Stock Market Basics
All companies require funds to operate their business. Sometimes, the profits earned from selling goods or services are not enough to cover their working capital needs. Therefore, companies invite individuals like you and me to invest money in their business. In return, investors receive a share of the profits the company generates.
Understanding this is the first step towards understanding stock market basics. Let’s learn about this in detail.
Table of Contents
What are Stocks?
Stocks are a straightforward method to build wealth through investment. When you buy a company’s stock, you own a share of that company.
Investing in stocks allows you to invest in some of the most successful companies.
Additionally, various types of stocks are available in the market for investing and trading. These stocks are categorized based on the following criteria:
- Market capitalization
- Ownership
- Fundamentals
- Price volatility
- Profit sharing
- Economic trends
People often wonder about the difference between the stock market and the share market, often using the terms interchangeably.
A stock market is similar to a share market. A share market is where shares are issued or traded. The primary difference is that the stock market allows individuals to trade in bonds, mutual funds, derivatives, and company shares, while the share market focuses solely on the trading of shares.
How Does the Stock Market Work?
Companies raise money on the stock market by selling ownership stakes to investors. These equity stakes are known as shares of stock.
By listing shares for sale on the stock exchanges that make up the stock market, companies get access to the capital they need to operate and expand their businesses without having to take on debt. Investors benefit by exchanging their money for shares on the stock market.
As companies put that money to grow and expand their businesses, it profits the investors as their shares of stock become more valuable over time, leading to capital gains. In addition, companies pay dividends to their shareholders as their profits grow.
The performances of individual stocks vary widely over time but taken as a whole, the stock market has historically rewarded investors with average annual returns of around 10%, making it one of the most reliable ways of growing your money.
Understanding the Stock Market Basics – Important Terms
Here is a list of commonly used terms when talking about the stock market. You can use this as a glossary to look for any time you want to learn.
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Term |
Description |
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Sensex is a collection of the top 30 stocks listed on the BSE by way of market capitalisation. |
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SEBI |
The securities and Exchange Board of India (Sebi) is the securities market regulator to oversee any fraudulent transactions and activities made by any of the parties: companies, investors, traders, brokers and the like. |
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Demat, or dematerialised account, is a form of an online portfolio that holds a customer’s shares and other securities in an electronic (dematerialised) format. |
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It is the process of buying or selling shares in a company. |
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A stock index or stock market index is a statistical source that measures financial market fluctuations. They are performance indicators that indicate the performance of a certain market segment or the market as a whole. |
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It is a collection of a wide range of assets that are owned by investors. A portfolio can also include valuables ranging from gold, stocks, funds, derivatives, property, cash equivalents, bonds, etc. |
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In a bull market, companies tend to generate more revenue, and as the economy grows, consumers are more likely to spend. |
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Bear markets refer to a slowdown in the economy, which may make consumers less likely to spend and, in turn, lower the GDP. |
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Nifty 50 is a collection of the top 50 companies listed on the National Stock Exchange (NSE). |
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Stock Market Broker |
A stock broker is an investment advisor who executes transactions such as the buying and selling of stocks on behalf of their clients. |
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Bid Price |
The bid price is the highest price a buyer will pay to buy a specified number of shares of a stock at any given time. |
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Ask Price |
The ask price in the stock market refers to the lowest price at which a seller will sell the stock. |
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IPO |
Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. |
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Equity |
Equity is the value that would be received by the shareholder if all of the company’s assets were liquidated and all of the company’s debts were paid off. |
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Dividend |
A dividend refers to cash or reward that a company provides to its shareholders. It can be issued in various forms, such as cash payment, stocks or any other form. |
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Bombay Stock Exchange (BSE) is the largest and first securities exchange market in India. It was established in 1875 as the Native Share and Stock Brokers’ Association. It is also the first stock exchange in India and provides an equities trading platform for small-and-medium enterprises. |
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National Stock Exchange was the first to implement screen-based or electronic trading in India. It is the fourth largest stock exchange in the world in terms of equity trading volume, as per the World Federation of Exchanges (WFE). |
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Call & Put Option |
The call option gives the investor the right to purchase the underlying security, while the put option gives the investor the right to sell shares of the underlying security. Both opinions let the investors profit from movements in a stock’s price. |
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Types of Stock Market |
There are 2 types of stock markets:
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Ask and Close |
The term ‘ask’ in the stock market refers to the lowest price at which a seller will sell the stock. ‘Closing price’ generally refers to the last price at which a stock trades during a regular trading session. |
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Moving Average |
It is a stock indicator commonly used for technical analysis to smoothen the price data by creating a constantly updated average price. A rising moving average indicates that the security is in an uptrend, while a declining moving average indicates a downtrend. |