You might have read and learnt a lot about Stock Markets, if you are an expert. But, what if you are an amateur, or a newbie in the stock market world? Today we’ll take you back to the very basics of investing in stocks. Don’t miss out these wonderful Stock Market Basics for Beginners, a complete guide to make you understand and simplify complex concepts.
Thinking to dive into the robust and dynamic stock market arena, you probably can’t miss to know about these important and interesting terms and concepts.
Let’s catch up with them one by one…
Stock Market Basics: What to Know?
A stock signifies a piece of ownership in a public company. As an investor this allows you to to generate financial gains from owning a part of that company. Simply speaking, stocks are a share of a company that can be purchased or traded by investors. If you buy a stock, you turn to be a shareholder in that public company. This means that you hold equity in that company. The company’s performance combined with other important factors influence the stock price. So, the value of a stock may increase or decrease, i.e. its shareholders will either gain or lose money out of it.
Also, know the difference: Stocks vs. Shares
2. Different Types of Stocks:
There are 2 main types of stocks: Common Stock and Preferred Stock.
- Common Stocks: Common stocks represent ownership in a company. An investor of common stock is entitled to receive dividends plus earn a profit from the gain in value of shares. As a shareholder, you also get one vote per share in voting for the board members. But, if the company goes bankrupt, the common shareholders won’t receive any money until the creditors, bondholders, and preferred shareholders get paid.
- Preferred Stocks: Preferred stock represents some degree of ownership in a company. But, shareholders don’t voting rights. However, for preferred stocks, dividends are declared before the common stocks. In case liquidity is demanded, preferred shareholders are also given precedence over common stock shareholders.
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Classification of Stocks: Other
However, stocks can be classified into various types based on:
- Market Capitalization: Large cap stocks, Mid cap stocks, and Small cap stocks.
- Risk-volatility: Beta stocks, Blue chip stocks.
- Dividend type: Growth stocks, Income stocks.
- Price trends: Defensive stocks, Cyclical stocks.
- Price: Overvalued stocks, Undervalued stocks.
- Sector type: Banking stocks, Metal stocks, IT stocks, Pharmacy stocks, etc.
3. Stock Market:
A stock market is a platform where stocks are bought and sold, just as food is bought and sold at a grocery store. Nowadays, it exists in electronic form. You can access the market electronically from your computer/mobile. A stock market is there to help you facilitate your transactions. So, if you wish to buy a share, the stock market helps you meet the seller, and vice versa. There are two main stock exchanges in India: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
4. Stock Broker:
An average person doesn’t have direct access to the stock exchange. In order to trade on the exchange, you need an intermediary, who is called a broker. The stock exchange authorizes these brokers to trade. So, every stock broker is registered as a trading member with the stock exchange and holds a stock broker license. These stock brokers charge a fee for their services which is termed as brokerage.
You can choose between a full service broker or any of the best discount brokers in India.
Earning from Stocks:
There are primarily 2 ways of earning from stocks.
- Increase in Price: When a stock is sold at a price higher than the price it was bought.
- Dividend: When a company pays out dividend (share from its profits) to the investor.
Change in Stock Prices:
Stock prices change because of two crucial factors: Supply and Demand. Imagine more people willing to buy a stock (demand) instead of selling it (supply), the the price of the share will move up. Conversely, if more people wish to sell a stock than buy it, there would be greater supply than demand, and the share price would fall.
There are numerous major factors that can affect the price of a stock. However, one of the major factors is Company’s Earnings. The more profit a company earns; the more people will be willing to buy it. Companies listed on stock market are required to publish their earnings for every quarter (quarterly results 4 times in a year) and annual earnings (annual results once in a year). If a company’s results are better than expected, the stock price will rise and if the results are disappointing, the stock price will fall.
Market sentiment also plays a vital role in this regard. When positive announcements are made market participants tend to buy the stock at any given price and this cascades into a stock price rally.
Dividend is amount paid by a company to its shareholders. While major portion of the net profit is kept by the company for ongoing and future business activities, remainder can be allocated to the shareholders as dividend. Sometimes, companies do not make profit but continue to pay dividend to maintain their track record of making regular dividends.
Picking Up a Stock: How to go about it?
When a company grows and earns large profits, the demand for its stock usually rises, as so does its stock price. If a company’s profits are shrinking, the investors will want to sell their shares, and the stock price will fall. For buying a stock successfully, so the stock price rise after the purchase, the best policy is to gather as much information as possible. Research about the company, analyze it from different angles, and test the relationship between the company and its stock price.
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Stock Market Terms & Concepts:
Stock Market Index:
A stock market index is a statistical measure that displays changes occurring in the stock market. It reflects overall market sentiment and direction of price movements of products in various market segments. It is a tool used by investors and financial managers to describe the market and to compare the return on specific investments.
