Imagine waking up one morning and deciding to invest some of your savings. You hear people talking about the stock market, but it sounds confusing. How does it even work? In India, the stock market is like a bustling marketplace where people buy and sell shares of companies. Think of shares as tiny pieces of ownership in a company. When you buy shares via stocks app, you become a part-owner and can benefit if the company does well. But how do you start? What are the steps, and what should you know?
What Is the Stock Market?
At its core, the stock market is a platform where individual and institutional investors can buy and sell shares of publicly listed companies. This marketplace enables companies to raise capital by offering ownership stakes to investors. By selling shares, businesses can gather funds for various purposes, such as expansion, paying off debts, or maintaining operations.
The stock market is divided into two segments: the primary market and the secondary market.
- Primary Market: This is where new shares are issued to investors for the first time, typically through Initial Public Offerings (IPOs). Companies utilise this market to attract investment to fund their growth directly.
- Secondary Market: Here, existing shares are traded among investors through stock market app. This segment provides liquidity, allowing investors to buy and sell shares without directly affecting the company’s capital.
How Does Share Market Work in India?
Understanding the Primary Stock Market
The process of a company going public can be broken down into several key steps:
- Engaging Underwriters: A company planning to go public first collaborates with a group of underwriters or investment banks. These experts assess the company’s financial status and devise a strategy to meet its fundraising goals.
- Drafting the Red Herring Prospectus: This crucial document details the company’s business model, financial health, and rationale for raising funds through an IPO. The Draft Red Herring Prospectus (DRHP) is submitted to the Securities and Exchange Board of India (SEBI) for approval.
- Filing with Stock Exchanges: Once SEBI approves the DRHP, the company submits its offer documents to the stock exchanges where it intends to list its shares.
- Setting the IPO Price: The price for the IPO shares is established through a method called book building. In this process, the company and its underwriters create a price range, and investors submit bids within that range. The final price relies on the demand and the bids received.
- Bidding Phase: The IPO opens for bidding after the price is set. Investors can place their bids during this window. When the bidding period closes, shares are allocated based on the bids.
- Listing Shares: The last step in the IPO process is listing the shares on stock exchanges. Once listed, these shares become available for trading in the secondary market.
How Does the Secondary Stock Market Operate?
The secondary market functions as follows:
- Placing Orders: As a trader, you can place orders to buy or sell stocks. Orders can be implemented at the current market price (market order) or at a specified price (limit order).
- Order Matching: Once an order is placed, it is matched on the electronic exchange. After a match, the shares are transferred from the seller’s Demat account to the buyer’s Demat account.
- Settlement Process: This phase updates ownership records, ensuring the buyer has paid for the shares and the seller has delivered them. This typically takes two working days (T+2).
What is a Stock Exchange?
A stock exchange serves as the marketplace for online stock trading. In India, the two prominent stock exchanges are:
- Bombay Stock Exchange (BSE): Established in 1875, BSE is Asia’s oldest stock exchange and ranks among the largest globally. It is known for its benchmark index, the Sensex, which tracks the movement of the top 30 companies on the exchange.
- National Stock Exchange (NSE): Established in 1992, NSE holds the distinction of being India’s largest stock exchange in terms of trading volume. Its primary index, the Nifty 50, tracks the performance of the top 50 companies.
How to Invest in the Share Market?
If you are asking how to invest in the stock market, here are the primary methods:
Direct Investment
This involves purchasing shares of companies listed on the stock exchange. To begin trading, you must open a Demat account with a registered stockbroker, which holds your shares electronically.
Mutual Funds
These funds pool money from diverse investors to invest in various financial instruments. Managed by professionals, mutual funds provide an accessible option for those looking for a less hands-on investment approach. They can be actively managed or follow a passive strategy, such as index funds.
Exchange-traded funds (ETFs)
Like mutual funds, ETFs track specific indices, sectors, or commodities, offering flexibility for investors. They can be transacted on stock exchanges like individual shares.
Initial Public Offerings (IPOs)
Investing in stock IPOs means purchasing shares in a company when it first goes public. This can be a unique opportunity to invest early, but it carries risks, as the company’s future performance is uncertain.
Derivatives (Futures and Options)
Derivatives get their value from underlying assets such as stocks, indices, or commodities. In the stock market, futures and options are commonly traded and can be used for risk management or speculating on price changes.
Key Strategies for Investing in the Stock Market
To maximise your stock market trade and investment potential, consider the following strategies:
Diversify Your Portfolio
Spreading your holdings across different sectors and asset classes helps minimise risk. Diversification can reduce the poor performance effect of a single stock or sector on your entire portfolio.
Invest for the Long Term
Focus on long-term gains instead of seeking quick profits. In the
history of stock exchange, the market has yielded better returns over extended periods, so patience is essential during short-term fluctuations.
Understand Market Cycles
The stock market experiences cycles of growth (bull markets) and decline (bear markets). Recognising these patterns can help you make more informed buying and selling decisions.
Conduct Thorough Research
Before stock market trading/investing, plan comprehensive research on the company’s financial health, market position, and growth prospects. Analysing fundamentals rather than speculating leads to better investment decisions.
Avoid Emotional Trading
It is crucial to make investment choices independently, without being swayed by emotions. Emotional trading can result in poor decisions, such as panic selling during downturns or buying at market peaks.
Use Stop-Loss Orders
Employ stop-loss orders to safeguard your investments. These orders automatically sell a stock once it reaches a predetermined price, limiting losses and preventing further declines during volatile market conditions.
Reinvest Dividends
Consider reinvesting dividends instead of taking cash payouts. This strategy allows you to buy further shares, significantly enhancing your long-term returns through compounding.
Monitor Economic Indicators
Stay aware of key economic indicators, such as inflation, interest, and employment figures. These factors influence the stock market, and knowing them can help you anticipate market changes.
Conclusion
The Indian stock market presents an exciting avenue for wealth creation but demands knowledge, discipline, and a well-defined strategy. By understanding the fundamentals of how stock exchanges operate, ability to read stock charts, the different investment options at your disposal, and the effective strategies you can implement, you will be well-equipped to make informed and confident decisions.
Whether your interest lies in day trading or you want to invest in stocks, starting your journey in the stock market can be rewarding. Embrace the opportunities and consider exploring platforms like HDFC Sky to open demat account and kickstart your investment adventure.
