Share Market Basics

Hey, are you new to the Share market?

I will take you through the world of the Share market with this in-depth guide. In this guide, I am going to explain all about the Indian Share Market and how to start investing in the Share Market in today’s scenario.

This is going to be a Definitive Share Market Guide. So, bring a cup of coffee and hold on to your seat.

The guide will cover the following topics:


What is a Share?

A Share is a little piece of a company, often called a Share or Stock. A Share represents a unit of ownership of the company from which you bought it. If you own a share of Company A, you own a tiny portion of Company A, along with all the other shareholders in that company.

For example, you bought 100 shares of Rs. 200 each of X company, then you become a shareholder of X company among other shareholders.

I hope you got an idea about a Stock or Share and what does it mean? Now before going to learn about the operations of Share Market, we should learn a little bit about Share Market.


What is Share Market?

In short, the Share market is a platform where buying and selling a company’s shares takes place. The Share Market is a collaboration of buyers and sellers of shares on a common platform called Stock Exchange like NSE & BSE in India. Share market is also known with another name like Stock Market or Equity Market.

The Stock market works as a platform where investors can buy or sell shares of publicly listed companies through Brokers. Or we can say, Share Market is an interface (through Broker) between Investors, Traders, and Publicly listed companies on the Stock Exchange.

Share Market is the source for companies to raise funds and for Investors to buy ownership in business by acquiring shares of a particular company. A Stock Market is a place, Where investors and companies come together as partners and share their Profit & Loss.

Alongside shares of companies, other financial instruments also traded in the stock market. These instruments will be discussed later in this article.


Share Market in India

Share Market is not a new thing in India. It traces it’s history a way back in 18th century where trading used to take place under the shades of a Banyan tree, opposite to the Town Hall Mumbai.

People used to gather here to trade the cotton informally until 1850 when the Companies Act was introduced. Later people have shown their interest in corporate equities and in the next 100 years, it has grown further.

The Bombay Stock Exchange was established in 1875 and it took too long to get recognized by the Government. Finally, in 1957, the Bombay Stock Exchange (BSE) was officially recognized by the Government of India under the Securities Contracts Regulation Act. Later, SENSEX was introduced in 1986.

With the growing market in India, it became the necessity of that time, to form a regulatory body that can monitor and regulate the trades on the Share Market. So, in 1988, the Security Exchange Board of India (SEBI) was introduced as a regulatory body for the Indian Share Market. In 1992, SEBI was granted its independent power to regulate the security market and Stock Exchange.

Stock Market is a comprehensive thing, so now we’ll dive into the types of Share Market.


Types of Share Market

Basically the Stock market is divided into two main types:

1. Primary Share Market

As we know that a company raises funds through the Share market by going public. The Primary Market allows a company to get registered to issue Shares to the public to raise money via Initial Public Offer (IPO).

Primary Market is the only way to get listed on the Stock Exchange for a company. An Initial Public Offer or IPO is a primary mechanism for companies to offer Shares for the first time. After that company becomes Public. The company has to provide details about itself, its business, its promoters, financial instruments, and Stocks being issued before filing for an IPO.

2. Secondary Share Market

After offering an IPO, the company gets listed on a particular Stock Exchange and directly available to retail investors in the Secondary Market for buying and selling their Shares. Basically, Secondary Market allows Inventors to buy and sell shares at the current price. At the secondary market, all transactions are conducted through a Broker.


Main Components of Share Market

To learn the basics of Share Market Working procedures, you need to understand what are the main components that form the Stock Market.

I’ve tried to write in very simple language so everyone can understand and hope that you got an idea about Share, Share Market & its types. Now we’ll move on to the Main Components of Share Market their relationship with each other.

Publicly Listed Companies, Stock Exchange, Trading Participants and Investors are the main components of the Stock Market these collectively form the term “Share Market”.

For better understating I am discussing the main components of Stock Market & their relationship:

1. The Publicly Listed Company & The Stock Exchange

A company applies to the Stock Exchange to offer its shares to the public through Initial Public Offer (IPO). The company must comply with stringent requirements before the shares are available to the public.

2. The Stock Exchange & The Trading Participant (Broker)

As I mentioned above, the stock exchange is a platform to trade shares but does not directly deal with investors. Stock Exchange license Trading Participants to buy and sell shares, only to simplify work and purpose. The Stock Exchange is monitoring the authority of publicly Listed companies while the Trading Participants transact with the investing public (Investors).

3. The Trading Participant & Investors

If you want to start investing in Share Market, you have to contact a trading participant (broker) for the DEMAT account. For taking care of your transactions, the broker will charge you a very small fee. The broker also provides you with Investing advice for companies, that are good for Investment in addition to their transaction services (not necessary).


Depository Participants

There is also a Depositary Participant that you need to be aware of.

