If you have ever wondered how people buy shares of companies, you have probably come across the term stock market.
At its simplest, the stock market is a marketplace where investors can buy and sell shares of publicly listed companies. When you purchase a share, you are purchasing a small ownership interest in that company.
What Is the Stock Market?
Companies sometimes need capital to expand their business, develop products, build facilities or fund other activities. One way a company can raise money is by selling ownership shares to investors.
Once a company is publicly listed, investors can generally buy and sell its shares through a stock exchange.
In India, two major stock exchanges are the National Stock Exchange (NSE) and BSE Ltd.
How Does the Stock Market Work?
Think of the stock market as a large digital marketplace. Instead of buying vegetables or electronics, investors buy and sell ownership in companies.
When you place an order through your broker, the order is sent to the relevant exchange for execution.
If a matching buyer and seller are available at the required price, the transaction can take place.
A simple example
Suppose Company ABC has issued shares that trade at ₹100 per share. If you purchase 10 shares, your purchase value before applicable charges would be:
What Are NSE and BSE?
NSE and BSE are India's two major stock exchanges.
| Exchange | Full Name | Known Index |
|---|---|---|
| NSE | National Stock Exchange | Nifty 50 |
| BSE | BSE Ltd. | Sensex |
Both exchanges provide platforms for trading securities. Their indexes are commonly used to understand the performance of groups of major companies.
What Is a Demat Account?
A demat account is used to hold securities electronically.
Before electronic systems became common, shares could be represented by physical certificates. Today, securities are generally held electronically through the financial market infrastructure.
To invest in listed shares, an investor typically needs a demat account along with a trading account and a linked bank account.
What Does a Stock Broker Do?
Most individual investors do not directly connect to the stock exchange themselves. They use a registered stock broker.
A broker provides a platform through which you can place buy and sell orders.
Depending on the broker and service, you may also get access to market data, charts, research tools and other investment features.
How Can a Beginner Start Investing?
Before investing real money, it is useful to understand the basic process.
- Learn the basic concepts of investing.
- Understand your financial goals.
- Build an emergency fund.
- Understand the risks associated with market investments.
- Open the required investment accounts with an appropriate registered intermediary.
- Research an investment before buying.
- Invest according to your financial situation and risk tolerance.
How Do Investors Make Money?
There are two common ways investors may potentially benefit from owning shares.
1. Capital appreciation
If the market value of a share increases after you purchase it, you may be able to sell it for a profit.
For example, if an investor purchases a share at ₹100 and later sells it at ₹130, the difference is ₹30 before applicable taxes and costs.
2. Dividends
Some companies distribute part of their profits to eligible shareholders in the form of dividends.
However, companies are not required to provide a fixed dividend, and past dividend payments do not guarantee future payments.
What Are the Risks of Investing in Stocks?
Stocks can provide opportunities for growth, but they also involve risk. The value of a stock can fall, sometimes substantially.
Some important risks include:
- Market volatility
- Company-specific risk
- Economic conditions
- Changes in interest rates
- Industry-related risks
- Poor investment decisions
- Concentration risk
Common Stock Market Mistakes Beginners Should Avoid
Investing based on tips
Buying a stock simply because someone posted about it on social media can be risky. Understand what you are buying before investing.
Expecting quick profits
The stock market should not be treated as a guaranteed method of making money every day.
Putting everything into one stock
Concentrating your money in a small number of investments can increase the impact of a single investment performing poorly.
Ignoring costs and taxes
Brokerage, exchange charges, taxes and other costs can affect your actual investment outcome.
Is Stock Market Investing Suitable for Everyone?
Not necessarily.
Whether stocks are appropriate for you depends on factors such as your financial goals, investment horizon, income, financial obligations and ability to tolerate losses.
Money that you may need in the short term may not be suitable for investments that can experience significant market fluctuations.
Stock Market: Key Takeaways
- A stock represents ownership in a company.
- Stocks can be bought and sold through stock exchanges.
- NSE and BSE are major Indian stock exchanges.
- Investors generally use a broker to place trades.
- A demat account is used to hold securities electronically.
- Stock investments can rise or fall in value.
- Understanding risk is essential before investing.
Frequently Asked Questions
What is a stock?
A stock represents a unit of ownership in a company. When you own shares of a company, you own a proportionate interest in that company.
Can beginners invest in stocks?
Beginners can invest in stocks, but they should first understand the risks, investment process and their own financial goals.
Is stock market investment risky?
Yes. Stock prices can fluctuate and investors can lose part or all of the money invested in an individual stock.
What is NSE?
NSE stands for National Stock Exchange. It is one of India's major stock exchanges.
What is a demat account?
A demat account is an electronic account used to hold securities such as shares in dematerialized form.