To create an index, a few stocks are chosen from amongst the securities already listed on the exchange and are grouped together. There are different methodologies for constructing individual indices, but most of the calculations are based on the weighted average mathematics of these selected stocks.
The two benchmark stock market indices in India are NSE Nifty and BSE Sensex.
Sensex & Nifty:
Sensex and Nifty are two large-cap stock market indexes based on the shares of distinguished companies. These are linked to two distinct national stock exchanges in India, namely Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), respectively.
Sensex or BSE30 is the market index for companies listed at Bombay Stock Exchange (BSE) whereas Nifty or Nifty50 is the market index for companies listed at National Stock Exchange (NSE).
The first sale of a stock, which is issued by the company itself is called the initial public offering(IPO). This means that company is offering the stocks for the first time to the public. The main purpose of an Initial Public Offering (IPO) is to raise funds which can be utilized for various reasons – for CAPEX, restructuring debt, rewarding shareholders, etc.
Market capitalization refers to the total value of all company’s shares of stock. You multiply the price of a stock by the total number of outstanding shares, the resulting value of “Market Cap”. For example, a company with 20 million shares selling at Rs.50 a share would have a market cap of Rs.1 billion.
The companies are typically divided according to market capitalization: large-cap (Rs.20,000 crores or more), mid-cap (Rs.5000 crores to Rs.20,000 crores), and small-cap (less than Rs.5000 crores).
What is Fundamental Analysis?
Fundamental analysis is a methodology of assessing a stock’s real or fair value (known as intrinsic value), which is further used to determine whether it is undervalued or overvalued. If undervalued, it is recommended for buy and if overvalued, it is recommended for sell. This method looks beyond a company’s share price to measure its true financial health. Revenues, earnings and profit growth are some of the key factors taken into consideration during the analysis. This approach further helps an investor in decision making while investing for long term.
What is Technical Analysis?
Technical analysis is a methodology which is used to forecast future stock price based on historical price movements of the stock. This analysis takes only two things into consideration: the prices for which a stock has traded, and the volume of shares traded at those prices. Considering these two factors, a technical analysts simply locates patterns in the stock price behavior. This approach helps an investor to identify trading opportunities by analyzing statistical trends gathered from trading activity. Technical analysis is far more prevalent in commodities and forex markets where traders focus on short-term price movements.
Don’t forget to have a look at the Best Trading Indicators Every Trader must know
What is a Bull Market & Bear Market?
In simple terms, Bull Market means Market is UP & Bear Market means market is DOWN.
“Bull Market” is a used to highlight an economic phase that direct towards growth and optimism. This term is primarily used in regard to stock market, however, it can also be used for bonds, currencies and other securities. Bulls are optimistic that the stock market will continue to rise in future. People tend to buy more stocks to cash in extra gains.
On the contrary, Bears are pessimistic about the future and expect the stock market to fall. A “Bear Market” is an economic indication about the pessimism in the stock market. There comes a point when you observe stagnation or a decline, investors have low confidence in the economy. As a result, more people start selling the stocks rather than buying. Does it sound a good strategy? One should not panic and act calmly in such a bearish market.
What is Intraday Trading & Delivery Trading?
You may call it, Intraday trading or Day trading! Here the trader buys or sells the stock on the same day. Day traders book profits or losses quickly. They close their trade before the closing hours of the stock market. You can hold the stocks for few hours, few seconds and multiple number of times, all in a single day. Intraday trading is highly volatile and requires fast decision making as compared to other types of trading.
Delivery trading is also known as position trading. In this type of trading, the trader buys and holds the stocks for longer period of time (weeks or months or years). Delivery trading requires extensive research before buying a stock.
These days, you can easily open a Demat and Trading account with any of the popular stock brokers in India and initiate your trading interests.
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Debt and Equity:
Debt and equity are the external sources of finance for a business. When a business needs a lot of money for an expansion of projects or for reinvestment and improving their products, services, or deliverable, they go for equity and debt. Debt refers to the source of money which is raised from loans on which the interest is required to be paid. Thus, it is form of becoming creditors of lenders. Whereas equity means raising money by issuing shares of company and shareholders get return on such shares from profit of company in the form of dividends.
Hey!! And, that’s not all! The deeper you get into the massive stock market, the more knowledge you’ll wish to gather. We have covered some of the common stock market concepts that you must know as an investor. Any other crucial stock market terminology you wish us to discuss, feel free to request in the comments.
Disclaimer: There is a high degree of risk involved in stock trading. The details given on this website are for informational purpose only and cannot be constituted as professional advice in any regard. Please follow due diligence while investing your money.
Happy Investing!! But, be very cautious, a lot of risk attached to the stock markets. Now, whether you are an experience or a beginner, returns are not guaranteed. So, be prepared and act wisely!