Stock Market
Get Ahead in the Stock Market: A Beginner's Guide to Investing and the Basics of Trading!
2 days ago
Companies have multiple options to source finance to run their business. An existing company or group may use its own cash - accumulated profit - to meet its working capital needs or fund its expansion or new ventures. If the internal fund is insufficient, they can resort to debt financing - loans from banks and financial institutions.
A startup - a private company - typically sources its initial money through bootstrapping (funding using the savings of the owners or founders) followed by investments from angel investors or venture capitals. The next option to source funds is to go to the stock market by offering its shares to the public - one such example is Nykaa. We will come to the stock market a bit later.
What is a share?
A share, also known as stock, represents a unit of ownership in a company. Each share has an equal claim on the profit and losses of the company. There are typically two types of shares:
Preference Share: As the name suggests, preference shareholders enjoy preference over equity shareholders during liquidation of the company, but they do not have any voting rights. There are various types of preferential shares based on structure, maturity terms, nature of dividends, etc.
Equity Share: Also known as ordinary shares, these are arguably the most common type of shares traded in the stock exchange. Equity shareholders have voting rights. Each share has a face value or the share value as recorded in a company's financial records and statements. The face value is different from the market value of a share, which fluctuates in the market during trading. Market value can go higher or lower than the face value of the share.
How to buy or invest in shares?
There are two kinds of stock markets - primary markets and secondary markets. You can buy shares from both markets.
The primary market is where a company registers with SEBI (the market regulator) to obtain permission to issue shares to the public - individuals and institutions - to source money. This process is called getting listed in a stock exchange. If it is the first time, it is called IPO (Initial Public Offering), and the offering by an already listed company is known as FPO (Follow On Public Offering). There are mainly two reasons why a company enters the market through a public offering. The first is to raise funds, and the other is to facilitate the exit of investors and venture capitals by offloading their shareholding at a premium.
When the shares issued to the public through an IPO or FPO are traded in the stock market, it is known as the secondary market. You can buy and sell those shares in the stock market at the prevailing market value or at whatever price the buyer and seller agree upon.
What is the stock market and index?
A stock market broadly refers to the collection of stock exchanges and platforms where investors connect to buy and sell or redeem investments, mostly shares, bonds, and mutual funds. In India, there are two major stock markets - the largest is the National Stock Exchange (NSE), while the oldest is the Bombay Stock Exchange (BSE).
The Securities and Exchanges Board of India (SEBI) regulates day-to-day trades, insider trading, the activities and operations of depositories, participants, custodians of securities, foreign portfolio investors, and credit rating agencies, among others.
Stock exchanges also manage indices, which are baskets of stocks. The most popular indices in India are the NIFTY which comprises the top 50 NSE listed stocks based on revenue, liquidity, diversification, market capitalisation and SENSEX - a term coined from Sensitive and Index, with top 30BSE listed stocks. Indices tell us how the market is doing and the trend.
How to buy or invest in shares?
What time do the markets trade?
Trading time is from 9:15 in the morning to 3:30 in the afternoon on weekdays and working days. Both the NSE and BSE publish a list of holidays and non-working days for trading on the respective exchange.
How can you make money from the stock market?
There are two ways you can participate and make money in the stock market–trading and investing. While investing involves buying a stock or fund to keep it with you for long term gains, trading is about buying and selling stock within a short period, mostly the same day, to make quick profits. Earnings from shares come in two primary forms:
Capital appreciation: It is the gain made on the capital (principal invested) when the share price rises. For example, if you bought a share for Rs 50 and sold it for Rs 80, you have made a capital gain of Rs 30. However, the probability of market prices going below the price you bought it for always exists.
Dividends: A company distributes full or part of its profits to its shareholders as dividends. The dividends are declared and distributed as a percentage of the face value of the share.
How to start investing in the stock market?
You can buy or sell shares through authorised stockbrokers or the platforms provided by stock brokerage companies. It works like this:
The first thing to do is open a Trading Account with a broker or a stock brokerage platform. A trading account is used to buy or sell financial securities
A Demat account is opened by the broker or through the stock brokerage platform. A Demat account holds the record and balance of your securities like a bank account maintains your cash transactions and balance
The Demat and Trading accounts are then linked to your bank account to facilitate the cash in and cash out on trading transactions
You will need to provide KYC documentation like a PAN card and/or your Aadhar card to open a trading and Demat account
Once these accounts are opened, you can trade via an online portal or conventional offline mode.
What investments can you make in the stock market?
Equity shares: They are shares issued by companies and listed on the stock exchange
Bonds: Governments and corporate issue bonds to represent loans made by the investor to the issuer
Mutual Funds (MFs): They are funds that pool your money to invest in different financial instruments. Gains from the investments are distributed among the investors proportionately based on the number of units they hold
Exchange-Traded Funds (ETFs): A type of security that tracks an index, sector, commodity, or other assets. One unit of your ETF holding represents a portion of the 50 stocks in the NIFTY in the proportionate weightage that the NIFTY holds them, or of the 30 stocks in the SENSEX.
Derivatives: A type of security that tracks an index, sector, commodity, or other assets. One unit of your ETF holding represents a portion of the 50 stocks in the NIFTY in the proportionate weightage that the NIFTY holds them, or of the 30 stocks in the SENSEX.
How are market investments taxed?
The gains from investments in securities can be from capital gains and/or dividends. The most common forms of investment are equity shares and equity-oriented mutual funds. While dividends are taxed at income tax rates, the rates on capital gains differ based on whether it is long term (held for more than 12 months) or short term capital gains.
Bottom Line
Investing in stocks can help you manage your finances in the long term. Stock markets can seem challenging, complex or risky. However, a careful understanding of the market and due diligence can help you reap rich rewards.