Introduction to the Indian Stock Market: A Beginner's Guide

Dear Fin Friends,
I hope this message finds you well and thriving. As many of you know, the stock market is one of the most effective place to grow your wealth. However, before diving into the stock market, it is crucial to understand some basic terminologies and concept that you will encounter. The stock market is vast, and covering all the fundamentals in a single article is impossible. Therefore, we will gradually explore the essential basics that every beginner needs to know. Stay tuned, and let’s start on this journey into the world of stocks together.

What is the Stock Market?

The stock market is where shares of publicly listed companies are traded (bought and sold) at market prices under regulatory compliance. There are two types of markets for buying and selling stocks:

Primary Market: When a company wants to raise capital, it applies for an IPO in the primary market. Shares are issued for the first time in the primary market, where investors buy shares directly from the company by applying for an IPO. The IPO process allows a company to enter the primary market.
Secondary Market: After a successful IPO, the company’s shares are traded on the secondary market through stock exchanges (NSE, BSE, or both). Both the public and institutions can participate in buying and selling stocks in the secondary market through a stockbroker. Once the IPO is complete, the primary market no longer plays a role, and all shares are traded in the secondary market.

Entities Driving the Indian Stock Market:

Company Promoters: They are the founders and major shareholders of the company. Promoters bring the IPO to the market. If they have a significant stake, the company is generally considered strong, though there can be exceptions too.

Retail Investors: Individuals like you and me who own a small number of shares and trade in the stock market.
High Net Worth Individuals (HNIs): Wealthy individuals who hold significant stakes in company shares, often trading in large amounts.
Institutional Investors: These include mutual fund houses, insurance companies, pension funds, hedge funds, banks, financial institutions, foreign institutional investors (FII), and domestic institutional investors (DII). They typically have substantial shareholdings, second only to company promoters, though there are exceptions.
Traders: Traders engage in frequent buying and selling of stocks. Examples include swing traders, intraday traders, and F&O traders. They play a crucial role in maintaining market liquidity.
Stock Exchange: The stock exchange is where securities trading occurs. It serves as a platform where buyers and sellers meet to trade stocks at market-determined prices. Stock exchanges charge transaction fees for facilitating trades. In India, there are two prominent stock exchanges:
- Bombay Stock Exchange (BSE): India’s first stock exchange and the world’s seventh largest by market capitalization in 2024. Its key index is the SENSEX.
- National Stock Exchange (NSE): India’s second stock exchange and the world’s eighth largest by market capitalization in 2024. Its primary index is the NIFTY 50.
Securities and Exchange Board of India (SEBI): SEBI is the regulatory body overseeing India’s securities market. It establishes rules and regulations governing trading and investments.
Stock Broker: A stock broker acts as an intermediary between investors and the stock market, operating under SEBI regulations. Investors can buy and sell stocks through a stockbroker. Types of stock brokers include:
- Full-service Brokers
- Discount Brokers
Portfolio Management Services (PMS): PMS is a professionally managed service that allocates investor funds across asset classes based on financial goals and risk tolerance. Typically, PMS requires a substantial minimum investment, often starting from 50 lakhs. Types of PMS include:
- Active Portfolio Management
- Passive Portfolio Management
- Discretionary Portfolio Management
- Non-Discretionary Portfolio Management
Bull Market: When the stock market is consistently rising, leading to high company valuations and increased share prices due to high demand and limited supply. A market is considered a bull market if most stock prices increase by around 20%.
Bear Market: When the stock market is declining over a prolonged period, causing pessimism among investors. A bear market can see market values drop by up to 20%, causing widespread fear.
Sideways Market: When stock prices neither rise nor fall significantly, moving in a horizontal trend.
Stock Market Rally: A sudden, temporary increase in stock prices due to specific reasons. It’s generally seen as a positive sign, even occurring during bear markets.
Macro and Microeconomic Factors: These major economic factors heavily influence the stock market. A strong economy typically leads to a bullish market, while a weak economy can result in a bearish or sideways market.
Company Performance: A company’s financial performance directly impacts its stock price over the long term. Good performance tends to drive up stock prices and overall market performance.
Political Stability and Policies: Political stability and favorable government policies that support businesses are positive signs for a country’s stock market.

Why the company shares are traded in the stock market?

When a company needs capital to grow its business, it can raise money in various ways. One effective method is raising money through the stock market. To do this, the company goes public through the IPO (Initial Public Offering) process in the primary market.
After a successful IPO, the company’s shares are publicly traded on the stock exchange.
In stock trading, people buy and sell shares of publicly listed companies. Some invest for the long term, others for the short term, and some trade daily.

How to make money from the stock market?

People make money in the stock market in various ways:

Buying Low and Selling High: It is the most common approach is to buy stocks at a low price and sell them at a higher price to booking a profit. However, it’s important to remember that this is not always easy, and it’s not guaranteed to profit from every trade.
Different Strategies: You can earn money by adopting different strategies:

Long-Term Investing (Buy and Hold): Holding onto stocks for an extended period.
Short-Term Investing (Swing Trading): Buying and holding stocks for a few days or weeks.
Daily Trading (Intra-Day Trading): Buying and selling stocks within the same trading day.
Dividends: Long-term investors can also earn money through company dividends, which are periodic payments made to shareholders.
Short Selling: Some people make money by shorting stocks. This technique allows investors or traders to profit when stock prices go down, but it is very risky.
Futures and Options Trading: Some people make money through futures and options trading. However, this method is very risky and should be avoided by those new to the stock market.

