Understanding the Stock Market Basics for Beginners: Are you feeling caught up in the stock market frenzy where literally everyone you know has begun speaking in market jargon? This is a position I too found myself in a few years back.
Don’t worry as we have decided to cover some basics in order to get your foot in the door. This article covers the stock market basic topics like What are shares, why are they issued, why are they bought by us, and more. Keep Reading to explore more on the stock market for beginners!
1. What are Shares?
One could say that Shares are the most popular financial instruments available for investments. A Share, also known as equity or stock, represents a unit of ownership of a particular company. The total capital of a company is divided into smaller equal units and each unit is known as a share.
The owner of the share will have a right to vote and benefit from the profits of the company and suffer the losses that the company makes. Investors who hold shares of a company are known as shareholders. The influence a shareholder will have on a vote or his profits/losses will depend on the total number of shares held.
Take for eg. ABC Ltd. has a market valuation (or market capitalization) of Rs. 10 Lakh. Each share has a value of Rs. 100, meaning that there are a total of 10,000 shares. A shareholder owning 1,000 shares will own 10% of the company. His vote will carry the same weight and will be entitled to the same portion of profits passed on to the shareholders as dividends.
Let us take another example of stock from the Indian Share Market. For example, Tata Consultancy Services (TCS) has a total of 375.24 Crores of outstanding shares in the market. Out of all these shares, 72.05% are held by the promoters i.e. the Tata Group as of Jan 2021.
The remaining shares are held by the Public, Domestic Institutional Investors (DII), Foreign Institutional Investors (FII), etc. If you’ve got 1,000 shares of TCS, then you own approximately (1,000/375.24 Cr)th part of the company.
As you own more shares of that company, your ownership in that company will increase and you’ll be entitled to more benefits like voting dividends, voting rights, etc. However, if the company doesn’t perform well, you’ll also be entitled to losses made by the firm as you’re also the partial owner of the company.
2. How many Shares can be issued by a company?
There is no upper limit on the number of shares that a company can issue. They depend on the capital a company raises and the denomination it sets.
For Example, if ABC Ltd. had issued shares at a face value of Rs.10 for a total valuation of Rs 10 Lakhs, then ABC Ltd. would have a total of 100,000 shares at the same capital. The minimum number of shares, however, is 1.
3. Stock market basics – How much is a share worth?
The face value or the intrinsic value of a share is set at the time when capital is raised by a company. Generally, it could be at Rs. 5, Rs. 10, Rs. 100 etc. The value of the total shares held here out of the total capital would show one’s ownership within a company.
The market value of a share however is different. This is the value at which an investor like you and me can buy a share.
The market value of a share is dependent on the forces of demand and supply. These factors affect the price of shares just like commodities. Say the demand exceeds the supply of shares or the availability of shares in the secondary market (stock exchanges) then the prices will shoot up. Vice versa and the shares will fall down.
Once a company enters the share market, there is a share price associated with all the public companies at which investors and traders can buy and sell its stock. For example, 1 Share of TCS is currently trading at Rs 3,266.50. You can find the share price of all the public companies at any financial research website like Trade Brains Portal.
4. Different Types of Shares
There are many different types of shares. However, when considered on the basis of ownership, they are considered as:
— Preferential Shares
These shares are preferential in nature. Investors who hold preferential shares are entitled to receive preferential treatment when it comes to profits of the company, in the event of the company winding up over equity shares. Preferential shareholders however do not have any voting rights.
— Equity Shares
In simpler terms, these are the regular shares that are available in the market. They make up most of the shares of a company. Equity Shareholders do have voting rights but are paid after preferential shareholders or in the case of the company winding up.
5. Why do companies issue shares (or go for IPO)?
The first time when a private company enters the stock market and offers its shares to the public, it is called an Initial Public Offering or IPO or Going Public. The basic reason why companies issue their shares or go for an IPO is to raise capital or funds.
Stock exchanges facilitate the exchange of shares for capital. The process involves shares being offered, shares being allotted to investors, and finally the shares being listed on an exchange where they can be bought and sold. By doing so companies can get access to a wider pool of investors which includes retail and domestic/foreign institutional investors.
Take the example of Tesla. Once Elon Musk sold PayPal he invested his fortunes in SpaceX, Tesla, and SolarCity. The $70 million which he invested in Tesla wouldn’t even get it close to where the company is today. For Tesla to truly grow in order to compete globally it required loads of funds. This was initially met through venture capitalists, but this too isn’t enough. The company opted for an IPO in 2010 raising $226 million. This could however only be possible if Musk was willing to let go of his ownership in the form of shares issued.
Similarly in India, there are a lot of private companies like Zomato, Paytm, Flipkart, Patanjali, etc whose shares are owned only the promoters currently, If they want to raise big money, they can offer their shares to the public via an IPO and enter the Indian stock market.
Now let’s take a look at why investors buy these shares?
6. Stock market basics – How do people make money from the Stock Market?
The main purpose of investors buying shares of a company is to make money. In the stock market investors make money in two ways.
— Long Term Investing
The initial investment made by an investor in a company has the potential to grow at rates exceeding interest offered by savings accounts by multi-folds. Hence it is always advisable to stay invested in a stock for the long term.
Take the example of Bajaj Finance whose shares were worth Rs. 70.36 on 31 December 2010 is worth over Rs. 5200 today in April 2021. If you would have bought 100 shares of Bajaj Finance in 2010 at an initial investment value of Rs 7,036, your current investment value would be Rs 5.2 lakhs. Anyways, these investments must only be made after careful analysis of the company’s financials and if the shares are available at a cheaper price than their actual worth.
One of the best examples of long-term investors holding stocks for many years is Warren Buffet, whose net worth briefly exceeded $100 billion this year.
