Stock Market Explained for Beginners
The stock market is one place that attracts as well as scares investors, especially the first timers. There are two schools of thought when it comes to the market, some believe it will make you rich quickly while others think that you will lose everything in it. In a way, both ideas ring true. How you perform with stocks depends largely on your understanding of how the market works.
This article explains share market basics for beginners to help you learn about it and make informed investment decisions.
The meaning of the stock market
Are you wondering, “what is the stock market?”, well, to begin with, it is essential to understand stocks and shares. When you buy the share of a company, you become a part-owner of that business. The share works as a documented proof of ownership that you can sell to others.
There are separate markets where you can buy or sell stocks. The stocks are issued and traded in the share market, where the investors can exchange the ownership documents. There are mainly two such markets in India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Some misconceptions around the share market
Before you start investing in stocks, it is important to understand the myths about the market. The below list explains the most common misconceptions.
- Investing in stocks is like gambling: In gambling, the winners take money from losers. It is a matter of pure luck. But that is not how the stocks work. When you buy shares of a company, you are investing in its growth. You make money from these when the company makes a profit.
- It is only for the rich: The market is for everyone. Due to the availability of online share trading, anyone can access the market and buy stocks. Moreover, there are many research tools that can help anyone understand the market better. So, even small-time investors can trade without any hassles.
- All stocks eventually fall: There are multiple companies whose stock price has not dropped in years. Although markets fluctuate, it is not entirely true that share prices always eventually drop. But you must learn the fundamentals of the companies before buying their stocks.
How to buy and sell stocks
If you want to know how to invest in the share market, you first need to open trading and Dematerialization (Demat) accounts. Nowadays, you can get a trading cum Demat from most brokers and online investment platforms. If you want to become a trader, who buys and sells stocks on the same day, opening a trading account will be enough. If you get a Demat account, you can keep the shares in digital form. You can then buy the stocks for the long term and sell them using the Demat account.
Stock exchanges in India
The following are two primary stock exchanges in the country.
- Bombay Stock Exchange (BSE): Established by Mr. Premchand Roychand in 1875, it is India’s oldest and the world’s 10th largest stock exchange with a market capitalization of more than $4.9 trillion.
- National Stock Exchange (NSE): Incorporated in 1992, NSE was the first to introduce electronic trading, making the entire process easy and accessible to everyone.
Here are some other stock exchanges in India.
- NSE International Exchange (NSE IFSC Limited)
- India International Exchange (India INX)
- Metropolitan Stock Exchange (MSE)
- Calcutta Stock Exchange (CSE)
Stock investment terms you should know about
To understand stock trading for beginners, you must learn the basic investment terms. The most prevalent ones are as follows:
- Stock exchange: This is the marketplace where the stocks are listed. It is a digital platform that allows you to trade in shares.
- Over-the-counter trade: It is a type of trading for securities that are not listed in stock exchanges.
- Bull market: When the stock prices are rising, the condition is called a bull market.
- Bear market: When the stock prices are falling, the condition is called a bear market.
- Order: It is the process of showing intent to buy or sell shares within a specific price range.
- Liquidity: It indicates how easily you can sell a stock. If a share has high-trade volumes, it can be sold quickly, reflecting high liquidity.
- Intra-day trading: It is the process of buying and selling a share on the same trading day.
- Index: It is the benchmark to measure the market performance on a given day. The most popular indexes are Sensex and Nifty.
Difference between Nifty and Sensex
NSE and BSE have thousands of companies listed under them. But only the top few have the potential to influence the stock exchanges. So, to know which companies are on the top in terms of stock performance, you must check the Nifty and Sensex indexes.
Nifty shows the top 50 stocks listed on the NSE; thus, the market index is known as Nifty 50. And Sensex shows the 30 financially strong companies listed on the BSE. Checking the indexes is the quickest way to determine which shares have the highest potential to earn you profit.
Things to keep in mind before investing in stocks
The process of investing in stocks for beginners can be tricky. To help you out, here is a list of things that you must keep in mind before investing.
- Think long term: Investing in stocks requires you to be patient. You must buy multiple good-quality stocks and hold on to them through ups and downs to earn profit in the long run.
- Conduct thorough research: Buying a stock requires careful analysis. You need to find out how a company is performing financially and its growth potential before investing in the stock.
- Preferred vs. common stocks: Preferred stocks generally offer fixed dividends, ensuring fixed annual income from the investment. The common stocks pay dividends when there is a profit. So, common stocks cannot guarantee a return.
When can you place orders in the stock market?
Are you wondering, “how does the stock market work?” and want to know when to start trading in shares? We have got you covered.
The Indian stock exchanges operate from 9.15 A.M. to 3.30 P.M. They stay closed on Saturdays, Sundays, and during market holidays like Holi, Independence Day, Eid, Republic Day, and other festivals.
Tips on stock trading and investment
Below are some tips for stock market trading for beginners to help you find success.
- Sell losing stocks: Do not hold on to shares that are continuously performing poorly as that may lead to more losses in the long run.
- Conduct your research: Never invest in a stock based on someone’s tip, irrespective of who they are. Always conduct research about a stock carefully before investing.
- Stick to a strategy: Do not change your strategy over and over based on market fluctuations. Once you develop an investment strategy, stick to it for an extended period.
- Stay invested: Make your investment decisions based on how a company may perform in the future. Staying invested in a stock for the long term is important if you believe in its growth potential.
How to decide the company to invest in
A key factor for investing in the share market for beginners is choosing the right company. Check out the four tips given below to identify a potentially good company to invest in.
- Analyze a company’s Earnings Per Share (EPS), Price to Earnings Ratio (PER), Price to Book (P/B) Ratio, Debt to Equity (D/E) Ratio, Return on Equity (ROE), Price to Sales (P/S) Ratio, Current Ratio, and last five years’ dividend increment. It will give you an idea about their fundamentals.
- Invest in stocks of companies only if you understand their products or services well. It will help you make informed decisions.
- Determine if a company’s offerings will still have importance in the next twenty years to set your long-term goals.
- Find out if the company has any debt. Investing in even a well-performing company with significant debt can be risky.
Investing in the stock market for beginners can always be complicated as new investors often do not understand how trading works. However, now that you know how to invest in the stock market, consider the tips provided in this article and proceed with caution. If you keep your fundamentals right, stocks can be a profitable investment option.
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