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Share Market Basics
In India, share markets are broadly classified into Primary Markets and Secondary Markets. Let us understand the difference between the two.
Primary market is also called the IPO market. Here companies issue shares so as to get listed in the stock market. Primary market raise money through New Offers (fresh issue of shares) or through offer-for-sale (existing shareholders selling their shares)
Secondary market is where listed shares are traded. Once the IPO is completed, shares normally get listed within a period of 10 days. Once the listing is done, then the shares start trading in the secondary markets.
Why do people invest in share markets?
There are 3 reasons people invest in the share markets in India. Here we are referring to the secondary markets in particular.
People invest so that these share values can appreciate and give good returns in the long run. For example an amount of Rs.1 lakh invested in Havells in 1996 would be worth Rs.32 crore today. That is potential to create value that share markets have.
People also invest in share markets to participate in the growth of the Indian economy over a period of time. Unlike bonds, these shares do not assure any returns. But over longer periods of 10-12 years they give above index returns.
People also invest in shares markets for the sake of dividends that are paid out by these companies from their profits. This is also called dividend yield investing.
What is stock exchange?
Stock exchange is a platform for investing in shares. You buy and sell shares in the stock exchange. In the old days you had to go to the ring and execute traders. However, today you can trade on both the stock exchanges (NSE and BSE) using an online trading platform by sitting on your computer. You can also trade using your mobile app. A little more about the 2 stock exchanges in India
Bombay Stock Exchange (BSE) is more than 125 years old and was the first stock exchange in Asia. Today the BSE trades more than 6000 stocks and you can trade equities, currencies, equity futures, index futures, equity options and index options on the BSE platform.
National Stock Exchange (NSE) was set up in 1994 but has become the largest stock exchange in India in terms of volumes. While NSE has much lesser number of shares listed, they were the pioneers in using technology for stock trading. Investors and traders can choose to trade on the BSE or even on the NSE as per their choice and liquidity available.
How does the share market work?
The share market plays 3 important roles to help the investors and the brokers. Brokers are your intermediaries for trading in the share markets. Here are the 3 critical functions that share markets actually perform in India.
Share markets bring buyers and sellers together. When both the buyer and the seller place their orders on the stock exchange, the stock market gives best execution to both. For buyers, execution is at lowest available price and for seller it is done at highest available price.
Stock markets clear trades which is one of the most important functions. Stock exchanges have their own clearing corporations to clear trades which connect with brokers to ensure that credits, debits, delivery are all handled properly.
Stock exchanges manage risk. They impose margins on traders to ensure that no undue risk is taken in the markets. More importantly, stock exchanges (through their clearing corporations) guarantee the trades. Effectively, for every trade, the stock exchanges are the counter party. Therefore, when you deal in stock markets, there is no counterparty risk.
Is stock market different from share market?
Stock markets are share markets are one and the same. In India they were always referred to as the share market. Stock market is a US term where they refer to equity as stocks rather than as shares. Both stocks and shares represent a share of the company ownership.
How to start investing in the share market
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First you need to open your trading and demat account. You need to fill up the Trading-cum-demat (TCD) form with the broker. Now you can also open your broking account entirely online using your Aadhar authentication.
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Next is the documentation. You need to submit appropriate proof of identity and proof of residence as per SEBI requirements. Additionally, copies of your PAN card and your photographs have to be submitted. In case of online account opening all these documents are picked up directly via your Aadhar authentication. Only an in-person verification (IPV) has to be done by you after that.
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Once your KYC is completed and your documents are checked, the broker will open your broking account and the demat account and allot the necessary unique codes to you. Once your account is activated, you are ready to trade. Also ensure to activate online trading and get the user name and password to start trading online.
Difference Between Trading Account and Demat Account?
We normally understand trading as a short term activity in the stock market and investing as long term investing in stock market. That is broadly correct. However, it would be better to look at some key differences between trading and investing.
Trading in Stocks
Investing in Stocks
What is Trading in Stocks
Trading is for the short term. A trader is basically looking at short term opportunities in the stock as a reaction to news or some announcement by the company
What is Investing in Stocks
First you need to open your trading and demat account. You need to fill up the Trading-cum-demat (TCD) form with the broker. Now you can also open your broking account entirely online using your Aadhar authentication.
Trading can be of different types. There is intraday trading, and then there is trend trading which is for a few days to weeks and finally there is even trading which is just done to capitalize on a major event.
Investing is normally classified as value investing or growth investing. In value investing you look for undervalued stocks. In growth investing you look for high growth companies to invest in.
A short term trader looks to increase return on investment (ROI) in trading by churning the money very fast by trading in and out of stocks.
An investor is not interested in churning the money. The idea is to invest and hold the shares for the long term to benefit from the price appreciation.
Traders normally use technical analysis and charts to take buy and sell decisions in the stock market.
Investors use fundamental analysis for their investment decisions. They still use charts to time their entry and exit.
FAQs
What is the difference between Stock and Share?
A stock and a share are essentially one and the same. They both represent a part of the capital of a joint stock company. In India it was always called shares whereas in the US they have been referred to as stocks. They essentially mean the same thing.
What Instruments Are Traded In The Stock Markets?
The stock market trades equity shares of various listed companies. In addition, the markets also trade other instruments like index futures, index options, stock futures, stock options, VIX futures etc. Both equity and derivative products are traded in stock markets.
Where Do I Find Stock Related Information?
There are various sources for finding stock related information like the newspaper, websites, company annual reports etc. Brokerage houses like Tradebulls also provide a plethora of rich stock market content and analytics on the website itself.
What Are The Factors That Determine The Price Of The Stock
Price of the stock is normally determined by growth prospects and the profitability of the company. Normally, based on the attractiveness of the stock a P/E ratio is assigned by the market. Stock prices also depend on demand and supply as well as news flows.
How Would You Choose Stock For Your Portfolio?
You choose stock by screening the stocks in the market on profitability, risk, valuations etc. Such analytics are available on the Tradebulls website for traders to easily create a portfolio. It is always advisable to check with your RM or advisor before taking portfolio decisions.
