In this article, we have discussed about: What is a Stock?; Stock Market Definition (Stock Market Meaning), How to invest in Stock Market?; What time does the stock market open? ; The benefits of investing in stock market & Stock Market India
Table of Contents
Stock Market Meaning
What is a Stock: Stock refers to part-ownership of a company. It is a financial token or an instrument that signifies ownership of a company in some proportion. The term stock and share are generally used interchangeably. However, it must be noted that the term ‘share’ refers to part-ownership in a particular company whereas the term ‘stock’ refers to part-ownership of any company or multiple companies.
A Netflix Original Documentary Series
Consider Amazon has 1,000 shares. You bought one of the 1000 shares. Now, you own 1/1000th of Amazon. In reality, Amazon and companies alike have millions of shares. When you own a share that means that you own a portion of that company and as the value of that company increases so does your share price.
Stocks allow a company to raise massive amounts of operating capital with essentially no extra effort or product. So when you purchase a stock, it implies that you actually bought a piece of the respective company. Now you might wonder why people do this. Typically most of the people do this by investing in the companies in order to gain revenue or gain financial perks that can be used to build or grow the company.
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Stock Market Definition
The stock market is defined as a collection of markets and exchanges where primarily the selling and buying of shares of companies take place. In short, a stock market is a place where you buy and sell shares of public listed companies. It is a marketplace where individual and institutional investors come together to buy and sell shares in a public venue. The Stock Market is also called an equity market.
Consider the following example, let us say you have entered a vegetable market. In any vegetable market, you can see different vegetable vendors in different shops. It is not uncommon to see vendors of different shops selling the same vegetables, right? The vegetable market is the place where the vendors present their vegetables in the shops. In the same vegetable market, you can observe vendors selling spices, fruits etc in their respective shops
So the vegetable market is used as a collective term that represents shops of vegetables, spices, fruits, buyers, vendors, warehouses etc. In the same way, the stock market operates with a network of stock exchanges. The stock exchanges are a part of the stock market in which the listings and trading of stocks take place according to the regulations. Just like different shops in the vegetable market can sell the same vegetables, the different stock exchanges in the stock market can have stocks in common. For example, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the two major stock exchanges in India.
Just like the shops in the vegetable market would also sell other products like spices and fruits, the stock market also has exchanges that deal with products other than stocks such as commodities, bonds etc. So in a way, we can say just like vegetable markets operate through shops where vendors sell their goods to the buyers, the stock market operates through the stock exchanges in which shares transfer from sellers to buyers.
To get a similar example watch the video below:
And that is how the whole concept of stock market works, in the simplest way!
Why is the Stock Market needed?
So let us say, if we have a business and to grow this business, we need capital. So where can we get the capital from? There are three resources of capital. First is the bank. Bank normally gives capital in the form of a loan at a certain amount of interest which the business ought to repay.
The second source of capital for a business is the individual investor of private equity, where they buy a certain percentage of the company and receive a stake which they can later sell at higher prices. But if a company wishes to create a huge amount of capital from thousands of investors, in such a case, the company needs to go public. For that, they need to list their shares on the stock market. So companies get their shares listed on the stock exchanges and they get money from the public to include in their business.
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History of Stock Trading
In the 1600s, the Dutch East India Company employed hundreds of ships to trade gold, porcelain, spices and silk around the globe. But running this massive operation wasn’t cheap. To fund their expensive voyages, the company turned to private citizens–individuals who could invest money to support the trip in exchange for a share of the ship’s profit. This practice allowed the company to afford even grander voyages, increasing profits for both themselves and their savvy investors. Selling these shares in coffee houses and shipping ports across the continent, the Dutch East India Company unknowingly invented the world’s first stock market.
Since then, companies have been collecting funds from willing investors to support all kinds of businesses. And today, the stock market has schools, careers and even whole television channels dedicated to understanding it. But the modern stock market is significantly more complicated than its original incarnation.
Benefits of investing in the stock market:
- Incremental investment strategy: There is no minimum amount required to enter the stock market. Anybody with money can start investing right away in the stock market. You can pump in new money or reinvest the dividend money in order to grow your investment. The amount of money you make is directly proportional to the time invested in the stock market. Longer you stay with the market the higher your growth potential is.
- Money makes more money: This is a classic case of money making more money. The more money you put to work, the more money gets earned. There are a lot of blue-chip stocks that have great growth potential and share their profit to the investors every quarter in the form of dividends. Stock value goes up during good times and goes down during bad times.
- No limit to rewards: There is no limit to how high the stock can grow. As long as the fundamentals are correct, the stock will keep rising up in value. This is applicable to both; growth stock and dividend stock. When it comes to growth stock, the value appreciates more rapidly than the dividend stock, but dividend stock has the advantage to bring in cash flow from your investment. The cash flow when effectively reinvested can grow even bigger in the long run.
