Stock Market Trading Basics

Introduction to Stock Market

The stock market is a financial marketplace where buyers and sellers trade shares of publicly listed companies. Investors buy stocks to own a portion of a company and potentially benefit from its profits and growth. Stock exchanges, such as NSE and BSE, facilitate these transactions. The market provides companies with capital through initial public offerings (IPOs), and prices are influenced by supply and demand dynamics, economic conditions, and investor sentiment. It plays a crucial role in the global economy, serving as a platform for wealth creation, investment, and capital allocation.

What is stock market trading?

Stock market trading involves buying and selling financial instruments like stocks and bonds on exchanges. Traders aim to profit from price fluctuations by executing timely and strategic transactions. It is a dynamic process influenced by market trends, economic factors, and investor behavior.

What are share trading basics?

Share trading basics involve understanding:

1. Shares represent ownership in a company, giving shareholders a stake in its profits and assets.

2. Market participants buy and sell shares on stock exchanges, influencing prices through supply and demand.

3. Knowledge of stock market operations, terminology, and investment strategies is essential for successful participation.

What is investment?

Earned money is often divided between current expenses and future savings; instead of keeping savings idle, investing them is a way to generate future returns.

What are the various options available for investments?

Invest in physical assets like gold, and commodities, or opt for financial assets such as fixed deposits, small savings instruments, insurance, and securities like shares and bonds.

What are various short term financial options available for investments?

Consider savings accounts, money market/liquid funds, and fixed deposits as short-term financial investments. Savings accounts offer low interest, while money market funds provide liquidity and aim to protect capital with returns better than savings accounts but lower than fixed deposits, which are suitable for low-risk investors over 6-12 months.

What are various long term financial options available for investments?

Consider various financial instruments like Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds, Debentures, and Mutual Funds. Examples include the Post Office Monthly Income Scheme with an 8% annual interest, Public Provident Fund offering tax benefits and 8% interest, Company Fixed Deposits with rates ranging from 6-9%, Bonds for fixed-income over a specified period, and Mutual Funds providing professional money management and diversification.

What is a Stock?

A stock represents ownership in a company and entitles the holder to a share of its assets and profits.

What is meant by a Stock Exchange?

The Securities Contract (Regulation) Act, 1956 [SCRA] defines a 'Stock Exchange' as a body, incorporated or not, aiding, regulating, or controlling the buying, selling, or dealing in securities. It can be a regional exchange with specified jurisdiction or a national exchange like NSE, incorporated for nationwide trading.

What is an ‘Equity/ Share ‘?

A company's equity capital is divided into shares, small units of a specified value, such as Rs 10 each. For instance, a total equity capital of Rs 2,00,00,000 may be divided into 20,00,000 shares of Rs 10 each, making shareholders members with voting rights.

What is a Derivative?

A 'Derivative' derives its value from underlying variables like equity, indices, forex, or commodities. Initially used for hedging commodity price fluctuations, financial derivatives gained prominence post-1970s due to financial market instability, becoming highly popular, constituting about two-thirds of total derivative transactions by the 1990s.

What is a Mutual Fund?

A Mutual Fund, registered with SEBI, pools funds from individuals/corporate investors, investing in diverse financial instruments. Functioning as financial intermediaries, they issue units, and the appreciation of invested securities increases the unit value for investors. Mutual Funds follow specified investment objectives outlined in their prospectus, investing across asset classes like equity, bonds, debentures, commercial paper, and government securities. Scheme options vary, including pure equity, mixed equity, and bond schemes, with investor choices for dividends or capital appreciation.

What is meant by Trading?

Trading refers to the buying and selling of financial instruments, such as stocks or commodities, in the financial markets with the aim of making a profit. It involves the exchange of assets between buyers and sellers based on market conditions and price fluctuations.

What is meant by Stock Index?

A stock index is a statistical measure representing a portfolio of stocks, providing insight into the overall performance of a specific segment or the entire stock market. It typically tracks the value of selected stocks, reflecting market trends and changes.

