This post and subsequent posts in this category will be for the people who are newcomers in the stock market or thinking to enter the markets or facing a lot of questions about the stock market. They can be college students or housewives or retired persons. Basically this series for the people who do not have any knowledge about the stock market. This is not a subject that is taught in the schools. Most of the people in our country are ignorant about the markets. Hence, this post stock market basics for beginners can be a stepping stone on this subject.
This subject is taught in schools to some extent to commerce students, but the teachers who are teaching do not have any practical knowledge. So teachers basically give a bookish knowledge even to commerce students. So, I thought a need to educate people on the basics. But it was not easy, as I deal with advanced trading techniques and back to the basics was not easy for me. Still, I took the challenge as down the line after few years these episodes can be a guide for the people in need.
In this series, I will tell you step by step what is a stock market, what is a stock, how can you participate in the markets, how can you make money in this, how can you increase your wealth here etc. Especially if you are a youngster and starting your career, you must learn to invest in the stock market that can develop a wealth for you in the long-term. In this stock market basics for beginners, we will discuss some basic terms and things that are not described in details elsewhere.
Let’s start with the question what is a financial market? In the phrase financial market, there are two words FINANCIAL and MARKET. As you know, a market is a place where few sellers are present and some buyers visit there to purchase the items. The buyers and sellers bargain on the price between each other and the good is ultimately sold at a price at which both the buyer and the seller agree. You visit the market to purchase dresses or shoes, everywhere the same thing happens. In the financial market no other items are traded, rather FINANCE is traded. Here money and anything related to money is traded.
What is a stock market?
The stock market is a part of the financial market. In the financial market, many things are traded, commodities are traded, currencies or FOREX like dollar, euro etc are traded as well as stocks are traded. As we are discussing on stock market basics for beginners, we will be mainly discussing on the stock market.
Once again there are two words in the phrase stock market. One is STOCK and the other is MARKET. So in the stock market basically stocks or shares are traded. Its also called as share market. But why do we need the share market? This is because the share market is the part of the economy. Here the companies get interest-free money to utilize in their business. For the money, a company can go to two places. One is a bank, where he can lend money in return of some interest. The other option is share market, where they approach the investors to take some ownership in return for some money.
The company describes their business to the investor and gives some ownership to them for some pre-defined money. Suppose a company has 100 shares. So we can divide their entire infrastructure among 100 shares. If you take 1 share out of it, you become 1% partner of that company. You have not signed any contract, you have not signed any partnership deed, still, you become a partner of 1% in that company. This is the main concept of stock market basics for beginners.
Suppose today this company has a valuation of 5 lac rupees, but tomorrow if it becomes a 50 lac rupees company, your 1% of 2 lacs becomes 1% of 50 lacs. In this way, the valuation of your ownership grows with the growth of the company.
Many people tell that the stock market is basically a gambling and no one should trade or invest in it. But this concept is totally wrong. As if investors don’t enter the stock market, the economy will be stopped. A share market is a place from where companies take money for investment, grow their business and in return give some ownership and profit percentage to the investors. This helps in growth of our entire economy. If companies try to lend entire money to banks, the banks will run short of money and if they take entire money from banks, they will be charged with a hefty interest.
The banks will not take any risk, so whether a business runs well or not, banks will claim their interest back. So a promoter of a company borrows the money from the investors in return for an ownership, on which the investor takes a risk. As the bank is not taking a risk and charging interest, they can only earn the interest. But the investor can theoretically gain unlimited money if the business of the company grows well. The ownership value can increase a lot and the return will not be fixed, rather it will be proportional to the growth of the company. If the company becomes a 5 crores company from a 5 lacs company, the bank is not going to get anything other than the interest. But the investor’s ownership can grow by 100 times in this case. This is the difference between bank interest and stock market returns. And why are you getting this high return, because you have taken the risk, not the interest? You have kept faith in the company that they can grow in future and hence, you deserve the higher return.
Our stock market basics for beginners tutorial will continue in the coming posts in this series. Newcomers are welcome to ask their questions in the comments below the post.
Indrajit is a professional blogger and trading system developer. Amibroker expert, Wordpress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.