- Liquidity: The biggest advantage of holding the asset in the form of stock is that it can be liquidated pretty easily. Often takes only a couple of mouse clicks to convert the huge investment into cash and vice versa.
- Tax benefits: There is no tax liability but owning the stock investment. You need to pay taxes on dividends and other cashflows you receive from your investment but there are no taxes to just owning the stock. There are no maintenance costs no property tax to be paid etc. Cash you receive in the form of dividends can have benefits as well. Qualified dividends are subjected to lower taxes than non-qualified dividends.
- Emotional intelligence: In most cases, it is like swimming against the waves. It is tough mentally and physically when the easiest thing to do is to go with the flow and follow the crowd. If you are a serious investor and would like to be in the market in the long run, you should know that you must not follow the crowd. It takes a great deal of emotional strength to buy the stock when everyone is selling and sell the stock when everyone is buying.
The emotional outcomes are not logical. So, every ten years the market crashes for no logical reason. This is the logical time for the new investor to get in. The stock market is neither your friend nor your enemy. It is a reflection of the economic condition of the country. It is a system created and maintained by humans. So, it has the strength and weakness of a human being. You are better off using your emotion to think and instead of thinking with your emotion.
- Cash flow: Dividend-paying stocks provide healthy cash flow for the investors. Dividend money is a portion of a company’s earning approved by the board of directors to be distributed to the shareholders. Dividends are usually issued as cash payments either quarterly or on a monthly basis. Adding more stocks to your portfolio increases the cash flow from your stock investment. If planned and executed carefully this can be a way to financial independence for long-term investors.
- Power of compound interest: The power of compounding is directly proportional to the duration of the investment. The key to the power of compounding is the snowball effect that happens when dividends and the capital gains are laid over a period of time to make money grow faster as the years go on.
- Beat inflation: The best way to beat inflation is to invest in the stock market. Historically, the stock has averaged an annual return of over 10%, which is much higher than the average inflation rate of 3.2%.
- Powered by Main Street: Wall Street is not the enemy of Main Street. In fact, Wall Street depends on the prosperity of Main Street. Wall Street focuses on generating money using money to make more money and globalize business and employment opportunities in order to save money. Whereas, Main Street creates livelihood, provides employment opportunity needs in society, and advances human interest. It is the heart and soul of capitalism. Without Main Street, Wall Street is like a gleaming mobile phone without any software.
Check out our list of some prominent online courses on Stock Market – Click Here.
Stock Market India
Indian stock market consists of two leading stock exchanges. One being the Bombay Stock Exchange (BSE) while second is the National Stock Exchange (NSE). Stock exchanges are the places that facilitate the buying and selling of securities such as stocks, bonds, etc. In India, as of 26 Nov 2019, there are 23 stock exchanges. Among them, two are national-level stock exchanges namely BSE and NSE. The rest 21 are Regional Stock Exchanges (RSEs). Due to stringent norms introduced by SEBI, 20 RSEs in the country opted to exit the business.
The Bombay Stock Exchange located in Mumbai is the first stock exchange in Asia founded on 9th July 1875. The BSE has more than 6,000 companies listed on the exchange while NSE has more than 1600 companies listed. The primary index of BSE is ‘Sensex’, whereas the primary index of the National Stock Exchange is ‘Nifty’. The second participant in the stock market is the depositories which comprise of National Depository and Central Depository. This is where the shares get stored. The third important participant is a ‘Stockbroker’. Brokers are responsible for facilitating transactions between the individual investors and the share market. For their services, Stockbrokers charge fee or commission from the customers.
In general, stockbrokers are associated with brokerage firms. In many cases, a stockbroker can also be an investment advisor who suggests potentially profitable trades to the customers. In addition to the infrastructure to trade, brokerage firms also provide trading Softwares and research on the market. Depending on the exchange the client wanted to trade, the brokerage firms charge the client with a fee or commission which is generally termed as Brokerage.
The Securities and Exchange Board of India (SEBI) regulates the country’s stock market. All stock exchanges in India follows the rules and regulations of SEBI & all stockbrokers and brokerage houses should be licensed by SEBI to offer their services to clients. India started allowing outside investments in the 1990s. Investments are either Foreign Direct Investments (FDI) or Foreign Portfolio Investments (FPI). FDI allows investors to participate in the company’s day-to-day operations. Indian government determines FDI limits which varies over the years.
Read more on Groww: https://groww.in/blog/list-of-stock-exchanges-in-india/
What time does the stock market open?
