After seeing the slowdown and boom of 2020, every person is feeling like trying his hand in the stock market. In such a situation, many people want to know what is the stock market and how to invest in it.
So today we will guide you very easily through this post that what is stock market and how even a simple person can invest in it.
1.What are stock markets?
Stock Market or Share Market is the place where Equity, Debentures, Mutual Funds, Derivatives and other types of Securities are bought and sold through Stock Exchange.
The two largest stock exchanges in India are –
BSE (Bombay Stock Exchange)
NSE (National Stock Exchange)
Companies take out their IPO based on the guidelines of SEBI and after which their shares can be bought and sold in the open market. After which if you buy the shares of that company, then you become the owner of that company in proportion to the percentage of the share.
For example –
A XYZ.ltd took out a public issue with 1 lakh shares. Now from the day of listing, you have bought 5000 shares of that company i.e. now you have become a shareholder of 5% in the profits of that company.
If you do not know what is a public issue and how to invest in it, then definitely see this post – How to invest in IPO?
2 How does the stock market work?
After understanding what the stock market is, let us know how it works.
It is very easy, you have to understand these four things –
- listed companies
- share holder
- demand and supply
- Market conditions etc.
Lets understand it one by one in a simple way.
2.1 How do companies issue shares?
First of all, companies get their shares listed on the stock exchange and bring IPO (Initial Public Offering) and issue their shares to the public at a price set by themselves. Once the IPO is completed, the shares come into the market and are bought and sold by the investors among themselves through stock exchanges and brokers.
2.2 How do Share Prices Change?
The company decides the price of the shares while bringing the IPO, but once the IPO is completed, the value of the shares varies depending on the demand and supply of the market. This demand and supply keeps on changing in many ways –
You can understand it like this-
If the number of people who buy shares is more than those who sell, then the price of shares will increase –
And if it is reversed, that is, the number of sellers is more than the buyers, then the price will be less –
3 Securities and Indices?
Most of the people think that only shares are traded in the stock market but it is not so. Like shares, there are many other securities which are traded in the stock market.
3.1 What is Sensex?
Sensex is an index of Bombay Stock Exchange and Sensex is determined on the basis of market capitalization (total value of companies) of top 30 companies listed on BSE.
If the Sensex rises, it means that most of the companies registered in BSE have performed well.
And similarly, if the Sensex falls, it means that the performance of most of the companies has been poor.
3.2 What is Nifty?
Nifty is an index of the National Stock Exchange and is determined on the basis of the market capitalization of the top 50 companies listed on the NSE.
If Nifty increases then it means that companies registered in NSE have performed well and if Nifty decreases then it means that companies of NSE have performed poorly.
3.3 What are Bonds & Debentures?
Bond / Debenture is like a loan in a way.
When the company needs money for a project, either they can take a loan from the bank or they take loan from the public and issue Bonds/Debentures to the public.
Whose repayment they have to do in the stipulated time.
Companies pay interest on Bonds/Debentures at a fixed rate and after the maturity of the bond, they make repayment in exchange for the bonds.
Bonds/Debenture are a safer investment option for any investor than Shares.
Because in this interest is given from time to time at the rate fixed by the company and repayment is done on maturity.
3.4 What is Mutual Funds?
Mutual Funds are a type of Indirect Investment in Shares and Bonds.
Mutual funds are a type of institution or trust that issues its own shares, which people buy and invest in mutual funds.
On the basis of their knowledge, experience, understanding and analysis, professional managers of mutual funds invest the invested amount in a variety of shares and other securities.
The benefit of investing in Mutual Funds is that Professional Fund Managers try to invest all the collected money in the best way based on their knowledge, in return for which they charge some fees.
3.5 What is SIP?
SIP means – Systematic Investment Plan (SIP) is a way of investing in Mutual Funds.
In this instead of lump sum investment, a fixed amount is invested in Mutual Fund every month.
The investor’s bank account is linked to the SIP scheme, so that every month a certain amount is transferred from the bank account to the mutual fund and mutual fund units equal to that amount come to the investor’s account.
Being simple and automatic, SIPs are very popular nowadays.
3.6 What are Derivatives?
- Derivatives means to determine the future transactions today.
- Which are executed through Options and Futures in the stock market.
- Under futures trading, you can execute future transactions at a set price today.
- In this Actual Delivery is not given and settlement is done on the basis of difference in price.
4 How to Invest in Shares Market?
After understanding what is share market and how it works, it comes to how you can invest in it –
For this you have to open Trading and Demat Account with a good Stock Broker.
4.1 What are Demat Accounts?
Just as you can deposit money in a bank account, in the same way all the securities related to your investment in Demat Account like Shares, Bonds, Government Securities, Mutual Funds etc. are stored in Electronic Form.
4.1 What are Trading Accounts?
The use of Trading Account is used for Share Sell and Purchase in your share business.
You can open this account with a good broker and due to the online facility, you can buy and sell shares anytime with the help of this account.
4.3 How to Open Investment Account?
To open trading and demat account, it is necessary that you open your account in Best Demat Account only –
For this you need to get KYC done from your bank.
In a way, this account manages your funds and keeps all the information related to it.
You can open this account from the bank in the same way as you open a normal account from any bank.
Documents you will need to open Demat and Trading Account >>>
- PAN Card
- Address Proof
- Income Proof
- Cancel Check
- 2 Passport Size Photo
While submitting all these documents, keep in mind that in all these certificates your name is written correctly and clearly and written in the same way.
Apart from this, you apply photostat copy of all these documents while opening the account.
But keep the original copy with you which can be asked for verification at any time.
While opening a Demat Account or Trading Account, you must carefully read the rules and instructions written on the papers you sign.
I hope you know what is share market? It would have been understood.