What Is The Stock Market?
Are you looking for an expert to break down the complexities of the Stock Market for you? Upstox has got you covered. This easy-to-understand video will teach you the fundamentals of the Stock Market.
Hello and welcome to our new series - Learn with Upstox.
In this series, we will learn about a lot of investing concepts. Like IPOs, Mutual Funds, Digital gold, Stock market, Real estate and many more.
Today, we are going to discuss a very sought after and exciting topic - the stock market.
Let’s begin understanding, what exactly is the stock market?
Well, it definitely is something that scares a lot of people and we always hear our relatives say, “Stock market se durr raho.” Stock market is kind of considered to be like gambling. But at the same time, we have friends who say that they’ve made a lot of money by investing in shares. So what do we do?
Let’s look at a fun fact - If someone had invested Rs 10,000 in Wipro 40 years ago, by now that amount would have been Rs 700 Crore rupees. Some will be shocked to hear this, and others will rightly point out that 40 years ago, Rs 10,000 was a big amount. So let’s look at it this way - even if someone had invested only Rs 1000,, it would still have become Rs 70 crores. If someone only had Rs 100 to invest, those 100 rupees would have now turned into seven crores. And this is the potential of the stock market.
What is a Stock Market?
Let’s assume that you want to start a business, what would you do? You would ask your friends or family or relatives. But what will you do if you need more money that isn’t available with your friends or family members? Right. You will approach the bank. But, what if you want twenty crore rupees? Then what will you do? You will get this money from the public.
You will explain to them your business model. Then the people who found your plan trustworthy, might be ready to give some of their money to you. But what will they ask for in return? They will ask you to give them a share of your company. And this is nothing but the share we talk about in the share market.
Now, let’s take the point of view of the person investing. Say you gave some and got a share. But three days later, you suddenly need that money. What do you do then? The company that gave it’s share to you won’t give you back the money, it has already used it for it’s business operation. But you need the money. What do you do now? In this case, you need a market, where you can go and sell this share to someone else.
This market is nothing but the Share or Stock Market. Here, more than 4000 companies are listed and you can buy or sell their shares, whenever you want. For example, if you think that Colgate is going to do good, or that they have been selling lots of toothpastes and brushes, then you can just buy it’s share. On the other hand, if someone thinks that HUL is going to do better, they can buy that share. So basically, you can buy shares of any of the 4000+ companies listed on the market, based on whichever you like or think is doing well. And as crores of people buy and sell shares everyday, you will most certainly get a buyer.
And that’s the specialty of the share market, on a single click, you can be a partial owner of any company you want, run by some of the most intelligent of people.
Now, moving on.
Why is the Stock Market risky?
When you buy a share, you’re getting a small part of the company or a share of it, and hence it is called the share market. You become a partial owner of the company. Which means that when you invest in a business, and if the business doesn’t do good, you are also the one who loses money.
All the companies that are listed on the stock market are really big. When you invest in them, you become a partial owner and if the company suffers a loss, you suffer a loss and when the company earns profits, you also earn profits.
Share market doesn’t provide interest, because this isn’t a loan. Hence there are many companies here which do really well but there are also companies that perform badly.
Let’s take the example of Eicher motors. This company highly increased the sale of Bullets in the last few years which led for it’s shares to increase by 10/12%. You could similarly look at MRF, TVS, Wipro or many other companies like these, who have given great results in the last few years.
So, it’s true that the stock market poses a lot of risks. But it is also true that it gives equally good returns. And even if there are risks, it’s not like we can’t do anything about it. We can use risk mitigation strategies.
Now, let’s take a look at how we can reduce the risks in the Share market. For this, let’s take an example.
Say that you invest in your friend’s business. You don’t know how much returns the business is going to give. Maybe in the first year, it’ll give a return of 10%. In the second year, it will give a return of 20% and in the third year, it might even give a return of 30%. There is no fixed criteria of how much returns will be made. So we don’t really know how much returns a company can give.
It might happen that some company doesn’t give any returns for five years in the stock market. And this is also possible that another company can give 2X, 3X or more in returns. Here, we’re only talking about one share. But we can’t invest all of our money in one share because we don’t know when it will grow. That is why it is suggested that while investing, you shouldn’t invest in only one stock. Instead you should make a portfolio with investments in 8 - 10 stocks.
By now, we know what a share is and what a share market means. But we might wonder, if the company has taken our money and given us a share, then why do the prices fluctuate on a daily basis?
But before that we need to know who all are the participants of the share market. As it is because of them that the prices go up and down.
Types of Participants in the share market
- Retail investors: These are people like you and me who invest.
