Knowing the basics of the stock market is always helpful when it comes to starting a new journey. The stock market is a whole new world of investment and assets.
So before diving head first, it is best to gain some understanding of the key factors which drive the market and the methods you can use to interact with the market.
This article will cover the basics of the stock market, its key participants, types of stock trading, and the benefits of indulging in this world.
Overview of the Indian Stock Market
Currently, there are two stock exchanges in India, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). But it was not always like this.
In the very beginning, the traders used to conduct the exchange of trade in Bombay under a big ole tree. And today there stands the country’s first-ever organized stock exchange, BSE. It was established in 1875.
Post this, multiple other exchanges started in Ahmedabad, Calcutta, Madras, and so on. As of now, there are 24 stock exchanges in India with 21 being regional ones. NSE was established in the year 1992 and is headquartered in Mumbai.
The stock exchanges are governed by SEBI, i.e., the Securities and Exchange Board of India. More details on this are provided below.
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What is the Stock Market?
The stock market is the venue where multiple buyers and sellers interact to buy and sell shares of multiple companies. Now, these trading transactions can take place through stock exchanges or over-the-counter marketplaces.
The main feature of this marketplace is that this is the spot for traders to trade directly with each other without the intervention of a common authority like NSE or BSE.
Within the stock market, there are two types of markets:
The primary market is for the entities that issue their Initial Public Offering and for the investors who wish to subscribe to these shares.
The secondary market is for the shares that have already gone through their IPO. These stocks are listed in the stock exchanges and can be freely traded among the market participants.
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Key Participants of the Stock Market
Understanding the key participants of the market will receive more clarity on the purpose of the stock market.
Stock Exchange is the place where all the listed shares, bonds, and derivatives are traded. The two primary exchanges are BSE and NSE.
Every market requires a regulating body, for the stock market it is the Securities and Exchange Board of India. The regulatory body lays down necessary rules and frameworks for stockbrokers and listed companies to ensure a secure marketplace for trading.
Brokerages and Stockbrokers
A broker is a middleman between the exchanges and the investors. They execute the buy and sell orders placed by the investors in return for a fixed or variable commission or fees.
Finally, the investors, are the participants who indulge in the trading of the listed stocks and ensure a constant buying and selling of shares. These investors can be further classified as retail investors, high-net-worth investors, and qualified institutional buyers.
How does Stock Market work?
The trading process is quite simple. Once the stocks of the companies are listed, they are traded in the secondary market.
The trading is done by stockbrokers or their brokerage firms. You can think of them as a middleman between the stock exchanges and the investors.
You relay your interest on a particular stock, the brokers will place the buy order. For every order, a price is decided and once the order is executed, the price becomes the Last Traded Price (LTP) of the share.
Now the main activity here is to find a sell order with the same price as the buy order. Once the two match, both order is complete. And this process is called the settlement process.
Initially, it used to take a week’s worth of time to completely execute the orders, but now it is down to T+2 days.
Interested investors can trade in the stock market through two mediums:
In offline trading, the investors will have to visit the physical office of their brokers or can have a conversation over the phone and decide on the prospective shares and trading procedure.
In online trading, the entire trading is done using the internet. So, the investors can use the application of their brokers to place trade orders and also sell them in record time.
The easy availability of trading facilities on multiple platforms makes this trading method more engaging and convenient.
Understanding Capital and Investment Income
The key to understanding these two concepts is by getting clarity on the terms capital and investment.
Capital means the initial sum invested by the investor and investment is the complete process of investing and holding the asset.
Therefore, the capital gain is when the initial purchase price of the asset is lower than the selling price.
And the investment income is the regular dividend, interest payment, or capital gain received from purchasing, holding, and selling the asset.
Benefits of the Stock Market
When it comes to trading in the stock market, the result has always been a mix of good and bad news. It works out for some people while others fail to work their success formula.
Such a mixed reaction is what leads stock market beginners to think twice before entering this market. However, with all this confusion, people tend to miss out on the major benefits of trading in the stock market.
The first and foremost benefit is the ability to earn investment gains. As the share value rises in the long term, the spread between the initial investment cost and the current market value also increases leading to earning capital gains.
Other than the market rewarding you with capital gains, there is also the benefit of earning a regular income in the form of dividends.
Irrespective of how the stock is performing in the market, the shareholders will receive a dividend. This is an advantageous factor for many retired people as the dividends can be their regular source of income.
The stock market is all about building a diversified portfolio of assets. Why put all the eggs in the same basket, when you have multiple containers available?
Balancing risky investments with non-risky ones will help mitigate the losses from sudden market fluctuations.
One of the major issues with holding assets is the lack of liquidity. However, with shares, traders can easily buy and sell their investments at any given point from the comfort of their homes.
Be part of a growing economy
The stock market is highly influenced by economical growth. Because as the economy grows so do the corporate earnings.
This means the companies will be able to make better profits which will be made available to their investors as dividends or capital gains.
Smaller amount investment
Usually, if you decide to invest in physical assets, you might be required to provide a heft initial investment money. This is not the case with the stock market. You can become part of big growths and profits even by investing small funds.
Future of the Indian Stock Market – Conclusion
We hope this article has been helpful for you to understand the basics of the stock market and clear the confusion about capital gains and investment income.
Because this could be the right time to begin the journey to the stock market as the majority of the analysts are showing a positive attitude for the Financial Year 2023.
The key sectors where you can look to invest and hope for stellar growth are real estate, automobile, and banking. Happy Investing!
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