All companies need money to run their business. Sometimes the profit acquired from selling goods or services is not sufficient to meet the working capital requirements. And so, companies invite normal people like you and me to put some money into their company so that they can run it efficiently and in return, investors get a share of whatever profit they make.
Understanding this is the first step towards understanding stock market basics. Let’s learn about this in detail.
What are Stocks?
Stocks are simply an investment method to build wealth. When you invest in the stock of a company, it means you own a share in the company that issued the stock.
Stock investment is a way to invest in some of the most successful companies.
Also, there are different types of stocks available in the market to invest/trade-in. These stocks are categorised based on the following criteria:
- Market capitalization
- Ownership
- Fundamentals
- Price volatility
- Profit sharing
- Economic trends
What is Share Market?
People often wonder what is stock market and share market, and often use it interchangeably.
A stock market is similar to a share market. A share market is where the shares are issued or traded in. The primary difference between the two is that the stock market lets an individual trade in bonds, mutual funds, derivatives, shares of a company, etc. On the other hand, a share market only allows the trading of shares.
How Does the Stock Market Work?
Companies raise money on the stock market by selling ownership stakes to investors. These equity stakes are known as shares of stock.
By listing shares for sale on the stock exchanges that make up the stock market, companies get access to the capital they need to operate and expand their businesses without having to take on debt. Investors benefit by exchanging their money for shares on the stock market.
As companies put that money to grow and expand their businesses, it profits the investors as their shares of stock become more valuable over time, leading to capital gains. In addition, companies pay dividends to their shareholders as their profits grow.
The performances of individual stocks vary widely over time but taken as a whole, the stock market has historically rewarded investors with average annual returns of around 10%, making it one of the most reliable ways of growing your money.
Understanding the Stock Market Basics - Important Terms
Here is a list of commonly used terms when talking about the stock market. You can use this as a glossary to look for any time you want to learn.
Term | Description |
Sensex | Sensex is a collection of the top 30 stocks listed on the BSE by way of market capitalisation. |
SEBI | The securities and Exchange Board of India (Sebi) is the securities market regulator to oversee any fraudulent transactions and activities made by any of the parties: companies, investors, traders, brokers and the like. |
Demat | Demat, or dematerialised account, is a form of an online portfolio that holds a customer’s shares and other securities in an electronic (dematerialised) format. |
Trading | It is the process of buying or selling shares in a company. |
Stock Index | A stock index or stock market index is a statistical source that measures financial market fluctuations. They are performance indicators that indicate the performance of a certain market segment or the market as a whole. |
Portfolio | It is a collection of a wide range of assets that are owned by investors. A portfolio can also include valuables ranging from gold, stocks, funds, derivatives, property, cash equivalents, bonds, etc. |
Bull Market | In a bull market, companies tend to generate more revenue, and as the economy grows, consumers are more likely to spend. |
Bear Market | Bear markets refer to a slowdown in the economy, which may make consumers less likely to spend and, in turn, lower the GDP. |
Nifty50 | Nifty 50 is a collection of the top 50 companies listed on the National Stock Exchange (NSE). |
Stock Market Broker | A stock broker is an investment advisor who executes transactions such as the buying and selling of stocks on behalf of their clients. |
Bid Price | The bid price is the highest price a buyer will pay to buy a specified number of shares of a stock at any given time. |
Ask Price | The ask price in the stock market refers to the lowest price at which a seller will sell the stock. |
IPO | Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. |
Equity | Equity is the value that would be received by the shareholder if all of the company’s assets were liquidated and all of the company's debts were paid off. |
Dividend | A dividend refers to cash or reward that a company provides to its shareholders. It can be issued in various forms, such as cash payment, stocks or any other form. |
BSE | Bombay Stock Exchange (BSE) is the largest and first securities exchange market in India. It was established in 1875 as the Native Share and Stock Brokers' Association. It is also the first stock exchange in India and provides an equities trading platform for small-and-medium enterprises. |
NSE | National Stock Exchange was the first to implement screen-based or electronic trading in India. It is the fourth largest stock exchange in the world in terms of equity trading volume, as per the World Federation of Exchanges (WFE). |
Call & Put Option | The call option gives the investor the right to purchase the underlying security, while the put option gives the investor the right to sell shares of the underlying security. Both opinions let the investors profit from movements in a stock's price. |
Types of Stock Market | There are 2 types of stock markets:
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Ask and Close | The term ‘ask’ in the stock market refers to the lowest price at which a seller will sell the stock. ‘Closing price’ generally refers to the last price at which a stock trades during a regular trading session. |
Moving Average | It is a stock indicator commonly used for technical analysis to smoothen the price data by creating a constantly updated average price. A rising moving average indicates that the security is in an uptrend, while a declining moving average indicates a downtrend. |
| Also Explore | |
| Top Gainers Today | New 52 Week High Stocks |
| Top Losers Today | New 52 Week Low Stocks |
| Top By Volume | |