- Institutional Investors: Mutual funds, government agencies, Insurance companies and many other investors like these make up the Institutional Investors.
- Advisors/ Trading Rating companies: This category includes advisors, credit rating companies, analysts, equity research firms and many other companies which make predictions about the economy, bonds, government policies or simply put, about stocks. All these companies or agencies keep giving their opinions - in a day or month, and because of these opinions, the moods of investors keep changing.
Hence, these are the participants which affect the price changes in the stock market and their activities are very important. When a respected agency gives its opinion, it causes the retail or institutional investors to change their opinions as well and this causes the price of shares to rise or fall.
How the Price Change occurs
For example, if we look at the reports for Maruti, ten brokers might say that it’s good and we should invest in it’s shares. On the other hand, ten brokers might call it bad. The investors can get divided or they might even keep changing their opinions. Company news and sector news can change advisors’ opinions. If Maruti itself says that their manufacturing unit is going to be closed for three days due to a lack of demand, then this negative news will negatively affect the share prices of Maruti and they will drop. On the other hand, if news comes up that there is going to be some strategic partnership between Maruti and Toyota, then this might lead to a rise in the prices as this is positive news.
This was the case for news. And we have seen how opinions can also affect the price changes.
Let’s take another example of technical analysts. If a share’s price drops, the analysts might say that the share is going in a downward trend. This changes people’s beliefs and they start selling these shares, which further lowers the price. These analysts usually analyze intra-day trading and their opinions fluctuate a lot. This causes the stock price to shift a lot, even within minutes as these investors are trying to make a profit even if it’s by 10 to 20 paisa.
In summary, we can say that the demand and supply causes these dramatic changes in share prices.
Bull or Bear Market
Now, we will look at some basic terminologies like:
- Bull Market
- Bear Market
- Intraday Trading
- Stop Loss etc
- A bull market or the market is said to be bullish when the share market grows by more than 10%, substantially and continuously.
- It's a bear market or the market is said to be bearish when the share market goes down by more than 10%, substantially and continuously. If you watch Sensex, you’ll hear phrases like the market went up by this percent or it went down by this percent. These are basically the terms used to denote the overall market. Now let’s see what Intraday Trading and Delivery means.
- Intraday trading is done when the investor wants to earn profits on the same day. When trading like this, the investor has to buy and sell the shares on the same day, they can’t carry it forward on the next day. Suppose I buy an ITC share at Rs 200 thinking that it’s price is going to rise a lot today. If this happens, well and good. But if the price doesn’t rise by the end of the day when the market closes, or even if it drops down to Rs 190, I will compulsorily have to sell the share, even in loss.
- On the other hand, Delivery trading is done when there are no time constraints for selling a stock. You could hold it for as long as you want to, whether it’s one week, one month or ten years, it doesn’t matter.
- When you want to mitigate the loss, or reduce it, you use Stop Loss. Let’s take the same example we took before. In that example, I bought a share at Rs 200 and then it dropped to Rs 190, when I sold it. But I could use a Stop Loss while buying the stock and enter a price of say, Rs 195. Which means that if the price starts dropping and it reaches Rs 195, all my shares will automatically be sold. This is done because I can only afford Rs 5 of loss, not more than that. Stop Loss is usually used by Intraday traders.
Let’s take one more example.
Assume that there are four partners and each of them have a 25% of profit sharing agreement in a partnership firm. Now, this firm is making a profit of one lakh rupees at the end of one year. This means that every partner will get Rs 25,000 which is their profit per share.
Now the same goes with companies, where the shareholders get an EPS or the Earnings Per Share. As the number of shares increases but the profit does not increase, EPS starts getting diluted.
So, when we buy shares and the company grows positively, their share prices keep increasing. Because of this, we obviously earn the capital gain but we also gain a part of the profits. How so?
You must have heard that some companies declare dividends. But, what are dividends?
When we buy shares, we become the shareholders in the company. Now, because we’ve given some funds to the company, the company also in return shares its profits with us and these profits are called dividends. But not all companies give this dividend.
While the share market has risks, it also has lucrative returns. It is a good and attractive investment option because compared to all other types of investments like real estate or gold, shares allow a lot of liquidity and have the highest potential for profitable returns.
But remember, higher the risk, higher the returns and therefore it is very important to research well before investing. Look up for the kind of company it is, if it has growth opportunities, how is their management and many other things like these which we call as the Fundamental Analysis.
And that is all for this article. We really hope that this helped you understand the Stock market. If it did and if you want to read about related topics, feel free to browse through our blog. In fact, you could also check out our YouTube channel for the same.