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The Stock Market - What, Why & How?

Stock Market Concept

Stock Market is a market where the trading of company stock, both listed securities and unlisted takes place. When the buyers and sellers come together at a single place it is known as the stock market.

Earlier, when the trading of shares and securities were done in the physical form, the buyers and sellers use to stand in a ring to trade. With the introduction of bolt and electronic trading, the dealing of shares and securities is done with the help of brokers.The shares of the different companies are listed on two primary stock exchanges of the country: National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Investments in the stock market help to overcome the negative effects of inflation, decline in permanent income, etc. Therefore, it would not be wrong to say that stock market gives an opportunity for investors to buy the stocks at a lesser price and sell them at a higher price. To sum up, the investors must carefully select right stocks and put correct strategies in place to make good returns in the share market.

Difference between Primary Markets and Secondary Markets

When a company decides to list itself on the stock exchange, it comes out with an initial public offer i.e. IPO. So when a trader or investor applies for shares in an IPO, such market is termed as the primarymarket. On the other hand, when the traders and investors are able to purchase and sell the shares of a company after they are listed on the exchange, it is called secondary market.

How is Stock Price Determined?

The share price rises when there is buying in the stock and declines when there is selling. In fact, the buying can be due to good results, improving performance, or any other factor. On the other hand, the fall in the stock price can be due to bad results, some unexpected event, etc. To conclude, the share price is determined depending upon the demand and supply in the market.

Stock Indices

Many companies from different sectors are listed on the exchange. The companies from similar sectors are grouped together to form an index. The classification norms for grouping companies vary from sector to sector. NSE index comprises of 50 stocks and BSE index comprises of 30 stocks.

How to Buy and Sell Shares?

You have to place a purchase or sale order with the broker after opening a demat account. The brokers will take the order and act accordingly. In return, the investor or trader has to pay brokerage for the purchase or sale of the investment

What is Trading and Investment?

When shares are purchased and sold in short span of time, it is known as trading. On the other hand, investment means purchasing the shares and holding them for long-term i.e. more than 12 months. The traders sell the shares as soon as he makes profits while the investor waits for the long term gains.

Who Regulates Stock Market?

The Securities and Exchange Board of India (SEBI) regulates the Indian stock market. They have the power and responsibility to look after the interest of the investors. They aim to develop the share market and its working.

How to Invest?

How to Invest

Trading and investing in the stock market is nothing less than an art. High returns in the stock market always lure the investors. Investing in the stock market requires a lot of researching and analysis. Therefore, if you are new or a beginner in the stock market the dilemma regarding investing in the stock market shall definitely exist.

Many beginners think that stock market is a magic box that will give a lot of money. However, this is not the real picture. Stock market holds the potential to make any person rich but it does not guarantee that. Thus, it becomes more important for beginners to invest the correct way in the stock market.

Avoid What Others are Doing

Retail Investors often take buying decision under the influence of neighbours, relatives or a known person. To put it in simple terms, they invest in stocks in which everybody is investing. This approach is wrong in the long run. They should avoid investing with herd mentality.

Invest After Researching

The investors should do proper research on the company and its current valuations before investing. They should not fall for the name of the company but consider its fundamentals in the long run. Therefore, the investor must learn to analyse the company before investing.

Invest in Business of Understanding

The investors must invest in the business of their understanding. Any investor must research and analyse only that company or sector that interests him. The investor mustbe aware of that they are not buying a stock; they are buying a part of the business or rather a part owner of that business.

Diversify Your Portfolio

Any investor in the stock market must diversify the portfolio. The returns in the stock market can be optimized if the investor diversifies the portfolio. The level of diversification depends on the risk-taking capacity of the investor.

Review Your Investments

Every investor in the stock market should be reviewing their portfolios on a regular basis. In fact, it is recommended to review their portfolio every quarter to understand the health of their portfolio and future performance. To make the right investment with the right allocation is the key to create wealth.

Control Emotions

The investors must learn to keep a check on emotions in the stock market. They should know that stock market is not quick wealth making machine. The ups and downs will come. In fact, they must learn to keep holding their stocks for the long run. In addition, rather than burning the fingers by taking a wrong decision during the panic in the market, it is prudent to hold the stocks. Compounding creates wealth.

Do Not Time Markets

No one in the stock market can rightly predict its direction. In fact, it is not right to take a position in the stock by trying to time the market. In addition, while timing the market more people have lost money rather than making the money. Thus, the decision of a retailinvestor in the stock market should never be on the basis of an attempt to time the market.

How to Invest in Stock Market with Little Money?

The retail investors can make good money by investing small amounts in the stock market.
The below points shall help in investing in the stock market with little money and making high returns.

Invest At Regular Intervals

The investors must learn to invest in little amounts at regular intervals. They can even opt for investing in mutual funds through SIP. By investing at regular intervals the investors can spread their risk at different levels of the stock market. This protects them from volatility and big fluctuation in the market.

Play Safe

Since they generally start investing in the stock market with little money, it is prudent to play safe. To put it another way, they must invest a small amount of money in a stock with strong fundamentals. However, this requires a lot of research and analysis of the company along with its current valuations.

Invest With a Target in Mind

The investors must enter a stock with a target in mind. The little amount of investments can turn big with timely profit booking. The investors must learn to book the profits and take it back home. By following this approach, little investments can grow manifold.

Review & Restructure Your Portfolio

The investors must review their investments every quarter. The stocks they hold should be on track and perform as per the reason they bought them. Any changes in their performance, external factors, management changes etc. can harm the value of the stock. Regular portfolio review or rather restructuring will help their portfolios to perform.

Shares vs Mutual Funds ?

The retail investors can make good money by investing small amounts in the stock market.