Note: It may seem easy to buy and sell based on tips and news from others, but always do your own research and analysis before making any decisions.

How to buy and sell shares in the stock market?

You can buy and sell the shares of companies with the help of a stockbroker online.
To trade stocks, you need a Demat account and trading account, which you can open with a stockbroker. Nowadays, there are many discount brokers available in India. Choose a reputable one to open your Demat and trading account.
Once your Demat account is active, you can buy, hold, and sell stocks, bonds, and ETFs on this platform.
Keep in mind that trading in the stock market involves various charges, such as transaction fees, platform fees, service taxes, Stamp Duty, and Depository Participant charges, depending on the type of security.
These charges can vary based on the type of trade, such as Equity delivery, Equity intraday, F&O – Futures, and F&O – Options.
Charges also differ depending on the type of security, such as Equity, currency, and commodity.

In the upcoming article, we will explain to you how to trade practically.

When to buy and sell shares from the stock market?

People usually buy stocks at a low price and sell at a high price, but knowing when to buy low and sell high is always challenging for investors and traders.
It’s not easy to know if a stock will go up after you buy it. Sometimes the price goes down, or it might stay around the same price range (Side-Ways) for a long time.
Volatility is a natural part of the stock market. It can vary, being high at times and low at others, depending on various factors. The Volatility Index (VIX) is used to measure market volatility.
No one can perfectly time the market. This means no one can always predict the lowest (bottom) or highest (top) prices of a stock. Occasionally, someone might get lucky and identify the bottom or top, but doing it consistently is nearly impossible. If someone claims they can always time the market, they are lying. Don’t trust such claims.
While you can’t time the market perfectly, you can use technical analysis or fundamental analysis to decide when to buy (Enter) or sell (Exit) a stock. We will discuss technical and fundamental analysis in more detail in upcoming articles.

What is Market correction?

Usually, the Index represents the market. The popular indexes in India are Nifty 50 and Sensex. So, we can say that “Index” = “Market.”
If the market keeps going up without proper justification, it becomes overvalued. In this case, any negative event can cause a market correction, where prices drop ~10% to more realistic levels of valuation. The same can happen in reverse also. i.e. If the market is low for a long time, it will eventually go up as a market correction.
There are many reasons why the market can reach very high valuations that aren’t justified by real data and this unrealistic valuation can create a bubble in the stock market. Just like a bubble, the market won’t stay inflated for long if the valuations are unrealistic. The market needs a trigger point to bring prices down to their true value.
Market corrections often happen when there is an imbalance between expected valuations and current market valuations. Is the stock market a safe place to earn money?
The same thing can happen with the company’s stock also.

How risky the stock market is?

You might have heard that the stock market is like gambling (Satta Bazar), where people often lose money. While this can be true, but it’s not always the case. Losses typically occur when people are too greedy and unaware of the risks. So, should you avoid the stock market? No, you should invest in it, but only with a proper understanding of its risks. Here are some key points to know before investing:

Market Risk: Understand that market volatility can be caused by unpredictable events like natural disasters, government policies, or global economic conditions.
Credit Risk: This is related to the company itself. If a company can’t repay its debts, it might go bankrupt, causing you to lose your investment.
Liquidity Risk: This is the risk of not being able to sell your shares when you need cash. If there are no buyers, you can’t convert your shares into cash.
Fraud Risk: Beware of fraudsters promising high returns in a short time. Avoid unrealistic promises that could trap you in fraud.

There can be many other risks, above are the few major risks associated with the stock market

Can the stock price be manipulated?

The short answer is yes. While not all stock prices can be manipulated, some, especially micro and small-cap stocks, can be influenced by big investors.
Pump-and-dump is a stock manipulation tactic where big investors target certain stocks, buy large volumes, drive up the price, and then sell to make profits.
Other manipulation tactics include spreading fake news, placing fake orders, and making false trades.
The good news is you can spot stock manipulation using technical and fundamental analysis. We’ll explore stock analysis in more detail going forward.

Can You Make Decent Money in the Stock Market?

Yes, you can. Investing in the stock market can yield a decent amount of money over a long period.
Now you can ask How long time should you hold the stock? The answer is as long as the company performs well, and you have the patience to hold the stock. Good companies often provide excellent returns in the long run, but this usually means holding the stock for 5-10 years or more.
People also earn money through other trading methods such as swing trading, intraday trading, and F&O trading. However, intraday and F&O trading are considered risky. For these, you need proper knowledge and strategy. Relying solely on tips or news can lead to losses.
The best way to make decent money is by investing in high-quality stocks for the long term, based on the company’s performance. Some investors hold stocks for decades as long as the company continues to perform well.