Basic Stock Market Concepts to know

Basic stock market concepts you must know.

Are you a beginner in the stock market? What is share market or equity in the share market? It is a platform to buy and sell shares or ownership units in a listed company. The pricing of the stock is determined based on demand and supply factors and the top stock research opinions. There would be a lot more stock market basics you need to know.

To understand the stock markets or share markets inside-out, it is essential to start from the basics. So you need to start from the share market basics about equity, markets etc. Today, when we loosely refer to equity, we talk about the equity and derivatives market, comprising stock and index derivatives as a single unit. So let us begin to understand the share market for beginners right from the very basics of what share markets are all about.

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How to buy the stock of a company?

Broadly, there are two ways to buy stocks. First, you can buy the stock directly from the issuing company as part of the Initial Public Offer (IPO). This is also referred to as the primary market. This is the market that helps entrepreneurs to raise capital for business needs. The other type of equity market is the secondary market, where buying shares with a trading account with a SEBI registered broker is possible. Once you buy the shares and make the full payment, the shares come into your demat account on T+2 day, i.e. two trading days after the purchase date. The trading account can also be used to sell the shares.

Is equity shares the same as preferred shares?

There is a difference. The equity shareholder takes the full business risk of the company, but the preferred shares are preferred over equity shareholders in terms of payouts. Hence the risk to the preferred shareholders is lesser. While equity shareholders can earn dividends and voting rights, preference shareholders are entitled to dividends but are not eligible to vote at company meetings. 

NSE order, BSE order and SOR order

NSE and BSE are the two leading stock exchanges in India. When you place trading orders on the online trading interface of your broker, the trade is eventually executed on the stock exchange. As a trader, you can choose between NSE execution, BSE execution and SOR execution. The first two are pretty straightforward; they refer to which exchange you want the trade to be executed. The third is called the SOR order, which stands for Smart Order Routing. In SOR order, you don’t define the stock exchange. You just select the SOR order for execution. The system automatically gets the best price by comparing the two exchanges. NSE and BSE. If you buy, you get the lowest price; if you sell, you get the highest price.

What are some of the popular indices in India and the world?

Indices are benchmarks to which the performance of stocks or your overall portfolio can be compared. The most popular general indices in India are the NSE Nifty-50 and the BSE Sensex-30. An index typically has a base year, and the current value is with reference to that base year. For instance, the BSE Sensex has pegged the 1979 Sensex value as 100. So today, when the Sensex is 58,000, you can say that the value creation is 580 times over 43 years. 

An important function of indices is to benchmark performance. For example, if the Nifty 50 has earned 12% and your portfolio earned 14.50% last year, your portfolio has outperformed the index by 2.50%. This is one of the most popular ways to evaluate fund manager performance. Apart from Indian indices, some very popular global indices are closely tracked by investors. The Dow Jones Industrial Average (DJIA), NASDAQ Index, S&P 500, FTSE-100, CAC index of France, DAX index of Germany and the Nikkei of Japan are some popular global indices.

What is the difference between broker, sub-broker and jobber?

A stock broker or share broker is the intermediary who acts as the link between the investor/trader and the stock exchange. The stock broker executes trades on behalf of the client and provides advisory services. For that, they charge brokerage or advisory fees. Sub brokers are not stock exchange members but smaller service providers with regional expertise. Sub-brokers are attached to the main broker. With the advent of online trading, the role of sub-brokers is gradually reducing in India. The jobber used to give fine spreads for trading during the open outcry system. With BSE also shifting to the online trading system, the traditional jobbers have gradually transformed into other roles.

What is the meaning of market capitalisation?

Market cap is the value of the company that is determined by the stock market price of the company. For instance, if a company has 10 crore outstanding shares and the stock price is Rs95, then the market cap of the company is Rs950 crore. Market capitalisation is also referred to as market cap or market value. Reliance Industries, TCS and HDFC Bank are the companies with the largest market cap in India. Reliance is the most valuable company in India, with a market cap of over $200 billion. Globally, some companies with the highest market cap include Apple, Saudi Aramco, Microsoft, Google and Amazon. For instance, Apple has a market cap of $2,700 billion, nearly 13 times as valuable as Reliance Industries.

What do you understand by investing style and research style?

An investing style is the core strategy that the investor or fund manager pursues to try and make money in the market by consistently beating the benchmark indices. Some of the popular styles of Stock Market investing are value investing, growth investing and momentum investing. In value investing, the investor looks for stocks that are low P/E or at a deep discount to market valuations. In growth investing, the focus is on stocks with high growth potential, even if the P/E ratio is higher. Finally, momentum investing is a short-term approach focusing on the direction and strength of market momentum.

Research styles can be fundamental or technical. In fundamental style, the focus is on macros, industry, company financials, brand strengths etc. In technicals, the focus is on charts with the assumption that past patterns will repeat in future. In reality, most investors adopt an eclectic approach using fundamentals to identify stocks and technicals to time entry and exit.

Explain bull markets and bear markets.

These are popular usages. The bull market shows a consistent rise in the market index, while a bear market shows a constant fall in the index level. Typically, the bear market is defined as a correction of 20% in a general index from the peak levels. India enjoyed one of the longest structural bull markets between 2003 and 2008 before the Global Financial Crisis spoilt the party.

Is there a way to earn assured profits in stock markets?

That is hard to find. Stock markets are risky and volatile. Even for the best of investors, the stock markets are risky. However, there are ways and means to manage your risk. That is your best insurance against volatile equity markets.

Do I need to pay taxes on the stock market?

If you earn from shares, you have to pay taxes. In India, equity dividends are taxed like other income at your peak Income Tax rate. If you sell shares before 1 year, it is short-term gains and taxed at 15%. However, if you hold shares for more than 1 year, long-term capital gains are taxed at 10% after providing an annual exemption of up to Rs1 lakh. Of course, if you make losses, you can set off such losses against gains or even carry them forward for 8 years.