Describe Portfolio?

A portfolio is a collection of financial assets such as stocks, bonds, and other investments held by an individual, institution, or fund. It is designed to achieve specific financial objectives and manage risk through diversification.

Describe Bull Market?

A bull market is a financial market characterized by rising asset prices, optimism, and investor confidence, typically leading to increased buying activity. It signifies an upward trend, often accompanied by economic growth and positive sentiment.

Describe Bear Market?

A bear market is a financial market condition marked by declining asset prices, pessimism, and a lack of investor confidence, leading to increased selling activity. It typically reflects a prolonged period of economic downturn and negative sentiment.

Who is a stock market broker?

A stock market broker is an intermediary or financial professional who facilitates the buying and selling of financial securities, such as stocks, on behalf of investors. They operate on stock exchanges, executing trades and providing market-related advice to clients.

What are the types of Stock Market?

Stock markets can be categorized into primary markets, where new securities are issued, and secondary markets, where existing securities are bought and sold among investors. Secondary markets further include exchanges like NYSE and NASDAQ, providing platforms for trading listed stocks.

Describe moving average?

In the stock market, a moving average is a widely used technical indicator that smoothens price data over a specified period, helping traders identify trends and potential reversal points in stock prices. It aids in reducing noise and providing a clearer picture of the stock's price trajectory.

What is a Depository?

A depository is akin to a securities bank, where deposits are electronic holdings of securities like shares, debentures, bonds, government securities, and units.

What is Dematerialization?

Dematerialization(Demat) is the conversion of an investor's physical certificates into an equivalent electronic form, credited to their account with a Depository Participant (DP).

What is the function of the Stock Market?

Stock Markets facilitate the buying and selling of securities, such as shares and bonds, and play a crucial role in enabling corporates and entrepreneurs to raise resources through public issues. They efficiently reallocate savings to investments and entrepreneurship by connecting investors with those in need through various financial products termed 'Securities/ shares/ stocks.'

What types of securities are available for investment in the stock market? 

Some options include shares, government securities, derivative products, units of mutual funds, and more.

What is the role of the primary market?

The primary market facilitates the sale of new securities, offering issuers like the government and corporates a platform to raise funds for investments or obligations. Securities can be issued at face value, discount, or premium, taking various forms like equity or debt, and may be introduced in domestic and/or international markets.

What is meant by market capitalization?

Market capitalization, the market value of a publicly traded company, is determined by multiplying its current share price by the total number of shares in circulation. For instance, if Company A has 120 million shares at a market price of Rs. 100, its market capitalization would be Rs. 12,000 million.

What is an Initial Public Offer (IPO)?

An IPO is the sale of securities by an unlisted company to the public, marking its entry into the primary market. It involves either a fresh issue or an offer for sale of existing securities, enabling the listing and trading of the issuer's securities. The sale can occur through book building or a regular public issue.

What is meant by Secondary Market?

The secondary market is where securities are traded post their initial offering in the primary market or listing on the Stock Exchange. It includes both equity and debt markets, with the majority of trading occurring in this phase.

Frequently Asked Questions

How do I open a trading account in India?

To open a trading account in India, you need to choose a stockbroker, complete the account opening process by submitting necessary documents, and then fund the account. Online brokerages have simplified this process, making it accessible to investors.

What documents are required to open a trading account?

Typically, you'll need identity proof, address proof, PAN card, passport-sized photos, and a canceled cheque or bank statement. The exact requirements may vary between brokers.

Can I have multiple trading accounts?

Yes, you can have multiple trading accounts with different brokers. However, it's essential to manage them efficiently and be aware of any associated fees or charges.

Which is the best trading platform in India?

The best trading platform depends on your preferences and requirements. Consider Enrich Money for their best user interface, research tools, and customer support .

Is it necessary to link a bank account with a trading account?

Yes, it is necessary to link a bank account to facilitate fund transfers for trading. It ensures a seamless process for depositing and withdrawing funds from your trading account.