90% of people lose money in the share market as per an Economic Times report.
Do you know the reason?
Most people invest in the stock market after listening to the stock tips from brokerage houses or from their colleagues over the tea break.
They start stock investment even before understanding the concept of how the share market actually works. In the end, they lose their principal amount too.
You should understand how the stock market works is important before diving into the stock market investment.
In this article, you will learn about basic fundamentals of stock market working that help you whether you want to learn value investing or stock trading.
Key points that you’ll learn are –
- What is Share Market
- Types of Share Market
- Investment segments in the stock market
- How Share Market Works in India
- How do you Invest in Stocks
What is Share Market
The share market is a marketplace where you can buy and sell stocks. Public limited companies list their shares in the stock market for the common people to buy the same. Just like Amazon where sellers list their products and you can buy from the listed ones.
Companies sell their stocks to the general public to raise the funds for expansion or setting up new plans and projects.
In return, you get the stake in the company’s ownership proportional to the number of shares you own.
For example, if you own 1000 shares of Tata Steel Ltd. out of the total issued shares of 1 lakh, you become 1% owner in Tata Steel Ltd.
The public companies need approval from government authority SEBI to list the shares in the stock market. The process has 2 phases – the first phase is “offering IPOs” and the second part is “listing Shares”.
These phases divide the stock market into two parts: the primary stock market and the secondary stock market.
Types of Stock Market in India
#1. Primary Stock Market
A company’s share is first listed on the primary stock market to invite the general public for the first-time investment. These are called IPOs (Initial Public Offering). The companies raise the funds from the primary market and all the invested money goes to the companies.
You can invest in an IPO through a stockbroker. You need to place a bid to buy an IPO, which means the allotment of shares is not guaranteed.
For example, you place a bid for 5 lots of 100 shares in Kalyan Jewellers IPO, but you may be allotted 1 lot of 100 stocks. There is also a chance that you may not get any shares.
There are a few things that you need to know about IPOs
- Minimum Lot Size – companies fix a number of shares in each lot you have to buy minimum for placing a bid. For example 100 shares per lot.
- Bidding Price – You have to bid within the price band. For example, if the price band of a Kalyan Jewellers IPO is Rs. 85 to Rs. 87, you can bid at any price within the price band range. Based on your bid the allotment happen.
- Allotment of IPOs – Once bidding time is over, the number of allotted IPOs is transferred to your Demat account. The number of allotted units can be less if the subscribers are in huge numbers.
You can buy an IPO in two ways – ASBA and Broker.
#1. Applications Supported by Blocked Amount (ASBA)
To apply for IPO through ASBA (Applications Supported by Blocked Amount), you have to reach out to your bank, where they will fill your form and block the required amount from your savings account till the time the IPO subscription is open.
The only issue in this process is not all bank branches offer ASBA facilities. You can contact your dealing bank to know about the ASBA facility.
#2. Stock Broker
Stockbrokers allow you to subscribe for IPO online if you have an account with them. Popular stockbrokers are Zerodha, Upstox (read detailed review) , and Angle Broking, you can open an account with any of them whose services you feel better.
You can go with any brokers for IPO subscription because prices are same in brokers for IPOs. But you for stock investing or trading, you should look for a broker that offers
- free equity delivery (if you are buying stocks to keep for more than one day)
- low brokerage fee
- better trading platforms
- good customer service.
For example, you can go with Zerodha as they provide free equity delivery, discounted brokerage fee, a fast & robust trading platform with efficient customer support.
You will learn more about stockbroker in the upcoming section under “How share market works in India”.
#2. Secondary Stock Market
Companies list the stock in the share exchange after 7 days of the IPO distribution is over. The process is called Stock Listing or Listing.
The price at which the stocks are listed at the stock exchange is called the stock listing price.
Now IPOs are considered “Shares”.
After that, you can buy or sell the shares on the stock exchange at the listed price without any requirement of a minimum lot. Then the share price fluctuates based on the demand and supply principle.
Stock price rises if the demand is more than the supply and vice versa.
This is called the secondary market.
In the secondary market, the investors trade with each other, not with the company. Listed companies got the investment on the IPO not from the secondary market.
For example, the “Ksolves India Ltd.” stock price reached Rs 1505 from its listing price of Rs 100 in ten months. Now if you have invested at Rs 1505, then the money goes to the person who sold you at Rs 1505, not to the company.
Let’s discuss how the share market works in India in detail.
How Share Market Works in India
Stock market has different entities involved in the share market that collectively run the share market system.
- Companies – Public companies that list their shares in the stock market.
