The stock market can be a great way to grow your wealth over time, but it can also be overwhelming for beginners. Here is a detailed description of the basics of stock market for beginners in India:
What is the stock market?
The stock market is a platform where publicly traded companies can sell shares of stock to the public. These shares represent ownership in the company, and their value can fluctuate based on the company’s performance and the overall market conditions.
How does the stock market work?
The stock market operates on the principles of supply and demand. When more people want to buy a stock than sell it, the price goes up. When more people want to sell a stock than buy it, the price goes down. The stock market in India is regulated by the Securities and Exchange Board of India (SEBI) and operates through two exchanges: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Companies can raise capital by issuing shares of stock, which are then traded on the stock exchange. When a company first goes public, it will issue an initial public offering (IPO) of shares. These shares are then traded on the stock exchange, and their price will fluctuate based on supply and demand.
Individuals and institutions can buy and sell shares through a stockbroker. A stockbroker is a licensed professional who acts as an intermediary between buyers and sellers. They can execute trades on behalf of their clients and provide research and advice on the stock market.
What is share market in India?
The Indian stock market, also known as the share market, is a market where securities of public listed companies are traded. Investors can buy and sell shares of these companies on stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India. The performance of the stock market is often used as a barometer of the overall health of the Indian economy.
What is Sebi?
The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It was established in 1988 and given statutory powers in 1992 through the Securities and Exchange Board of India Act.
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SEBI’s main functions are to protect the interests of investors in securities, to promote the development of the securities market, and to regulate the securities market. It does this by issuing regulations and guidelines, registering and supervising market intermediaries, and enforcing compliance with securities laws and regulations.
SEBI’s main responsibilities include:
- Registering and regulating stock exchanges, mutual funds, and other market intermediaries.
- Registering and regulating the securities of public companies.
- Regulating the securities market through rules and regulations.
- Protecting the interests of investors in securities.
- Promoting the development of the securities market.
- Regulating the activities of the securities market intermediaries.
- Regulating the activities of the securities market participants.
SEBI also works to improve the efficiency and transparency of the securities market, and it takes action against market participants who violate securities laws or regulations.
What is BSE and NSE?
BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are the two main stock exchanges in India. They are both located in Mumbai, and are considered the premier exchanges for trading in equities, debt instruments, and derivatives.
BSE is the oldest stock exchange in Asia, having been established in 1875. It is often referred to as the “Sensex” exchange, as the BSE SENSEX index is one of the most widely followed stock market indices in the country.
NSE, on the other hand, is a relatively newer exchange, having been established in 1992. It is the largest stock exchange in India by daily trading volume and number of trades. The Nifty 50 index, which comprises of 50 of the largest publicly traded companies in India, is the exchange’s flagship index.
Both NSE and BSE exchanges have electronic computerized trading systems and are considered to be well-regulated, transparent, and efficient for buying and selling of shares. The price of a stock is determined by supply and demand in the market, and is affected by various factors such as the company’s financial performance, the overall state of the economy, and investor sentiment.
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In India, stock market also have indices such as Nifty 50 and Sensex which are used to measure the performance of the stock market, it is calculated based on the stock prices of 50 and 30 companies respectively.
What are Nifty and Sensex?
Nifty and Sensex are stock market indices in India. They are used to measure the performance of the stock market and to provide a broad overview of the market’s overall condition.
Nifty 50: Nifty 50 is an index of 50 of the largest publicly traded companies listed on the National Stock Exchange (NSE) of India. The index is designed to measure the performance of the broader Indian stock market and is considered to be a barometer of the Indian economy.
Sensex: S&P BSE SENSEX, also known as the BSE 30, is a stock market index that represents the performance of 30 of the largest and most liquid companies listed on the Bombay Stock Exchange (BSE) of India. It is considered to be a barometer of the Indian stock market and is widely used to measure market performance.
Both Nifty and Sensex are market capitalization weighted indices, which means that the weight of a particular stock in the index is determined by its market capitalization (the total value of all its outstanding shares).
The value of Nifty and Sensex changes throughout the trading day as the prices of the underlying stocks change. They are widely followed by investors and are used as benchmarks for the overall performance of the Indian stock market.
What are stocks and how do they work?
A stock, also known as a share, represents a unit of ownership in a company. When a company wants to raise capital, it can do so by issuing stocks. When an individual or institution buys a stock, they are buying a small piece of ownership in the company. The more stocks an individual or institution owns, the greater their ownership stake in the company.
Stocks are traded on stock exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India. The price of a stock is determined by supply and demand in the market. When demand for a stock is high, the price will go up, and when demand is low, the price will go down. The price of a stock can also be affected by various factors such as the company’s financial performance, the overall state of the economy, and investor sentiment.