Shares are the physical representation of a small portion of a company’s value that is traded in the stock market. When a company goes public and issues shares, the combined value of the shares of the company in the stock market and/or owned by persons, constitutes the total value of the company. Being a shareholder is in effect owning a small part of the company and means that one can take part in the annual shareholder meets.

Mutual funds are a collection of stocks and bonds that are managed by fund managers in an Asset Management Company (AMC). If it is an equity mutual fund, it will contain stocks, while debt mutual funds will contain government bonds and securities. A mutual fund is like a huge basket with shares from several companies. For example, DSP BlackRock Micro Cap Fund consists of stocks of 62 companies from diverse sectors, including Finolex Cables, DCB Bank, Manappuram Finance, Somany Ceramics, JK Lakshmi Cement, Siyaram Silk Mills, Ashiana Housing and Sun Pharma.

Investment in mutual funds are a form of investment in stocks and bonds that is managed by an AMC or investment house, while direct investment in stocks and shares is an active form of investment, where you are handling the purchase and sale of the products yourself. The institutionalization offered by mutual funds is good for a new investor, while direct investment in shares is good for those who know the market and can handle it themselves.

Difference between Investment in Mutual Funds and Direct Investment in Stocks
The following are the key differences between investment in mutual funds and shares:

Shares are a part of a business’s growth strategy, while mutual funds are investment options for individuals.
Mutual funds being a portfolio of stocks of companies pre-determined and altered by a fund manager, you as an investor have no control over the actual choice or trade of stocks. You also cannot choose to exit from 1 or 2 of the stocks from the portfolio.
Mutual funds are managed by a fund manager in an AMC. This external management of portfolio ensures that there is direct involvement on the part of the investor except at the time of choosing the fund. For this reason, mutual funds are ideal for a new investor who does not know much about the stock market. Direct investment in shares, on the other hand, requires strong knowledge of the stock market and company performances. It is a hands-on activity involving quick market decisions and is better for experienced stock traders.
The passive nature of mutual funds makes it easier for anyone and everyone with money to take part in it. For direct investment, you need more time and dedication.
You can invest in mutual funds through a fixed monthly Systematic Investment Plan (SIP), as it is managed by a professional. You cannot make such a fixed investment in shares directly as the prices fluctuate constantly and need personal attention and prompt trade decision.
Because mutual funds hold a diversified portfolio, negative returns are cushioned by the other stocks that do well. For example, if your portfolio contains 35 stocks, of which 3 are dropping, even the slightest growth in the other 32 will prevent your overall fund value from coming down. Direct investment in stocks does not offer you this protection and makes your stocks volatile. Unless you are dealing in a significant number of stocks at the same time, your money will be at high risk.
Mutual funds have a longer-term growth trajectory and will give good returns only after 5-7 years, while shares could give you quick returns if you buy and sell at the right time and choose high-growth stocks.
In mutual funds, you need to pay fund management charges, a front-end load upon initial purchase, back-end load upon sale, early redemption charges, etc. In direct investment in shares you need to pay brokerage to the stock broker.
It is easier to diversify your portfolio using mutual funds – there are options such as hybrid funds. While dealing with shares, you may not be able to juggle with a large portfolio yourself.

History of Indian Stock market ?

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the close of 18th century when the East India Company used to transact loan securities. In the 1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading was broad but the brokers were hardly half dozen during 1840 and 1850.

An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. This banyan tree still stands in the Horniman Circle Park, Mumbai.
In 1860, the exchange flourished with 60 brokers. In fact the 'Share Mania' in India began with the American Civil War broke and the cotton supply from the US to Europe stopped. Further the brokers increased to 250. The informal group of stockbrokers organized themselves as, The Native Share and Stockbrokers Association which, in 1875, was formally organized as the Bombay Stock Exchange (BSE). BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg and Hammam Street in downtown Mumbai) was acquired, and a building was constructed and occupied in 1930.

Premchand Roychand was a leading stockbroker of that time, and he assisted in setting out traditions, conventions, and procedures for the trading of stocks at Bombay Stock Exchange and they are still being followed. Several stock broking firms in Mumbai were family run enterprises, and were named after the heads of the family. The following is the list of some of the initial members of the exchange, and who are still running their respective business:

D.S. Prabhudas & Company (now known as DSP, and a joint venture partner with Merrill Lynch)
Jamnadas Morarjee (now known as JM)
Champaklal Devidas (now called Cifco Finance)
Brijmohan Laxminarayan

In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock exchange in the country under the Securities Contracts (Regulation) Act. The most decisive period in the history of the BSE took place after 1992. In the aftermath of a major scandal with market manipulation involving a BSE member named Harshad Mehta, BSE responded to calls for reform with intransigence. The foot-dragging by the BSE helped radicalise the position of the government, which encouraged the creation of the National Stock Exchange (NSE), which created an electronic marketplace.

NSE started trading on 4 November 1994. Within less than a year, NSE turnover exceeded the BSE. BSE rapidly automated, but it never caught up with NSE spot market turnover. The second strategic failure at BSE came in the following two years. NSE embarked on the launch of equity derivatives trading. BSE responded by political effort, with a friendly SEBI chairman (D. R. Mehta) aimed at blocking equity derivatives trading. The BSE and D. R. Mehta succeeded in delaying the onset of equity derivatives trading by roughly five years.
But this trading, and the accompanying shift of the spot market to rolling settlement, did come along in 2000 and 2001 - helped by another major scandal at BSE involving the then President Mr. Anand Rathi. NSE scored nearly 100% market share in the runaway success of equity derivatives trading, thus consigning BSE into clearly second place. Today, NSE has roughly 66% of equity spot turnover and roughly 100% of equity derivatives turnover.

Market -Basics