“The Stock Market runs on Three things: Optimism, Skepticism, Criticism.”
– Jak Zoudi
Everyone is talking about the stock market nowadays in India.
Long-term investors, short-term traders and of course the thrill loving speculators, everyone forms a part of the game.
But, the question is why invest in stock markets?
Know More: How the Indian Capital Market Works
The majority of the Indian community have a risk-averse attitude.
They prefer to make fixed income investments or even invest in gold rather than investing in the stock market.
What they do not realize is that savvy investors who make intelligent stock picking decision make the highest potential returns amongst all other investment instruments.
Over the long term, if the investor selects quality stocks with a strong fundamental backing, they are the best investment assets.
So what is the Stock Market all about, How does it function, how does the average Indian participate in it?
Elearnmarkets has the answers for you right here.
How it all started
A few centuries ago, people ran businesses with their own money.
Their businesses were small and whenever they increased their scale of operations, they did it only with their own money.
It was not possible for all the business owners to build factories and industries with their own money.
Even banks did not lend the young companies the huge amount of capital that was required to start or extend their businesses.
Thus in the early 17th century, when the trading companies were exploring the newly discovered continents of Asia and America, they required a huge amount of money which their kings were unable to provide.
The wealthy people of their country were willing to lend the money but demanded huge interest.
So, in 1602, The Dutch East India company decided to raise their capital from the common people and became the first company to issue its shares in the Amsterdam Stock Exchange.
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So, What is a Stock?
In simple terms, a stock is a part ownership in a company.
It provides a share of the company’s in return for the capital invested.
For example, if a company has a total of 1,00,000 shares and you buy 1 share of the company, you have 1/1,00,000th ownership of the company.
Read More: How the Indian Capital Market Works
Then, What is a Stock Exchange?
A stock exchange is a market where the exchange of stocks and other financial instruments are facilitated.
The exchange provides services to stock brokers and traders to buy or sell stocks
Companies who are interested to generate capital from the public get listed on the stock exchange.
The companies have to fulfill the documentation and fee requirements to get listed in the exchange so that their shares are available to the general public to buy and sell.
Types of Market
In the Stock market jargon, the term “market” can have many different meanings, but it is often used a common term to denote both the primary market and the secondary market.
The primary market is where companies issue their securities for the first time.
It is the place where the securities are created and the Initial Public Offering (IPO) of the company is made available to the people for the first time.
The company has to adhere to the guidelines and procedures laid by the exchange and the Regulatory body, i.e. the Securities Exchange Board of India (SEBI).
The commonly followed procedures are when
- An Underwriting firm is contacted by the company to determine the legal and financial soundness of the public offering.
- The company’s interests and prospects are filed with the proper authorities and a preliminary prospectus also known as the Red Herring is prepared which describes the company’s intent and business ambitions.
- A final prospectus is prepared and issued by the company which is availed to the prospective investors and details the issue’s price, restrictions, and benefits. This is legally binding for the company.
The Secondary market is what people usually refer to when they talk about the markets or “Stock Markets”.
It is the electronic platform where the buying and selling of shares and other financial instruments takes place.
An important feature of the secondary market is that here the investors trade amongst themselves.
This means that if you are buying 1000 shares of ITC, some other investor is selling 1000 shares of ITC.
The company whose stock is being traded is in no way involved in the transaction.
How the Indian Stock Market works?
Trading in the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) takes place through an Open Electronic Limit Order Book.
This means that the orders of the buyers and the sellers are matched by the trading computers of the exchanges.
The best buy orders are matched with the best sell orders and are given priority on the basis of Time, Price and Quantity.
The orders from retail investors have to be placed to their brokers who act as a middlemen in the exchange and facilitate the trades.
The stock broker places the orders in the exchange on behalf of the investors.
Settlement Cycle and Trading Hours
The Equity spot markets in India follows a T + 2 rolling settlement cycle
.This means that a trade taking place on a tuesday gets settled on thursday.
All the trading in the Indian Stock Exchanges in the equity and derivatives segment takes place between 9.15 A.M. to 3.30 P.M. The Currency Derivatives segment is open from 9.00 P.M.to 5.00 P.M.
An Index is a the basket of securities of an exchange which measures the value of a section of the stock market. It is like a barometer to measure the economic health of the country.
The prominent Indices of the Indian Stock Market are the Sensex and the Nifty.
The Nifty is the index of the National Stock Exchange (NSE). It consists of 50 shares listed on the NSE.
It represents about 62% of its free-float market capitalisation.
It was created in the year 1996 and contains the time series data from July 1990 onwards.
On the other hand, the Sensex is the index of the Bombay Stock Exchange (BSE).
It includes 30 stocks and represents about 45% of its free-float market capitalisation.
An emerging market like India has a huge potential for future growth both in terms of the financial markets and industrialisation
In the present scenario, only a very low percentage of the Indian households invest in the stock markets.
But with proper education and knowledge of the financial markets, investing in stock markets can be a very profitable and rewarding venture.