After the heavy fall in 2020 and then witnessing the amazing recovery, every person is now willing to try their hand in the share market. In such a scenario, many people want to know what is the share market and how to invest in it.
So, today through this post, we will guide you very easily on what is the stock market and how even an ordinary person can invest in it.
What is stock market?
The Stock Market or Share Market is a place where Equity, Debentures, Mutual Funds, Derivatives, and other types of securities are bought and sold through the medium of a Stock Exchange.
There are two biggest stock exchanges in India.
- BSE (Bombay Stock Exchange)
- NSE (National Stock Exchange)
Companies issue their IPO based on the directions given by SEBI, and after that, their shares can be bought and sold on the open market. If you buy shares of that company, you become a shareholder in proportion to the percentage of shares you own.
For example –
XYZ Ltd issued a public issue with 1 lakh shares. On the day of listing, you bought 5000 shares of that company. This means that you have become a shareholder with a 5% stake in the company’s profits.
How does the stock market work?
Once you understand what the stock market is, you can then learn how it works.
It is very easy to understand, you just need to understand these four things:
- Listed companies
- Shareholders
- Demand and supply
- Market conditions, etc.
Let’s understand each of these in a simple way:
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How do companies issue shares?
First, companies get their shares listed on a stock exchange and bring an IPO (Initial Public Offering) by issuing their shares to the public at a price determined by themselves. Once the IPO is completed, the shares are available in the stock market, and investors buy and sell them through stock exchanges and brokers.
How do the prices of shares change?
When bringing an IPO, the company determines the price of shares. However, once the IPO is complete, the price of shares changes based on the demand and supply of the market. This demand and supply can change in many ways.
You can understand it like this –
If the number of buyers of shares exceeds the number of sellers, then the price of shares will increase.
And if the opposite happens, meaning if the number of sellers exceeds the number of buyers, then the price will decrease.
Securities and Indices?
Most people think that only shares are traded in the stock market, but that’s not true. There are many other securities like shares that are also traded in the stock market.
What is Sensex?
Sensex is a stock market index of the Bombay Stock Exchange (BSE) in India. It is composed of the 30 largest and most actively traded companies listed on the BSE and provides a sense of the overall performance of the Indian stock market.
What is Nifty?
Nifty is a stock market index of the National Stock Exchange (NSE) in India. It is composed of the 50 largest and most actively traded companies listed on the NSE and provides a sense of the overall performance of the Indian stock market.
What is Nifty?
Bonds and debentures are financial instruments that are used to raise capital by companies and governments.
What is Bond & Debentures?
A bond is a type of debt security where the issuer (the company or government) borrows money from investors and promises to pay back the principal amount along with interest over a specified period of time. Bonds are usually issued for a longer-term, ranging from a few years to several decades, and can be traded on the bond market.
On the other hand, debentures are similar to bonds in that they are also debt instruments, but they are typically unsecured and backed only by the issuer’s creditworthiness. Debentures are also issued for a fixed term and pay interest to investors, but they may not have a specific collateral backing them up.
What is Mutual Funds?
Mutual Funds are a type of investment vehicle that pools money from multiple investors to invest in a variety of securities such as stocks, bonds, and other financial assets. The investments are managed by professional fund managers who make investment decisions on behalf of the investors.
The returns on these investments are then shared among the investors in proportion to their investments.
What is SIP?
SIP stands for Systematic Investment Plan. It is a method of investing in mutual funds where an investor can invest a fixed amount of money at regular intervals, typically monthly or quarterly. The investment amount is deducted automatically from the investor’s bank account and invested in the mutual fund scheme of their choice.
This allows investors to benefit from the power of compounding and invest in a disciplined manner without having to time the market.
What is Derivatives?
underlying asset. They can be used for speculation, hedging, or arbitrage purposes.
A derivative is a contract between two parties that specifies the value of an underlying asset, such as a stock, bond, currency, or commodity, at a future point in time. The value of the derivative is based on the value of the underlying asset, and can fluctuate based on changes in the underlying asset’s value.
- The meaning of “Derivatives” is to determine today’s trading of the future.
- These are executed through Options and Futures in the stock market.
- Under the agreement business, you can perform future transactions at a predetermined price today (Future Price).
- Actual delivery is not made in this, and settlement is done based on the difference in price.
How to invest in the stock market?
Once you understand what the stock market is and how it works, the next step is to figure out how to invest in it.
To invest in the stock market, you need to open a trading and demat account with a good stock broker.
You can choose Zerodha for this purpose.
What is a Demat Account?
Just like you can deposit money in a bank account, similarly in a Demat account, all the securities related to your investments such as shares, bonds, government securities, mutual funds, etc. are stored in electronic form.
What is Trading Account?
The Trading Account is used for buying and selling shares in your share trading business. You can open this account with a good broker and due to online facilities, you can buy and sell shares anytime with the help of this account.
How to open an Investment Account?
It is necessary to open your account in the Best Demat Account for trading and opening a Demat account.
You need to complete your KYC from your bank for this.
In a way, this account manages your funds and keeps all related information. You can open this account from the bank just like you open a regular account. For opening a Demat and Trading account, you will need certain documents
- PAN Card
- Address Proof
- Income Proof
- Cancel Cheque
- 2 Passport Size Photo
While submitting all these documents, make sure that your name is written correctly and clearly on all of these certificates and in the same way.
Additionally, when opening an account, attach a photocopy of all these documents.
However, keep the original copies with you as they may be required for verification at any time.
When opening a Demat or Trading account, carefully read the rules and instructions written on the papers that you sign.
I hope you understand what the stock market is.
If you have any questions related to this, you can ask us in the comment box.