  • NSDL (National Securities Depository Limited) – NSDL, the first and largest depository in India, established in August 1996 and promoted by institutions of national stature has established a state-of-the-art infrastructure that handles most of the securities held and settled in dematerialized form in the Indian capital market. (source – nsdl.co.in)
  • CDSL (Central Depository Services Limited) – CDSL, facilitates the holding of securities in electronic form and enables securities transactions to be processed by book entry through its Depository Participants (DP). Central Depository Services Limited works for Bombay Stock Exchange and promoted by State Bank of India (SBI), Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Axis Bank, and the Union Bank of India. (source – cdslindia.com)

These two have their agents in the form of Depository Participants who will provide an account to store the shares you hold.

It is not the same as Demat and Trading account as in Demat it shows the number of shares you hold and the Trading reflects the buying and selling that has taken place in your account. Depository Participants will hold those shares you bought and release the shares you sold.

However, it is usually taken care of by your broker who will also guide you about the Demat, Trading account opening process as well as register with a Depository. But you need to be aware of it none-the-less.


Stock Exchanges in India

These are the only two main exchanges in India where buying and selling of shares, commodities, and other trading instruments take place. These two stock exchanges are National Stock Exchange and the Bombay Stock Exchange.

You need to mention the exchange to your broker too while placing the order, as there is usually a slight difference in the price of shares at the two exchanges.

However, your broker can guide you here in case you do not understand where and what to trade.

As I mentioned, there are two main stock exchanges in India that offer to trade on five days a week except for National Stock Exchange Holidays and Bombay Stock Exchange Holidays.

BSE – Bombay Stock Exchange

BSE was established in 1875, is Asia’s first & the Fastest Stock Exchange in the world. Bombay Stock Exchange is operating for the last 146 years since 1875 and facilitating the growth of the Indian corporate sector by proving it an efficient capital-rising platform. Popularly known as BSE, the organization was initially established as “The Native Share & Stock Brokers’ Association” in 1875. (source – bseindia.com)

NSE – National Stock Exchange

The National Stock Exchange (NSE) is the leading stock exchange in India and the fourth largest in the world by equity trading volume in 2015, according to the World Federation of Exchanges (WFE). It began operations in 1994 and is ranked as the largest stock exchange in India in terms of total and average daily turnover for equity shares every year since 1995, based on annual reports of SEBI. (source – nseindia.com)


How Share Market Works?

Share Market works in the following manner:

  • A company gets listed on Primary Market via an IPO
  • Distribution happens of Shares between investors on Secondary Market
  • Stocks get issued and trading begins on the Secondary Market
  • Stock Brokers are the entities through investors and traders can buy/sell shares
  • Brokers process the buy/sell orders on the stock exchange
  • You get your desired share at a given price in your DEMAT account in T+2 days
  • Settlement takes T+2 days to complete the transaction and transfer of shares between accounts

How to Invest in Share Market?

Invest in Share Market in India in 10 simple steps:

  1. Get a PAN Card
  2. Choose a Broker
  3. Open a Demat / Trading Account
  4. Make an Initial Deposit
  5. Decide how much to Invest
  6. Know Depository Participant
  7. Know Stock Exchanges
  8. Buying & Selling
  9. Instrument Traded on Stock Market

Read in-depth guide on How to Invest in Share Market.


Instruments Traded on Stock Market

As I told you earlier in this article that you can make an investment on different types of assets through DEMAT Account, you can put in as much money as you want to.

Along with the Share Trading of listed companies, other instruments also traded on Stock Exchanges. These instruments are:

  • Equity
  • Derivatives: Futures & Options, Foreign Indices
  • Mutual Funds
  • Currency Derivatives
  • Fixed Deposits and Bonds
  • Initial Public Offer (IPOs)
  • Gold Exchange Traded Fund (ETF)

How Trader Makes Profit or Loss in the Share Market?

Assume that, you have bought some share(s) in a good company, and your Company A makes a profit. Thus, the value of your stock increases because the Company is now worth more than it was before it made a profit.

Now suppose that something happens to cause Company A to fumble a bit, and the reputation of the company falls, and profits cease, you now own a tiny portion of a company that is not doing well. Therefore, the value of your stock decreases because the net worth of the company itself is declining.

That is really all there is to understand the absolute basics of the stock market before entering. The trick, of course, is to know how to choose the right companies to invest in and when to buy the shares and when to sell them. Ideally, of course, you will buy when a company is relatively new and the cost of each share is low as well. Then, when you have chosen wisely, this new company invents a miraculous product or explodes on the scene with terrific service and makes a profit. Then, right before the company loses momentum in profits, you sell and make a profit from your shares.

Example

For example, you believe the recession will cause people to turn to religion, so you buy stock in a company that manufactures Books; you pay INR 10 per share and buy 10 shares, for a total investment of INR 100.