- Regulators – Authority that regulates the stock exchanges, brokers, and listed companies to protect the investor’s interest. SEBI (Securities and Exchange Board of India) is the regulator for stock market in India.
- Stock Exchanges – Platforms where you can buy or sell shares. BSE and NSE are the operational exchanges in India.
- Brokers – Brokers work as intermediaries between the stock exchange and retail investors. You can access the stock exchange either through their trading platforms. You can buy or sell stocks only through brokers in India.
- Investors – Investors like you and me who invest in stocks are called Retail Investors. Apart from that, investors like mutual fund houses, banks, financial institutions like LIC are called Institutional Investors.
#1. Stock Exchange
Stock exchange is the actual platform where you buy and sell stocks. A stock exchange represents the share market in real life.
There are 2 stock exchange in India –
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
Both stock exchanges are regulated by the SEBI (Securities and Exchange Board of India). A government authority that controls and regulates financial markets in India.
From an investing point of view, there’s no big difference for an investor. You can buy stocks from any exchange as per your liking.
However, you may find most of the newly launched stocks listed in BSE. BSE has 5000+ listed stocks.
NSE provides only 1700+ stocks because of strict benchmarks that small companies find difficult to comply with.
You may also see a slight price difference in the same stock on both exchanges. For example, Infosys share price on BSE is Rs. 1355.30
Infosys price on BSE
whereas the same share price on NSE is Rs.1353.70.
Infosys price on NSE
You can buy and sell on the same exchange only. So if you buy a stock on a higher price on an exchange then you will be able to sell the same stock at a high price as well.
Another difference is that both have different indices. BSE has an index Sensex and Nifty is the index for NSE.
Index is an indicator that represents the performance of a stock exchange.
When the index goes up, it represents the market is going high and the stock’s price increase. The rise in the share market is called Bull Market.
When the index goes down it shows the market fall and share prices decrease. Fall in the stock market is known as Bear Market.
#2. Stock Broker
A stockbroker is an intermediate between you and the stock exchange. A broker offers you to open the Demat and Trading accounts.
- A Demat account is an account that holds the stocks in digital form when you buy shares for a long time.
- A Trading account is for buying and selling stocks.
Stock brokers also provide trading platforms and mobile trading apps to facilitate you in stock trading online.
Some examples of brokers are Zerodha, Sharekhan, Upstox and many more.
#3. Market Movements (Price Fluctuations)
You can see the ups and downs in Reliance stock’s price during trading hours.
The stock price fluctuation is based on the “Demand-Supply” principle.
Price increase when there are more buyers in the market which leads to more demand but the supply is less.
For example, suppose a company releases its annual report with positive signs like profit earned, new contract grabbed, business expansion, and many more.
Now everyone is buying those stocks but no one would be willing to sell at the current prices. In such a case, the share price increases.
When there are more sellers than buyers, then the price of that stock decreases to attract the buyers.
For example, if a company has reported loss in their annual report, or they have received any enquiry from the government or any objection from an authority, then people want to sells to those stocks.
When more people start selling a share, the price of that stock falls.
But novice investors do the opposite and incur losses.
You can apply this rule for market behavior, not on individual stocks. You must understand a company’s fundamentals, potential, business strategy, and similar factors before investing in a company.
#4. Value Investing (Long Term Investing)
Value investing means you buy a share for a long time and wait for its value to increase over time.
Since the overall markets grow with time, companies with strong fundamentals and long-term vision also grow over years. That allows you to earn higher returns over your investment.
Let me give you better understanding with 2 examples.
In 2001, the Royal Enfield Bullet motorcycle’s price was Rs. 55,000 whereas the Eicher Company (who owns Royal Enfield) stock price was below Rs. 5 at that time.
Now if you have invested your money in Eicher shares in 2001 rather than buying a bullet motorcycle, could you imagine how much money you would have earned till now?
In the year 2001
Bullet motorcycle price = Rs. 55,000
Eicher Ltd. stock price = Rs 5 (for easy calculation, actual price was around Rs. 3 in May 2001)
You could have bought 11,000 shares of Eicher Ltd.
In the year 2021
Bullet motorcycle price = Rs. 1,25,000 approx.
Eicher Ltd. stock price = Rs. 2,000 (rounded off for easy calculations, the actual price today is Rs. 2,635)
Net worth you would have with 11,000 Eicher shares = 11,000 x 2,000 = Rs. 2,20,00,000.
You could have more than 2 Crores worth of shares today if you have invested in the company than the product.
That’s the power of value investing.
Example – 2
Let me show you another example of Maruti Car company stocks.