When a stock is bought, the buyer becomes a shareholder of the company and can participate in the company’s decision-making process through voting rights at the annual general meeting (AGM) or in other general meetings. Shareholders are also entitled to a share of the company’s profits, which is paid out in the form of dividends.
Stocks can also be used as a form of investment. When a stock’s price goes up, an investor can sell it for a profit. Conversely, if a stock’s price goes down, an investor can lose money. Investing in stocks can be a way to grow wealth over time, but it also carries a level of risk, as the value of the stocks can fluctuate greatly.
What are the different types of stocks?
There are two main types of stocks: common stocks and preferred stocks. Common stocks represent ownership in a company and allow shareholders to vote on certain company decisions. Preferred stocks do not have voting rights but usually pay a fixed dividend.
TYPES OF SHARE MARKET
There are two main types of stock markets: the primary market and the secondary market.
The primary market is where new securities are issued and sold to the public for the first time. Companies can raise money by issuing shares of stock in an initial public offering (IPO). Investors can buy shares directly from the issuing company during an IPO.
The secondary market is where securities are bought and sold after they have been initially offered to the public. This is where most stock trading takes place and it includes stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India. In the secondary market, investors buy and sell shares of stock with other investors, rather than with the issuing company.
Over the Counter Market (OTC): It is a decentralized market, where securities trade via a network of dealers, rather than on a formal exchange. It is also known as off-exchange trading.
Derivatives Market: This is a market for derivatives, which are financial contracts that derive their value from an underlying asset. Derivatives can be used to hedge against market risk, or to speculate on the future price of an underlying asset. The derivatives market includes exchange-traded derivatives and over-the-counter derivatives.
Commodity Market: It is a market that trades in primary economic sector rather than manufactured products. Soft commodities are agricultural products such as wheat, coffee, cocoa, and sugar. Hard commodities are mined, such as gold and oil.
How does a company list its shares?
A company can list its shares on a stock exchange by going through a process called an initial public offering (IPO). An IPO is the process by which a privately held company becomes a publicly traded company by offering shares of stock to the public for the first time. The process of listing shares through an IPO typically involves the following steps:
Hiring an investment bank: The company will hire an investment bank to act as the underwriter of the offering. The investment bank will work with the company to determine the appropriate price for the shares and will help market the offering to potential investors.
Filing a registration statement: The company will file a registration statement with the Securities and Exchange Board of India (SEBI) which includes financial and other information about the company. This is done to provide potential investors with information about the company and its financial condition.
Roadshows: The company and its investment bank will conduct “roadshows” to market the offering to potential investors. The roadshows typically take place in major cities and provide potential investors with an opportunity to meet with the company’s management team and learn more about the offering.
Pricing the offering: The investment bank will work with the company to determine the appropriate price for the shares, taking into account the company’s financial condition, industry conditions, and overall market conditions.
Allotment of shares: After the shares have been priced, the investment bank will allocate the shares to investors. This is the process of determining which investors will receive shares in the offering, and in what quantities.
Demat Account Vs Trading Account
A Demat account, short for “dematerialized account,” is an account that holds securities such as stocks, bonds, and mutual funds in an electronic format. It is similar to a bank account, where physical shares are replaced by electronic records. A Demat account is required to hold shares and other securities in an electronic format, it eliminates the need for physical certificates and makes it easier to track and manage the securities you own.
A trading account, on the other hand, is used to buy and sell securities on a stock exchange. It is a link between the investor and the stockbroker, which allows the investor to place orders to buy or sell securities. The trading account is necessary to execute trades on a stock exchange. It is also used to track the transactions and the balance of the investor’s account.
To sum up, a Demat account is used for holding the securities and a trading account is used for trading the securities. You will need to have a trading account with a broker to place your buy or sell order and a Demat account to hold the securities after the trade is executed.
NSDL Vs CDSL
- NSDL: NSDL was the first depository in India, set up in 1996 by the National Securities Depository Limited, which is promoted by the Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and National Stock Exchange of India Limited (NSEIL).
- CDSL: CDSL was set up in 1999, by the Bombay Stock Exchange Limited (BSE).
Both NSDL and CDSL provide similar services such as opening a demat account, holding securities in electronic form, settlement of trades, transfer of securities, pledging securities for loans, and transmission of securities.
However, there are some differences between the two, such as the number of registered DPs, and the number of issuers whose securities are held in the depository. NSDL has more registered DPs and more issuers whose securities are held in the depository. CDSL is said to be more investor-friendly with its services and charges.
In summary, both NSDL and CDSL are the two most important depositories in India, providing the same services with similar charges. An individual can have a demat account with any of the depositories and can hold securities with either of them. It is recommended to check the charges, services, and investor-friendly approach of the depository before opening an account.
What is the Role of a Broker in the Share Market?
