Investing in the stock market can seem like a nightmare for new beginners. Thus, this comprehensive guide can give you a detailed idea of how the stock market functions, who the key players are, what the backbone of the market is, and so on. So don’t forget to read this blog thoroughly to get a beautiful idea of how this market functions.
What is the Stock Market?
The stock market is a place people use to sell and buy publicly traded company shares. Companies used to sell their shares to acquire funds for their business. They use this money to develop their business. The people who have invested in the company are known as shareholders. Thus, the Stock market is crucial to facilitating capital raising for businesses. Hence, this is where investors can buy a piece of ownership in the company.
Key Players in the Market
Now, it’s essential to understand the various participants in the market.
- Investors: Investors may be individuals or institutions anticipating wealth growth by purchasing shares.
- Brokers: Brokers are the people who facilitate the trade of shares (i.e.) middlemen who are involved on behalf of the investors.
- Companies: Businesses that issue stocks to raise capital to grow their business.
- Regulators: Every financial institution needs to have a regulator to ensure transparency and fairness in the market. The Regulator is the Security and Exchange Board of India(SEBI), regulating the stock market.
How does the stock market work?
This process begins with an investor who orders to buy shares from the market for a specific quantity. This order is placed through a broker, who will eventually find a seller who will place an order to buy similar shares. Once this trade gets executed, the ownership of the particular stock gets transferred.
In India, the trade is settled in a T+2 manner, meaning the trade will be executed two days after the trade date. The National Securities Depository Limited (NSDL) clearing houses facilitate these transactions.
Stock Exchanges: The backbone of the Stock Market
There are various stock exchanges in the world, like NYSE & NASDAQ for America, the Shanghai Stock Exchange for China, NSE & BSE for India, etc.; they serve as the backbone of the financial market. BSE has SENSEX as its index, and NSE has NIFTY as its index. These represent the companies’ diverse range of performance. Indexes like NIFTY 50, NIFTY METAL, NIFTY AUTO, and NIFTY PHARMA represent unique sectors. These indexes play a vital role in analyzing how each industry works.
What influences Stock Prices?
There are various reasons for fluctuating stock prices:
- Company Performance: The company’s recent performance, such as earnings, growth prospects, and news, may be reflected in the stock prices.
- Economic conditions: Economic conditions of the country, like interest rates, employment data, and inflation, also play a vital role.
- Market Sentiment: Investors’ perception of the market and their emotions.
- Global Events: Issues like geopolitical issues, pandemics, or natural disasters.
Regarding India, policy changes, such as the Introduction of Goods and Services Tax(GST) and RBI’s monetary policy decisions, significantly impact stock prices.
Understanding Supply and Demand in the Stock Market
The supply and demand for the particular stock price drives each Stock price. When more investors prefer to buy a specific stock, the demand for the individual stock will increase. However, when more investors want to sell, the price will drop.
Types of Stock an investor can prefer
- Common Stocks: These Stocks will provide voting rights and potential dividends.
- Preferred Stocks: These stocks provide fixed dividends but usually provide no voting rights.
- Growth Stocks: These stocks will reinvest their profits instead of providing dividends to their investors.
- Value Stocks: These stocks will be traded at a lower value than their fundamentals.
Also read about : How to Save Electricity at Home: 10 Practical Tips
What is an IPO?
An initial public offering is when a private company sells shares to the public for the first time. It’s a way for companies to raise capital for their business and investors. It’s a way to invest early in a growing industry.
Trade Cycle
A trade follows these steps:
- Placing an order: The investor specifies the stock and quantity to the broker.
- Order matching: Exchange matches buyers and sellers.
- Execution: Trade is finalized, and ownership is transferred.
- Settlement: Funds and shares are exchanged.
Common mistakes new investors should avoid
- Overtrading: Frequent buying and selling can erode your profits.
- Emotional Decisions: Reacting impulsively to market fluctuations.
- Ignoring Research: Failing to analyze the particular stocks before investing.
- Lack of diversification: Putting all your eggs in one basket. (i.e.) investing all your money in one particular stock.
Final Tips for new investors
- Always start with a clear investment goal and do not deviate from the goal.
- Educate your continuously on all the financial news on the company you are investing.
- Always begin with small and manageable investments. Few people may tend to get loans for trading, which is always a terrible idea.
- Consult your financial advisors if you are unaware of the stock market.
- Instead of short-term gains, always focus on long-term gains, which will always be beneficial.
Understanding the stock market is a long-term journey. Do not rush. Be patient, learn the fundamentals, and stay informed. That will be enough when you are starting the journey. The key to success in the stock market is to start small, remain consistent, and always keep learning.