Trading takes place between 9:15 a.m. and 3:30 p.m. (Indian Standard Time) and Monday to Friday (except public holidays). Sensex and Nifty are India’s two main market indices.
The equity trading timings of NSE and BSE are divided into three parts:
- Pre-Opening Session
- Normal Trading Session
- Post-Trading Session
The Pre-opening session (9:00 AM and 9:15 AM). This session is further divided into three parts:
9:00 AM – 9:08 AM
This is the starting phase of the pre-opening session. Participants can start placing buy and sell orders from 9:00 AM. The orders will be received by the exchange from 9:00 AM – 9:08 AM but they will not be executed. Participants can cancel or modify their orders in this session.
9:08 AM – 9:12 AM
This is the second Phase of the pre-opening session in which order matching takes place. The buyers and sellers are matched through bids and orders placed in the first phase of the pre-opening session. Orders cannot be canceled or modified in this phase.
9:12AM – 9:15AM
This is a buffer period before the beginning of the normal session. This buffer period of 3 minutes will help to smoothen the translation of the Pre-opening session into a normal trading session.
Normal Trading Session (9:15 AM to 3:30 PM)
This period is where most of the trading in the exchanges take place. Participants can place buy/sell orders, modify and cancel them in this period. Most of the brokerages only allow orders from 9:15 AM to 3:15 PM. The remaining time period of 15min (3:15 PM – 3:30 PM) is used by the brokerages as a buffer for a smooth translation to post-trading session. Brokerage houses also use these 15min to close the intraday orders. In general, brokerage houses in India will not allow placing intraday orders from 3:20 PM.
The window of intraday order placement will end between 3;15 PM to 3:20 PM and it varies according to the brokerage firm the participant is associated with. Exchanges use the time between 3:30 PM to 3:40 PM for calculating the closing price of securities traded in the normal trading session.
Post-trading Session ( 3:40 PM – 4:00 PM)
Orders can only be placed at a closing price decided at the end of 3:30 PM to 3:40 PM period by the exchanges. For example, the closing price of the stock ICICI BANK is $370/- after the normal trading session. Now, market participants can only buy and sell ICICI BANK at $370/- in the post-trading session.
The above timings are for the equity segment of the market.
How to invest in Stock Market?
Things to remember before you start to invest into the market:
So before you start to invest into the market, there are the two main things you need to study about the markets; to be consistently profitable and to make huge profits in the market.
Fundamental analysis: Fundamental analysis is the process used in evaluating the economic health and financial performance of an underlying company. Each quarter, publicly traded companies issue reports that include accounting metrics such as sales debt and other information that will help the investors to gauge how well the company is doing financially. There are thousands of companies to select from. Investors often use fundamental analysis as a way to filter through these companies to narrow down the list. Fundamental analysis helps us decide which companies to choose from.
Technical analysis: Technical analysis is a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. The technical analysis seeks to identify price patterns, market trends, and attempts to exploit those patterns.
Check out our list of some prominent online courses on Stock Market– Click Here.
How to trade in stock markets?
To trade in the stock market, initially, you need to have a Demat and trading account. The trading & Demat accounts are closely related but serve different purposes. The trading account is used to conduct buy and sell transactions of securities. Every trading account is linked to a unique ID where all transactions are recorded. The Demat account is used to store the securities you own in an electronic format. For a trader/Investor, entire stock market transactions happen through the interactions among bank account, trading account, and the Demat account.
To open a Demat and trading account, all you need is a bank statement, your photo, Aadhaar card, and PAN card. These are some of the important documents that one needs for creating a Demat and trading account.
To start conducting transactions in the stock market, initially, you should transfer trading capital from a bank account to the trading account. When you buy a share through the trading account, the shares are deposited into your Demat account. Similarly, when you want to sell your share, the shares need to be debited from your Demat account and the selling happens through the trading account.
How to buy shares in the stock market?
Through Trading Platform: Trading platforms are the software provided by the brokerage houses that facilitate stock market transactions. A trading platform is used to buy, sell, and manage your stock market positions. In addition to this, trading platforms are also equipped with real-time quotes, newsfeed, broker research, and charting tools.
The features offered by the trading platforms depend on the brokerage house you are subscribed to. In general, trading platforms in India are offered for free by brokerage houses. However, the fee for trading platforms depends on the features the customers subscribed to. For example, if you need sophisticated statistics of options your trading platform, you will have to search for brokerage houses that provide it and may have to pay an extra fee for it
However, basic features such as buy/sell orders placements, managing your stock portfolio, charting tools, transfer of money in and out of the trading account, stock quotes, etc are provided by the broker for free in all trading platforms
As soon as your account gets activated with the brokerage houses, make sure you transfer the money from your bank account to your trading account. Once the money is in your trading account, you can now place an order via a broker. This broker would push the order into the stock exchanges and as per your buying price, the stock exchange will try to match your order with the best seller. And when your buying price matches the selling price, then the order gets executed and finally bought shares are delivered into your Demat account after trade day (T)+ 2 days.
