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 or even job-holders. Basically, this stock market basics series is for him or her who is a complete beginner.
This is not a subject that is taught in schools. Most of the people in our country are ignorant of the markets. Hence, this post can be a stepping stone on this subject.
Introduction of Stock Market Basics
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 bookish knowledge even to commerce students. So, I thought about the 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 a few years these episodes can be a guide for people in need.
Points of Explanation
In this series, I will tell you to step by step
- What is a stock market
- How can you participate in the markets?
- What is a stock
- 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 which can develop wealth for you in the long-term. In this beginner’s guide on the stock market’s basic ideas, we will discuss some basic terms and things that are not described in detail elsewhere.
What is a Financial Market?
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, and everywhere the same thing happens. In the financial market, only FINANCE is traded. Here money and anything related to money are traded.
What is the 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 the dollar, euro, etc are traded as well as stocks are traded. As we are discussing basics for the stock market beginners, we will be mainly discussing the stock market.
Once again there are two words in the phrase stock market. One is STOCK and the other is the MARKET. So in the stock market basically investors basically invest in stocks. It’s also called a share market.
Importance of Share Market
But why do we need the share market? This is because the share market is 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 for some interest. The other option is to share the market, where they approach the investors to take some ownership in return for some money.
FAQs on Stock Market Basics
The stock market is much like an auction house. Here, buyers and sellers exchange shares of companies through the medium of exchanges. The exchanges track the demand-supply records of their listed stocks. It is a financial platform where companies’ shares are bought and sold.
There are ample stock market sites available on the internet. To learn about the stock market, you may choose any options you like. Like:
You may read basic books about the stock market.
Can read blogs about it.
Watch youtube videos.
Follow the market and news to be a pro.
Start trading in a virtual platform.
Try to invest a small amount to know the market practically.
Simple, it is just like any other market where buying and selling take place between buyers and sellers. The only difference is here, instead of material things, shares are bought and sold through exchanges. The exchanges facilitate the buying-selling process and keep records of supply-demand.
These are step-by-step guidance on how beginners invest in stocks.
First, learn about the basics of the stock market
Second, open a demat/trading account under a broker (Choose brokers carefully as per your priority)
Third, fix your investment capital, try to start with a small investment.
Fourth, start trading (Go for delivery trading first, then after gaining experience, try intraday)
Elaboration of the Basic Knowledge
The company describes its 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 a 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. These are the main basics of the stock market for newcomers.
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.
Is Stock Market A Gambling?
Many people tell that the stock market is basically 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 (dividend) to the investors.
This helps in the 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 a hefty interest.
Difference Between Banks and Stock Markets
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 money from the investors in return for 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 crore 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.
So, this is the difference between bank returns 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 the future and hence, you deserve a higher return.
How to Learn Stock Market Basics?
There is no such rules and short trick in the stock market for profit maximization trade. One has to learn the initial fundamentals before starting trading. Therefore, the basics of stock market trading in India are certainly a quite vital subject. Investment is key to a safe and secure future. Everyone wants maximum profit from their investment and that should be the primary objective.
For investment, one has to collect data regarding the market, price movements, company details, etc. After that, one has to invest the money in a profitable stock. Basically, there are two kinds of analysis, fundamental analysis, and technical analysis. In short, fundamental analysis interprets the overall health of a company while technical analysis mainly shows the market movements upward, and downward.
Stock Market Basics in India- Types of Analysis
The basics of stock market trading in India-types of analysis shows below:
Fundamental analyst collects information about a company’s data, such as the company, growth plans, profit, balance sheet, PE ratio, ROCE and ROE ratio, product, innovation, export-import details, demand forecast, etc. This analysis focuses on the tangible and intangible aspects of the company to figure out the accurate value of the stock. A chart of fundamental analysis is as follows:
Technical analyst mainly works on price movements, market fluctuation, and price chart pattern. This focuses on internal market sentiments and price movements. The chart of technical analysis shows bullish and bearish market movements. Here bearish indicate that the market is up-trending, the bullish market shows the market is in a downtrend.
Basic Points of Stock Market Trading
In this context, one point should be noticed that fundamental analysis is a quite long-term process while technical analysis is a short-term process. One should collect and analyze company data thoroughly in order to chase market movements. In technical analysis, a huge amount of data about a company is not required at all. One can track market price movements, and the relationship between buyers and sellers only to analyze some of the basic things.
One and only work of analysts is to follow the movements of buyer and seller, price chart movements. Anyone with minimum basic knowledge of market movements can do trading by technical analysis. In the case of fundamental analysis, one needs to be knowledgeable.
There are some cautions which you should keep in your mind while you are trading. You should have some minimum information and knowledge about what you are doing with your money. There is no space for blind investment, it can take you to the loss. Therefore, do your research properly and don’t invest in what you don’t understand. Of course, you should have patience because it is one of the main keywords in trading. The basics of stock market trading in India are quite an important topic here.
Books on Stock Market Basics
There are many books on stock market basics. Out of them, I suggest reading the following: Stock Investing For Dummies. This book has been written by Paul Mladjenovic. This will give you initial guidance to grow your stock investments in today’s changing environment.
Video on the Subject
Watch the video above on this subject. There are paid websites like Learnapp, etc that can provide you with more good resources. Our beginners tutorial on stock market basics will also continue in the coming posts in this series. Newcomers are welcome to ask their questions in the comments below the post.
In conclusion, beginners in the stock market must learn some basics of investing before jumping with real money. An initial understanding of fundamental and technical analysis is very much needed. Newcomers must go through basic books and watch videos on this subject to gain more knowledge. Overall, investing in the share market can be really rewarding if you can have a clear understanding of how the market works.