Companies also reward those who stay invested through means of dividends, bonus shares, right issues, etc. A portion of the profits of a company is distributed as dividends for each share held.
— Stock Trading
Trading basically refers to the buying and selling of shares on a regular basis in the short term to make profits. These traders set strategies to take advantage of both rising and falling markets by buying and selling shares in a short time frame. Their profits however are infrequent and smaller per trade.
7. How to Start Investing in Share Market?
Next, we’ll discuss the three-step process for beginners to start investing in the Share Market in India:
Step 1: Learn the Basics
There are tons of websites on the internet where you can get tutorials for stock market basics and on how to start investing in the Stock Market? For beginners, I’ll recommend following Trade Brains Blogs where you can learn investing and trading concepts in a simplified way.
In addition, there are a few books that are a must-read for beginners in the stock market. They are The Intelligent Investor by Benjamin Graham, One Up on the wall street & Beating the street by Peter Lynch, Common Stocks and Uncommon Profits by Philip Fisher, etc. Do read these books to build up the basics of stock market investing. Here’s a link to more best books on to learn stock market.
Step 2: Set up your brokerage account
Stockbrokers can directly buy & sell stocks in the share market on behalf of their clients and charge a small commission for this service. However, the commission is minimal compared to the fast trading platform that they offer. Using these platforms, you can buy/sell stocks within minutes using your web/phone while sitting on your home sofa. To invest in Indian stocks, you’ll require to open your Demat and trading account which is offered by various stock brokers.
For beginners, we’ll recommend using Zerodha, the discount broker in India. Zerodha is the biggest discount broker in India with over 5 million happy clients and perfect for traders & investors looking for low brokerage and reliable trading platforms.
It offers zero brokerage for delivery equity & direct mutual fund investments. For all intraday, F&O, currency, and commodity trades across NSE, BSE, MCX, it offers a brokerage of Flat ₹20 irrespective of the trading volume. Therefore, you can save a lot of brokerage charges on your trades using Zerodha as your broker.
- Zerodha Review –Discount Broker in India | Brokerage, Trading Platform & More
- How to Open a Demat and Trading Account at Zerodha?
- 14 Best Stock Brokers in India 2021 – List/Review of Top Stock Brokers!
Step 3: Research stocks & start investing
The last step is to research stocks and start investing. You can use Trade Brains Portal to research any publically listed companies on the Indian stock exchange and get their stock quotes and financial details. Here, you can find the list of over 4,000 Indian companies and pick the one that suits you the best. In addition, you can also use websites like Money control, Economic Times Market, Trendlyne, Marketsmojo, etc to research stocks in India.
Once you’ve picked your company, log in to your brokerage account to buy that share.
Now that you have understood the stock market’s basic terms like shares and why they are issued it is time to keep taking these baby steps as the world of investing is vast. Check out our article on How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?
That is all for the article on “stock market for beginners”. Hope you have liked this small guide on some stock market basics. Let us know what other topics you would like us to cover. Welcome to the world of investing. All the best!
Frequently Asked Questions (FAQs)
- How do I start learning the stock market?
Some of the best ways to learn about the stock market are: reading stock market books, taking investing courses, and virtual trading. There are plenty of books written about the stock market and these will help you to gain a lot of knowledge. If you’re not a book person, then you might as well like taking up video courses related to the topic, and then reading a few books once you understand the basics. Once you have basic knowledge about the stock market, you could try virtual trading, which is a simulation of market scenarios that help the investors/traders learn the market without having to invest his/her own money. Finally, you can open a demat account and start investing in companies that you’ve researched and that are relatively safe.
- What are the basics of the stock market?
As a beginner, you could start with understanding the meaning of a share, the basic working of the stock market, how people make money from the stock market, the difference between trading investing and gambling, about a trading account and a demat account, the different players in the market, the difference between technical analysis and fundamental analysis, and the various instruments available in the market. Then learn about the types of companies, and how their share price is affected by various market factors.
- What are the 4 types of stocks?
Stocks are classified based on the following factors:
- Market Capitalization: Large Cap, Mid Cap, Small Cap.
- Ownership: Preferred and Common Stocks, Hybrid Stocks, Stocks embedded with derivative options
- Dividend payments: Growth Stocks, Income Stocks
- Fundamentals: Overvalued Shares, Undervalued Shares
- Risk: iBeta Stocks, Blue Chip Stocks
- Industry Trends: Defensive Stocks, Cyclical Stocks
- How much should a beginner invest in stocks?
The stock market is rewarding as well as risky. As a beginner, you should invest small amounts of money in companies that are relatively safe, going by the fundamentals. These are usually big and familiar companies. Before you invest in the stock market, pay your high-interest debts and personal loans first. Ensure that you invest only your additional/ surplus fund. The amount that you invest should not affect your daily life. Do not invest any amount that you have taken as a loan, and ensure that you have cash in hand, even after you invest.
- How do you know when to buy a stock?
The best time to buy a stock is when its price is relatively low. Most value investors buy stocks when stocks are trading at discounted price in the market, due to market correction, bear market or stock specific dips. Fundamental and technical analysis can help you with this decision.
- What is the best investment for beginners?
Some of the best investments for beginners are mutual funds, bank deposits, government schemes, and the blue chip stocks in the share market. Mutual funds, especially the SIP route help investors to get good returns and invest in a disciplined manner. Bank deposits are very safe, for a beginner who might be conservative by risk profile. However, they do not beat inflation. Government schemes offer returns of 7 to 9% for those who get scared of losing capital. Stocks on the other hand are risky, but rewarding at the same time. Picking the right stocks and staying invested for the long helps investors to accumulate a huge corpus and beat inflation. Whichever investment a beginner chooses, they should do so after being fully aware of the risks involved. Diversification can help in getting the advantages of all investment stocks.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.