You are sitting with your close friend who bought their first stock. Excitedly, they explained how the stock price went up, and they made a small profit. You feel intrigued and wonder, “How does this stock market thing work?” You are aware that people make money by investing in stocks, but beyond that, it feels like a puzzle. Where do you even begin? What makes stock prices rise and fall? How can one buy or sell stocks?
As these questions swirl in your mind, you decide it is time to dive in and learn more. After all, understanding the stock market could help you manage your finances better and grow your wealth.
What is the Stock Market?
The stock market, with its rich history of stock exchange, is where you, as an investor, can buy and sell company shares. When companies need funds to grow or pay off debt, they go public, offering shares to investors like you. In return, you own a part of the company and share in its journey, whether it succeeds or faces challenges.
In India, the stock market is classified into two segments:
- Primary Market: Where new shares are issued via Initial Public Offerings (IPOs). This is your chance to invest in a company when it first goes public.
- Secondary Market: After the shares are sold through IPOs, they are traded between investors. The secondary market provides liquidity, allowing you to buy or sell your shares at market value through the stock market app.
How Does the Share Market Work in India?
Let’s start with the basics if you are wondering how the stock market operates.
How the Primary Market Works
The primary market is the first step for any company to raise capital by selling shares directly to you and other investors. Here is how it happens:
- Underwriting Process: The company seeking to go public partners with underwriters, usually investment banks. These financial experts evaluate the company’s finances and help determine the amount of capital the company can raise through an IPO.
- Drafting the Prospectus: The company, along with the underwriters, prepares a Draft Red Herring Prospectus (DRHP), which outlines its financials, business model, and why it needs to raise funds. This document is submitted to the Securities and Exchange Board of India (SEBI) for approval.
- SEBI Approval: Once SEBI reviews and approves the prospectus, the company is ready to proceed with the IPO.
- Price Setting: “The share price is determined through a process called book building. The company fixes a price range, and investors, including yourself, submit bids. Depending on the demand, the final price is decided.
- IPO Listing: Once the IPO is complete, the shares gets listed on the stock exchanges, where you can buy and sell them on the secondary market.
How the Secondary Market Works
Once the company’s shares are listed, the secondary market kicks in, allowing you to trade these shares. Here is how it functions:
- Placing an Order: When you want to buy or sell shares, you place an order through your stockbroker. This could be a market order (executed at the current price) or a limit order (executed when the stock reaches your specified price).
- Order Matching: Your order is matched electronically on the stock exchange, either the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Once the order is matched, the trade is executed.
- Settlement: After your stock market trade is executed, there is a settlement process where the ownership of shares is transferred to your Demat account. This is usually completed within two business days (T+2).
Understanding Stock Exchanges in India
The stock exchanges are like the marketplace where these trades occur. In India, there are two major exchanges:
- Bombay Stock Exchange (BSE): The oldest stock exchange in Asia, BSE is home to the Sensex, a key index that tracks 30 of the largest companies listed on the exchange.
- National Stock Exchange (NSE): Established in 1992, the NSE is known for the Nifty 50 index, which mimics the performance of the top 50 companies.
The shares you trade are listed on one or both of these exchanges. These exchanges ensure fair trading, liquidity, and transparency in the market.
How to Invest in the Stock Market?
So, now you are thinking: How can you participate in this marketplace as an individual investor?
Direct Investment
This is the most straightforward way to invest. You buy and sell shares directly through a stockbroker/stocks app. For this, you must open Demat account and a trading account. A Demat account holds your shares electronically, while the trading account is where you execute your buy and sell orders.
Mutual Funds
Mutual funds offer an alternative to investing in stocks if you are unsure about picking individual shares. Mutual funds combine the resources of several investors to build a diversified portfolio that includes shares, bonds, and other types of assets.
Exchange-Traded Funds (ETFs)
ETFs are identical to mutual funds but are traded like individual stocks on stock exchanges. They usually track an index, sector, or commodity, offering you a way to invest in a broad market or specific industry.
Initial Public Offerings (IPOs)
IPOs are a way to invest in a company at the very start. When a company offers its shares for the first time, you can invest and potentially gain if the company grows. However, this also involves higher risks as there is no guarantee of future performance.
Derivatives
For seasoned traders, futures and options offer an opportunity to speculate on price fluctuations. However, these derivative products carry higher risk and complexity, making them unsuitable for beginners.
Key Investment Strategies for Success
To succeed in stock market trading, you must not just buy shares randomly. You need a strategy that fits your financial goals and risk appetite.
Diversify Your Portfolio
Don’t put all your eggs in one basket. Spread your contributions across various sectors like technology, healthcare, or energy. This reduces the risk of loss if one sector underperforms.
Long-Term Investing
The stock market tends to reward patience. Holding your investments for several years allows you to ward off short-term fluctuations and benefit from long-term growth.
Understand Market Trends
The stock market moves in cycles. There are bull markets (rising markets) and bear markets (declining markets). Being aware of these trends can help you make more informed decisions on when to buy and sell.
Do Your Research
Before investing in a company, study its financial health, management, market position, and future prospects. Investments that have been thoroughly researched are more likely to produce favourable outcomes.
Avoid Emotional Trading
It is easy to get caught up in market excitement or fear. However, emotional trading often leads to poor decisions. Stick to your plan; don’t let emotions drive your investment choices.
Use Stop-Loss Orders
A stop-loss order is a safeguard to protect your investment. It automatically sells your stock if the price drops to a certain level, minimising potential losses during market downturns.
Conclusion
The stock market in India offers you an exciting opportunity to grow your wealth, but it also requires careful planning and knowledge. By understanding the fundamentals—how the stock exchanges work, how to invest, and the strategies for success—you are better equipped to navigate this financial landscape.
Whether you are a long-term investor or prefer a more active trading style, the Indian stock market offers various avenues for wealth creation. Now that you know how it works, why not take the plunge? Start investing today with HDFC Sky and take control of your financial future.