Stock Market Basics

Stock Market basics help you understand important terms around the stock market. Stock market is a vast term that includes terms such as share price, BSE, NSE, demat account, bull market, bear market, dividend, stock index, and more.  Before investing in the stock market, you must understand these basic terms and have a good understanding of how the stock market works. This blog helps you understand stock market basics, helping you to make better decisions. Read on!

What are stocks?

Stocks give you ownership of the company as per the value of the particular share invested. Those who invest in the listed company are called shareholders. Traders, investors, stockbrokers, stock exchanges, regulators, and issuers are key participants in the share market.

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Different types of stocks

Below are the types of stocks based on different categorizations:  

Based on ownership

In the case of ownership, stocks are categorized based on rights and privileges. These stocks can be categorized into preferred stocks, common stocks, hybrid stocks, convertible preference shares, and stocks with embedded derivative options.

Based on market capitalization

Stocks are categorized based on the market capitalization of the company. These include large-cap stocks (top 100 companies based on market value), mid-cap stocks (101-250 companies based on market value), and small-cap stocks.

Based on Fundamentals

In the case of fundamentals, investors consider the financial health of the company before buying the stocks irrespective of the market price. These stocks are categorized into overvalued stocks and undervalued stocks.

Based on Price Volatility

When investors decide to buy the share based on the changes in the prices of the stocks. These stocks are categorized into ben stocks and blue-chip stocks.

Based on Economic Trends

Stocks based on economic trends react differently to changes in the economy. These stocks are categorized into cyclical stocks and defensive stocks.

What is a share market?

The term share market and stock market are often used interchangeably. Both are share market and stock market are similar terms. A share market is a platform where the trade of publicly listed companies occurs between buyers and sellers. The Securities and Exchange Board of India (SEBI) is a statutory body that ensures that the listed companies comply with regulations.

Different types of share market

A share market can be categorized into types:

Primary Market

A company lists its securities like stocks or bonds for the first time in the primary market. This helps companies to collect capital from investors by issuing new securities.  

Secondary Market

The securities already listed in the primary market are issued in the secondary market to the investors without any involvement of the listed company. The process of buying and selling the performed through a process called the trading process.

How does the stock market work?

The stock market is a huge marketplace with several listed companies. The listed companies raise money for different activities by selling their stocks. These stocks are bought and sold in the share market. The individual who owns the shares are called shareholders. A shareholder makes a profit by selling the share when the value of the share is higher. If some shareholders decide to keep shares, they can earn profit through the dividends. A share market is influenced by various factors which impact the share value of the company.

What Are Stock Indices?

Listed companies on the stock exchanges are grouped based on similar stocks to form an Index. This can be categorized on different bases such as industry type, market capitalization, company size, or other categories.

• Sensex: A group of 30 companies is indexed on the Sensex which is the oldest index and represents 45% of the free-float market capitalization.
• Nifty: Based on market capitalization, the top 50 companies in NSE are included in Nifty. Nifty IT, Nifty FMCG, and more are a few other indices based on different sectors.

Who Determines the Price of a Stock?

The price of a stock is influenced by various factors: demand and supply, financial performance of the company, government policies, political climate, market sentiment, dividend declarations, trends, liquidity, and news and events. These factors highly influence the share price as the price of the stock will increase if the company is growing rapidly and earning profit. The demand for the stock rises, and more investors buy the share, leading to an increase in the stock price.

Important terms used in share market

•  Bull Market: A market is identified as a bull market when the stock prices are rising and investors are optimistic.
• Bear Market: A market is identified as a bear market when the stock prices fall and investors are pessimistic.
• Demat Account: An investor can buy, sell, or hold their shares and securities using the electronic account.
•  Portfolio: An investor’s stocks and other assets are collectively called a portfolio.
•  Dividend: A dividend is part of the profit that is distributed to the shareholders.
• Blue Chip Stocks: A well-established company with large stocks and healthy finances is considered blue chip stocks.
•  Volatility: The degree of changes that occur in the share price over the period.
•  Initial Public Offering (IPO): When the company sells its shares for the first time after listing in the share market.
•  BSE: Established in 1875, the Bombay Stock Exchange is India’s largest and first security exchange market.
•  NSE: The National Stock Exchange is the leading stock exchange with major indices such as Nifty 100, Nifty 50, Nifty Bank, Nifty Midcap 100, and Nifty Next 50.
•  Nifty50:  A collection of the top 50 companies listed on the National Stock Exchange (NSE).
•  Broker: A broker is responsible for the trading of shares on behalf of investors.
•  Bid price: A buyer willing to pay at the highest share price.
•  Ask price: A seller willing to accept to sell the at lowest share price.
•   P/E Ratio (Price-to-Earnings):
• Market Order: An order to buy or sell performed immediately at the current market price.
• Limit Order: An order to buy or sell a share at the specified price or higher.
•    Index: A benchmark used to measure the performance of the share as per the group of stocks.
•   ETF (Exchange-Traded Fund): When a fund holds multiple assets like bonds, stocks, or commodities and is traded on an exchange.
•   Day Trading: When investors are buying and selling shares within the same trading day.
•    Liquidation: When a company sells its assets to pay off its debt.
•  Resistance Level: A point price when the share face selling pressure.
•  Support Level: A point price when the share experiences buying pressure.
•  Dividend Yield: A company pays an annual dividend compared to its share price.
•  Capital Gain: When a share is sold above its purchase price.
•  Stock Split: Increasing the number of shares by reducing the share price.
• Earnings Per Share (EPS): The company’s profit is divided by the outstanding shares.