A broker is a professional who acts as an intermediary between buyers and sellers in the stock market. They buy and sell stocks on behalf of their clients and charge a commission for their services. Here are the main roles of a broker in the share market:
Execution of trades: A broker’s main role is to execute buy and sell orders for their clients. They use their knowledge of the market and the stocks they trade to help their clients make informed decisions and to execute trades at the best possible price.
Research and analysis: Brokers typically have access to a wide range of research and analysis tools that they use to help their clients make informed investment decisions. They may also provide their clients with market updates, stock recommendations, and other information.
Risk management: Brokers help their clients manage risk by providing advice on how to diversify their portfolios, and by monitoring the performance of their clients’ investments.
Account management: Brokers are responsible for maintaining their clients’ accounts and keeping track of their transactions. They typically provide online access to account information, so that clients can monitor their investments in real-time.
Margin financing: Some brokers may also provide margin financing, which allows clients to borrow money from the broker to buy shares.
IPO and FPO: Brokers play an important role in the Initial Public Offering (IPO) and Follow-on Public Offer (FPO) process. They help the companies in preparing the documents, arranging roadshows and also help the investors in subscribing the shares.
How do I buy and sell stocks?
To buy and sell stocks, you need to open a trading account with a firm that offers online trading. Some of the popular online brokers in India are Zerodha, Upstox, ICICI Direct, HDFC Securities and many more. Once you have opened a brokerage account, you can place buy or sell orders for stocks online. Here are the basic steps to follow:
Open a trading account: You will need to provide some personal information, such as your name, address, and PAN number, as well as proof of identity and address. You will also need to complete any forms required by the stockbroker and fund your account with the initial deposit.
Choose a stock: Research the stocks you are interested in and decide which ones you want to buy or sell. You can use tools such as stock charts, financial statements, and analyst reports to help you make your decision.
Place an order: Once you have decided which stock to buy or sell, you can place an order through your trading account. You will need to specify the stock symbol, the number of shares, and the price at which you want to buy or sell.
Execute the trade: Once your order is placed, it will be matched with a buyer or seller, and the trade will be executed at the agreed-upon price. The shares will then be credited or debited to your Demat account.
Monitor your portfolio: Keep track of your portfolio by monitoring the performance of your stocks and making any necessary adjustments to your investment strategy.
It’s important to note that you will also need a Demat account to hold the securities after the trade is executed, your stock broker automatically opens a Demat account with either CDSL or NSDL.
It’s also important to do your own research, understand the risks and fundamentals of the company before investing and consult with a financial advisor if needed.
CDSL Vs NSDL
CDSL (Central Depository Services Limited) and NSDL (National Securities Depository Limited) are both depositories in India, which provide electronic holding and transfer of securities for investors. They are the backbone of the Indian securities market, and are responsible for maintaining the records of all transactions in the securities market.
The main difference between the two is that CDSL is promoted by the Bombay Stock Exchange (BSE) while NSDL is promoted by the National Stock Exchange (NSE). Apart from this, both CDSL and NSDL have similar functions and services, such as:
- Holding securities in an electronic format.
- Transfer of securities in an electronic format.
- Settlement of trades in the stock market.
- Providing a mechanism for voting in the annual general meetings (AGM) of companies.
Both CDSL and NSDL provide a secure and efficient way for investors to hold and transfer securities in the Indian stock market. An investor can open a Demat account with either CDSL or NSDL, and the choice usually depends on the preference of the investor or the availability of the services with the broker.
What factors should I consider when buying stocks?
When buying stocks, it’s important to consider the company’s financials, management team, industry trends, and overall market conditions. It’s also important to diversify your portfolio by investing in a variety of stocks across different sectors and industries.
How do I track my investments?
Once you’ve started investing, it’s important to regularly review your portfolio and track the performance of your stocks. Most online brokerage firms offer tools that allow you to track your investments and make adjustments as needed.
What are the taxes in stock market in India?
There are several taxes that may apply to stock market investments in India, including:
Capital Gains Tax: Capital gains tax is imposed on the profits made from the sale of securities. STCG (Short-term capital gains) and LTCG (Long-term capital gains) are two different types of capital gains tax that may apply to stock market investments in India.
Short-term capital gains (STCG) are profits made from the sale of securities that have been held for less than 12 months. The current tax rate for STCG is 15%, as per the marginal tax rate of the investor.
Long-term capital gains (LTCG) are profits made from the sale of securities that have been held for more than 12 months. The current tax rate for LTCG is 10%, if the gains exceed INR 1 Lakh.
Income Tax: Income tax is imposed on any income earned from investments in the stock market. The income tax rate varies depending on the investor’s income level.
It’s important to note that the tax laws and regulations are subject to change, so it’s a good idea to consult with a financial advisor or a tax professional to understand the current tax rates and how they may apply to your specific stock market investments.