Then, Book Printers, Incorporated lands an overseas account and becomes the exclusive Book supplier for the other regions. They are soon bringing in a huge profit, and since they are, more people want a piece of the pie. So, the cost of the stock goes up to INR 20 per share. You are ecstatic and decide to sell. Now, you sell your 10 shares to another trader for INR 20 each, for a total income of INR 200. You have doubled your money. That’s how the stock market works on a good day.


Investing in Stock Market as Beginner

As a beginner investor, the process of trading and investing in Share Market can seem a bit complicated & confusing. It requires you to open certain accounts and fulfill certain formalities before starting stock market investments.

If you are looking to invest in the share market, you don’t have to look any further but reading the following step-by-step guide by which you can start investing in the stock market in no time.

However, opening these accounts is not going to help you. You need to learn a lot about investing and trading in the stock market. For that you can learn to read on the internet, watching videos on YouTube, or joining a reputed institute.

I’ve already mentioned that investing in Stock Market can be confusing, especially for the beginner. Getting some Share Market Tips can help a beginning investor to make informed choices that fit their needs.

When it comes to Investing, each person has a different goal and that makes a big impact on how you Invest.


Best Share Market Tips

  1. No Set of Rule
  2. Make Informed Choices
  3. Plan Your Goals
  4. Value Pick
  5. Growing Return
  6. Build a Diversified Portfolio
  7. Understand Price
  8. Start Investing Today

The following list of Share Market Tips explains some important aspects beginners should know before investing.

1. No Set of Rule

You should understand that there are no set rules for investing in Share Market. Further, there are no guarantees of profit and no perfect way to invest. Because Financial Assets are volatile and trading financial assets carry a huge risk.

2. Make Informed Choices

Before investing in any way, you should completely make yourself understand how your investment will work in the future and all of the details of the transaction.

3. Plan Your Goals

Make a simple plan to determine your investing goals and needs. It will help you to determine where you should make investments and how much money to invest.

These three tips are great for general investing, but many people are looking to invest in the fast-paced world of the stock market.

The above three tips are a good beginning, but the following tips will further help those investors, interested in investing in stocks.

4. Value Pick

Look at the value of the stock instead of the price because low-cost stocks may be low for a reason. So, you should look at the whole picture.

You must check why the price is low and if there is a possibility it may rise.

5. Growing Return

Check the company’s return on net worth. Net Worth is the profit after taxes divided by the net worth. It is important to see a trend of growing returns on the net worth to gain profits on a specific stock.

6. Build a Diversified Portfolio

You should not put all your money in high-risk stocks better to spread across various stocks. Try different stocks, some lower risks and some higher risks. This is the best way to protect your money and get some profit.

Once you’ve deposited money into your investment account, it’s time to actually purchase assets to make investments.

If you are confused about where to invest. I’ve described in my guide about Best Investment Options in India.

If you are using Advisors or Algorithms to manage your money that they will take care of this process for you once you’ve filled out some basic information about your risk profile and goals for the money.

If you’re investing yourself, you’ll need to determine where to put your funds for better returns.

I strongly recommend that you don’t put all your eggs in one basket, so invest in a mix of different assets. A classic mix for a diversified portfolio includes investing in large-cap stocks, small-cap stocks, real-estate investment, bonds, and mutual funds.

ETF stands for exchange-traded funds, and the funds put the investor money to buy different categories of assets. ETFs, or exchange-traded funds, make it really easy to diversify investment because you can trade them on the market like stocks, and there are many different ETFs that provide you better exposure to a broad array of different kinds of assets. 

7. Understand Price

Understand the basics of stock prices. Stock prices move up or down depending on future projections.

Price is the most critical indicator in stock market because all indicators and predictions are derived from the stock price movement.

8. Start Investing Today

Whether you decide to choose an investment advisor to manage your money, use an Algorithm, or buy ETFs, you’re going to be in a much better position, if you start investing now rather than leaving your money to languish in a low-interest savings bank account, or spending whatever you earn.

The younger you are when you start investing, the more you can take advantage of compound interest and build real wealth while growing. So, start investing today. Open your DEMAT account now and get your money in the market so it can start working for you.

These eight tips can help a beginning investor start investing in the stock market.

No matter what type of investment you are looking into, deep knowledge will be the key to success. These short Share Market tip lists are just the beginning of understanding investing and how to maximize your return with a minimum risk. Keep learning and trying.


Share Market Timings

The general stock market trading time for the equity segment is between 09:15 am to 15:30 pm, Monday to Friday. If you are trading commodities at MCX, the Market Trading timing for MCX (commodity market) is between 10:00 am to 11:30 pm, Monday to Friday. The trading time for NCDEX (Agri-Community)is between 10:00 am to 05:00 pm, Monday to Friday.

Read more aboutShare Market Timings