A basic introduction to the stock market for new investors and traders

Understanding the Stock Market and Exchanges in India

The stock market is a platform, or a system, where stocks, bonds, and other securities are bought and sold. Think of the stock market as an enormous virtual market where investors buy and sell assets.

The actual buying/selling is transacted through exchanges, which supply a framework to allow for fair pricing and assured transactions.

In India, there are two primary exchanges:

• Bombay Stock Exchange (BSE): Established in 875 in the city of Mumbai, it is one of the oldest, if not the oldest, established exchanges in Asia.

• National Stock Exchange (NSE): Founded in 1992, in the city of Mumbai, it gave the Indian market digitisation and transparency.

Overseeing the exchanges is the Securities and Exchange Board of India (SEBI)—the regulator overseeing transparency, fairness, and protection of investors in the financial markets.

Why do companies issue stocks?

Companies issue stocks to obtain funding without going into debt. When a company sells shares of its organization, it essentially invites public investment in exchange for partial ownership of the company. The money raised from the sale of stocks is typically used for the following reasons:

• Expansion/Growth: Opening new branches or entering new markets.

• Acquisition: Buying or merging with other companies.

• Research and development: Spending money on innovations or technologies.

• Debt repayment: Paying down existing loans to have a more solid balance sheet.

• Increased visibility: Being listed on an exchange increases reliability.

• Liquidity: Early-stage investors may sell their stock for a profit.

What Are The Different Types of Stocks

There are two different types of stocks that an investor can buy:

• Common Stocks: These stocks represent ownership in a company and may pay you dividends. They also provide voting rights, such as those held for matters relating to board member elections.

• Preferred Stocks (Preference Shares): These are stocks that pay you dividends, but typically do not come with voting rights. Preferred stockholders get paid before shareholders and common stockholders do.

How Can You Earn Money from Stocks?

Investors can earn money in two primary ways:

Capital Appreciation means the stock price is appreciated. For example, you may buy a stock for ₹100 and sell it for ₹150.

Dividends are a portion of a company's earnings that is paid out to shareholders, for example, ₹5 per share if the company is successful.

Trading vs. Investing

Trading is comparable to a 100-meter sprint. Traders want to make a profit as quickly as possible by buying stock and selling it, usually within hours or days.

Investing is like running a marathon. Investors buy stock and hold it for years, expecting the stock price to increase over the long term and for compounding or total returns to occur.

Let's Examine These Differences More Closely

What Are Market Indices?

Market indices serve as an indication of stock market temperature, as they look at a select group of companies. In India, the two main indices are:

• Sensex (BSE): Tracks 30 leading companies on the Bombay Stock Exchange.
• Nifty (NSE): Tracks 50 top companies on the National Stock Exchange.

Market indices tell you if the overall market is going up, down, or sideways.

The Risks of the Stock Market

The stock market has the potential for high returns; however, returns come with risks. Some risks associated with the equities market include the following:

• Market Risk: A decline in the market can occur due to lower economic activity, political unrest, or global catastrophe.

• Company Risk: A company can experience a decline in performance if management is poor, the competition increases, or there are legal challenges.

• Liquidity Risk: There is an ability to sell a stock if nobody is willing to purchase shares. This can occur if a stock does not have shares traded relatively often or with volume.

• Inflation Risk: A decline in a real return will occur when returns are less than the rate of growth in prices; thus, the real gain will diminish.

New investors may want to start small, learn the fundamentals of the market, and add exposure slowly.