These days, there is a lot of talk about the Stock Market everywhere – whether it is among friends and relatives, on social media, or in the news. Many people want to invest in the Stock Market, whether they do it as a side income or as a full-time investment.
Most people show interest in the stock market, but they do not have complete knowledge about what is the stock market and how it works. In this blog, we will discuss about it, but before that, let us know what stocks are.
What is Stocks?
Stock (also called Share) means a small part of the ownership of a Company. When you buy Stock of a Company, you become the owner of a small part of that Company. If the Company performs well, the price of your stock also increases, due to which you can earn profit and you can also get dividend from the Company. For example, if a Company has 10,000 Shares and you buy 100 Shares, then you become the owner of 1% of that Company.
What is Stock Market?
Stock Market is a platform where people buy and sell Financial Instruments like Shares, Bonds, Mutual Funds, ETF etc. Stock Market is also called Share Market but there is a little difference in them. Shares, bonds, mutual funds, ETFs etc. all come in stock market but only Shares are bought and sold in share market, hence it is also called Equity Market.
In India, buyers and sellers in Stock Market mainly trade with the help of 2 Stock Exchanges:- NSE (National Stock Exchange) , BSE (Bombay Stock Exchange). Nowadays, all the work of Stock Market is done online with the help of some apps like Zerodha, Upstock, Angel One etc.
How Does Stock Market Works
If we talk in simple language about how the Stock Market Works, then there are mainly two functions in the Stock Market: Investing and Trading. From listing of Companies to investing and trading by people, we can easily understand step by step how it works.
Listing of Companies For Trading
To raise funds for expanding their business, Companies sell a small portion of their ownership to the public in the form of shares through IPO (Initial Public Offering) in the Primary Market where anyone can apply to buy shares for the first time. This process is called Listing on the Stock Market. Before doing so, the company has to follow all the regulations set by SEBI (Securities and Exchange Board of India). After getting SEBI’s approval, the company’s shares get listed on Stock Exchanges like NSE and BSE.
After listing, the shares become available for trading in the Secondary Market. This means that traders and investors can now buy and sell them using online platforms like Groww, Zerodha, and Angel One.
Accounts Opening & Orders Placing
To start your journey in the Stock Market, you need to open two accounts with a SEBI licensed broker (like Grow, Zerodha, Angel One etc.) – Demat Account and Trading Account, Demat Account holds shares in electronic form and Trading Account is used to buy and sell shares. Nowadays the process of opening accounts is very easy, online and paperless.
Once the account is opened, you can log in to your broker’s trading platform and place orders to buy or sell shares. For this, you have to select the shares you want to buy or sell, decide the quantity and place the order. You can place different types of orders like Market Order (Trade at Current Price) or Limit Order (Trade at your Chosen Price).
Trade Execution & Settlement
After placing an Order in the Stock Market, the next step is to execute the order. This means that when your order matches with another person in the market, the order gets executed. For example, suppose you have placed an order to buy at Rs 1000 and another person in the market places an order to sell that order at Rs 1000, then your order will be executed on the digital platform.
The final stage after trade execution is Settlement. Settlement means exchanging Shares and Money between the buyer and seller. Generally, Settlement in a Demat Account occurs on T+1 (T = Transaction Day) working day. For example, If we buy shares today, they will be credited to our Demat account the next working day. All these processes are handled safely and securely by clearing corporations like NSDL and CDSL.
Factors for Prices to go Up and Down
The main reason for the rise and fall of stock prices is Demand and Supply. When people buy more, Demand increases, driving up prices. Conversely, when people sell more, the price goes down. But why people buy or sell depends on various factors, such as:
- Company’s Performance – If the Company is Performing well, people demand more and the price goes up, and if the Company’s Performance is not good, they sell more, which brings down the price.
- News – If there is Good News about a company (like a new contract, expansion, good ratings), people become filled with confidence and buy shares, which pushes the price up. However, if there is bad news (like scams, penalties, cases), people’s confidence decreases and they sell more, which pushes the price down.
- Government Policies – If the government policies are beneficial for any sector, then the demand and price of the shares of the companies of that sector will go up and on the contrary, if the government policies are harmful for any sector (like increasing the tax or interest rate on any sector), then the price of the shares of that sector will go down.
- Global Events – Global events also play a significant role in the rise and fall of share prices. For example, if there is a War going on, demand decreases, and the market and prices go down.
- People’s Feelings – People’s feelings about the market also cause prices to fluctuate. If people think the market will go up, they buy more, leading to higher prices. Conversely, if people think the market will go down, they sell more, leading to lower prices.
Other Different Ways to Invest/Trade in Stock Market
There are many ways to invest/trade in the Stock Market, not just shares. It depends on your risk and time tolerance. There are different ways to invest in the market. Here are the other main ways to invest in the Indian Stock Market –
- Mutual Funds – If you do not want to take much risk by buying Stocks directly, then Mutual Funds are a better option for you. In this, your money is invested in different stocks by a Professional Fund Manager, for example – SIP and Lump Sum.
- IPO (Initial Public Offering) – When a Company comes to the Stock Market for the first time, it brings its IPO to raise money. You can apply for the IPO. If the allotment is done, there are high chances that the listing will happen with a profit, after which you can sell them and earn profit or can also keep them for the Long Term.
- ETF (Exchange Traded Fund) – ETF gives you the opportunity to invest in many Companies simultaneously, which reduces the risk. It gives you a small share in many Companies through a Single Fund. It can be bought and sold like a normal share, for example – SBI Nifty 50 and Bharat 22 ETF etc.
- Bonds – Bonds mean that you lend your Money to a Company or the Government for a period of time, on which you earn interest. Bonds are safer than Stocks.
- Futures & Options (F&O) – This is an Advanced Level and High Risk Trading. In this you also get margin facility in which you get a big position with less money, due to which your Profit and Loss also increases. Beginners should avoid getting into this without proper knowledge.
What are Bull & Bear Market?
When the Stock Market goes upwards, that means when people are positive and they feel that the market will go further up, hence they buy more shares and the prices in the market continuously increase, then it is called Bull Market. On the contrary, when the market goes towards the bottom and people feel that the market will go towards the bottom, hence they sell more, then it is called Bear Market.
In Bull Market, the Economy is in a strong state and in Bear Market, the Economy slows down and people start withdrawing Money from the Market.
What are Sensex and nifty?
Sensex and Nifty are two important index in India that measure market performance. Sensex is the main index of the BSE (Bombay Stock Exchange), tracking the performance of the top 30 Companies listed on the BSE. Sensex stands for “Sensitive Index.
Nifty stands for “National Stock Exchange Fifty,” the main index of the NSE (National Stock Exchange). It tracks the performance of the top 50 Companies listed on the NSE. When these Companies perform well, Nifty moves upwards. When these Companies perform negatively and their Shares values fall, Nifty moves downwards.
Who Regulate Stock Market?
The Stock Market in India is regulated by SEBI – Securities and Exchange Board of India. SEBI is a government agency whose job is to ensure that everything in the market runs smoothly and impartially. It sets rules that companies, traders, and investors must follow. It also educates investors and checks whether companies and brokers are conducting their business honestly, so that investors’ Money is protected.