indian stock market basics for beginners.
Important things to remember:
1. Do Not Blindly Follow Hot Tips
No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly.
2. Eliminate Loser Stocks from Portfolio
There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses.
3. Don't Exceed Your Investment Budget Abruptly
While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares.
How can I improve my share market knowledge?
You can take online courses and read books on the stock market to improve your share market knowledge.
How to learn stock market?
Firstly, you can buy books that talk about the stock market for beginners in India, and then you can open a Demat and trading account to observe the market.
How many types of stocks are there in the stock market?
Preferred stocks and common stocks (equity) are the most popular traded types.