How to sell a stock?
Now, let’s try to understand how to sell a stock in the share market. To sell a stock, you need to place an order with your broker. The broker forwards your order to the stock exchange. The stock exchange will look for the best buyer on the other side and whenever your price gets matched with the buyer, the order gets completed and by the end of the day, the stock will be debited from your Demat account. You can withdraw the money after T+ 2 days and you may request the withdrawal of the funds from your Demat account into your bank account.
Check out our list of some prominent online courses on Stock Market – Click Here.
What are the various ways of placing an order with a brokerage house?
In India, brokerage houses provide trading platforms to market participants in three formats:
Desktop-based Trading Platforms
Desktop-based trading platforms or ‘Trading terminals’ are the trading software provided by the broker. The trading terminal software can be installed on computers/laptops. The trading terminal is the most sophisticated form of trading platforms. They are highly customizable and provides all the features the broker provides. The major features include live data feed, adding and monitoring market watch list, quote monitoring, charting tools, depth market, etc.
Web-based Trading Platforms
Web-based trading platforms are also provided by the brokerage houses which doesn’t need to be installed in the PC/laptop. Instead, the web-based trading platforms can be accessed through web browsers like Chrome, Firefox, Internet Explorer etc. They provide the necessary features a trader or investor needs but have fewer features when compared to the trading terminals. Some of the most used web-based trading platforms in india are Zerodha Kite, Upstox Pro and NOW.
Mobile app-based Trading Platforms
These are trading applications that can be installed in mobiles. Almost all brokerage houses in India provide their mobile trading app. Although mobile trading apps are not as sophisticated as the trading terminal and web-based trading platforms, they do provide some of the most important features. Mobile trading apps have a basic form of order management and PMS facilities. It also comes with basic charting tools.
In India, mobile trading apps are mostly used by traders to track their stock positions and to get updated about the market on the go. One of the major advantages of mobile trading apps is that the user can trade from any place.
How do companies and investors use the stock market today?
Let’s imagine a new coffee company that decides to launch in the market. First, the company will advertise itself to big investors. If they think the company is a good idea, they get the first crack at investing and then sponsor the company’s Initial Public Offering (IPO). This launches the company onto the official public market, where any company or individual who believes the business could be profitable might buy a stock. Buying stocks make those investors partial owners in the business. Their investment helps the company to grow and as it becomes more successful, more buyers may see potential and start buying stocks.
As demand for those stocks increases, so does their price, increasing the cost for prospective buyers and thereby raising the value of the company’s stocks that people already own. For the company, this increased interest helps fund new initiatives and also boosts its overall market value by showing how many people are willing to invest in their idea. However, if for some reason a company starts to seem less profitable the reverse can also happen. If investors think their stock value is going to decline, they’ll sell their stocks in the hope of making a profit before the company loses any value.
As stocks are sold and demand for the stock goes down, the stock price falls and so does the company’s market value. This can leave investors with big losses unless the company starts to look profitable again. This see-saw of supply and demand is influenced by many factors.
Companies are under the unavoidable influence of market forces such as the fluctuating price of materials, changes in production technology, and the shifting costs of labor. Investors may be worried about changes in leadership, bad publicity, or larger factors like new laws and trade policies. And of course, plenty of investors are simply ready to sell valuable stocks and pursue personal interests. All these variables cause day-to-day noise in the market which can make companies appear more or less successful. And in the stock market, appearing to lose value often leads to losing investors and in turn losing actual value.
Human confidence in the market has the power to trigger everything from economic booms to financial crises. And this difficult-to-track variable is why most professionals promote reliable long term investing over trying to make quick cash. However, experts are constantly building tools in efforts to increase their chances of success in this highly unpredictable system. But the stock market is not just for the rich and powerful. With the dawn of the internet, investors can buy stocks everyday in the same ways as large investors do. As more people educate themselves about this complex system, they too can trade stocks, support the businesses they believe in and pursue their financial goals.
The Bottom Line
Stock exchanges are one of the most important constituents of the capital market in any country. Currently, only a few percentage of the Indian household savings are invested in the domestic stock market but with GDP growing and a stable financial market ahead, it is estimated that more Indians will start investing.
In order to get a comprehensive idea before you start investing in the stock market, we would highly recommend you to study in detail about the stock market by enrolling an online course. Check out our list of some prominent online courses on Stock Market – Click Here.
To know more, we suggest you to visit corporatefinanceinstitute.com
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