What is stock market in simpler words?

For basic financial terms and definitions, check this out.

To understand what a stock market is, first, we need to learn about a share. What is a share or a stock?

Think of a share as a piece of a company. For example, in an overly simplified world, if a company’s capital(initial investment in terms of money) is INR 50,000, and is divided into five shares, each share value is INR 10,000. This is also called stock in general terms. Each share is also exchangeable, which means you can buy or sell in the market, called share market.

The stock market is also known as a share or equity market. It is a marketplace where investors buy and sell shares of publicly traded companies. A share represents a part or unit of the company’s capital. 

For example, if you buy shares/stocks of Apple, if the company grows well or makes profits, then you will earn good money or high returns when you sell the company’s shares in the market place.

Stocks/ shares / equity

The stocks and shares are securities that provide ownership or equity to an investor in a public company. 

There is a difference between a stock and a share in technical terms, although some countries use them interchangeably. Stock is used to describing ownership in one or more companies, whereas a share represents ownership in a particular company. So, for example, if someone says, I own a stock, you can ask which company? As there is more than one company involved in a stock.

How does the stock market work?

The stock market of India has two major stock exchanges – the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Companies list their shares on these stock exchanges as something called initial listing of shares, which means that the companies issue their shares to the public for the first time at a specified price. Then investors(in other words, the general public that is interested in buying and selling of the shares) buy and sell these stocks through stock exchanges.

Stock exchanges appoint stockbrokers to provide automated trading facilities to investors. The shares are traded on an electronic platform, which is also known as a trading terminal. 

The benefit of Stock Exchanges

Stock exchanges serve as indicators for measuring the health of the national economy. For instance, if stock prices are rising, it is an indication that the country’s economy is doing well.

A national index describes the performance of the stock market of a particular nation. In India, Nifty is the stock market index for NSE and Sensex is for BSE based on which investors predict the market.

Nifty consists of the top 50 companies stocks and Sensex comprises 30.

Supply and demand are two factors that determine the price of a stock. If the demand is higher for a particular company product, then the cost of the stock(or share) goes higher, and similarly, if the demand is lower, then the stock prices will decrease for that company.  And generally, if the supply is lower, demand is higher for any product of a company.

Purpose of the stock market

The stock market serves two fundamental purposes: 

The first purpose is to provide capital to companies, which they use to fund and expand their businesses. Let’s discuss this with an example – Suppose a company has issued one crore shares to investors through initial listing at INR 10 per share. It means the company will earn INR 10 crore of capital through the sale of listed stocks, which it can use to reinvest in the business.

The second purpose is to allow investors to share the profits of a company. Investors can earn profit from the stocks they bought in one of the two ways:

• By earning stable dividends through some specific shares such as blue-chip stocks. 
• By selling their shares at a higher price(If the company is doing well in the market, the share of the company goes higher, and the investor can sell it at a higher price, thus earning a profit)

Stock market trends

As you notice in the image below, the trends are highly fluctuating going up and down on an hourly basis for the stock market. The trends are dependent on several market factors.

What is a Demat account?

It is an account that holds shares purchased by investors in an electronic format. Thus, it makes online trading easy by converting physical shares into electronic form.

How to invest in the stock market in India – A guide for beginners

• Research well about the stock market ( process and function)
• Make sure that you have a PAN and Aadhaar as they are mandatory to open a Demat account.
• Open a trading and Demat account with the assistance of a stockbroker who will charge a fee for this. The purpose of the Demat account is to hold and reflect the shares that you buy. 
• Understand your capacity to invest and set a goal (what you will do with the earned money?). It is better to invest with a small amount in the beginning.
• Find the stocks that align with your goals. Take the help of your broker while doing this.
• Don’t invest in one mutual fund portfolio or a company’s shares. Diversify your investment in different stocks.
• Now, if you buy stocks – the purchased shares will be credited in your Demat account. 
• If you sell stocks – they will be debited from your Demat account, and you will receive the corresponding money in your bank account.