Maruti Suzuki India’s stock price was Rs. 125 in 2003 that grew 8000% in 15 years to Rs. 10,000 in 2017.
So if you have bought 100 shares of Maruti Suzuki in 2003 at Rs. 12,500, your total investment corpus would have been increased to Rs. 10,00,000.
However, not every share grows like Maruti Suzuki but if you can understand the fundamentals of a company and you are sure that the company would rise in the future you can go with that stock.
#5. Stock Trading
Stock trading is buying and selling the same stocks on the same day with some profit margin. Let’s understand with an example.
Scenario – 1
You buy 100 Infosys shares at Rs. 1350 when the market opens at 9.15 am and after 2 hours, you sell the share at Rs. 1370 at 11.15 am.
Let’s do calculation.
You bought the shares for Rs. 1,35,000 the total selling amount is Rs. 1,37,000. The difference is Rs. 137000 – Rs.135000 = Rs. 2,000.
So you made a profit of Rs. 2,000 by trading stocks. You have to deduct the brokerage that you will pay to your broker against your trade.
What if you have just Rs. 20,000 to trade rather than Rs. 1,35,000.
Can you earn the same Rs. 2,000 profit as you have earned by investing Rs. 1,35,000?
Answer is YES.
How? Let’s see.
Your broker offers you Margin money to trade a particular share at large quantities. Margin is basically a loan that you borrow from your broker to trade large quantities of shares than you can afford with funds available.
Brokers often provide 2x, 5x or 10x margin that varies from stock to stock. High-value stocks have more margin leverage than other stocks.
For example, your broker may provide you 5x margin on SBI stock but he may provide only 2x margin on SBI Life share. because SBI stock has more market value than SBI Life shares.
Coming back to example.
If your broker offers you a 10x margin, you can get leverage of Rs. 2,00,000 with Rs. 20,000 in your trading account.
Now you can easily buy 100 stocks of Infosys at Rs. 1,350 per share by paying Rs. 1,35,000 from your margin money and earn Rs. 2,000 by selling at Rs. 1,370.
Means you earned Rs. 2000 profit by investing only Rs. 20,000.
(Note: These examples are just for reference purposes. The opposite can also happen, where the stock price decreases and you lose the money. Secondly, if you don’t return margin money, then you have to pay the interest charges on daily basis to your broker. So, you must have an understanding of market trends before starting stock trading. ).
Check out – Difference between stock market and mutual funds
How Do You Invest in the Stock Market?
You can invest in stock market in two ways –
- Short term – Stock trading
- Long term – Value investing
You need a clear understanding of technicalities of stock market, how different news affect a stock price, and which stock would behave in what way in upcoming day.
You use various indicators to like candlesticks, bollinger bands, fibonacci retracements to understand the right entry and exit time.
If you know the price of a share would go up you can buy that share when it is low or just start rising, and sell when you understand that its about to go down.
Similarly, you can sell a stock first, if you know its price would go down, and you can buy later when the price falls to a certain point, it’s called shorting or short selling.
In value investing you buy stocks for delivery. Stock delivery happens when you buy shares and hold them for more than a day, also known as equity delivery (equity and stock are the same thing).
Stocks bought in delivery are stored in your demat account opened with your broker. Some stock brokers don’t even charge any brokerage on equity delivery.
You can get links of detailed articles, like how to invest in the stock market, best discount brokers, and many more for a better understanding, from the “Resources” section.
- Difference between Demat and Trading accounts
- Best discount brokers in India
- How to invest in share market
- How to start trading in stock market
#1. Who Regulates Stock Markets in India?
SEBI (Securities and Exchange Board of India) is the regulatory authority in India that regulates the stock markets in India.
#2. Who are Stockbrokers?
Stock brokers are companies that provide you access to the stock market through their trading platforms. They open your demat and trading accounts which are necessary for the stock investment.
#3. Can the share market make you rich?
Yes. Only if you understand the market principles well. You know how to analyse the company fundamentals and believe in long term investments rather than making short term profits.
#4. Can I show share market loss in ITR?
Yes. If you have made a loss in your stock investments in the previous financial year, you can show loss in your ITR.
The Income Tax department allows you to carry forward your losses to the next 8 assessment years to set off against future capital gains.
#5. Where to invest in a share market in india?
You can invest stocks on any of the two stock exchanges – BSE and NSE.
You have to reach out to a broker for a demat and trading account to access stock exchanges.
Stock brokers examples are Zerodha, Upstox and 5paisa.
#6. Does share market work on Saturday?
No. Share market remains closed on Saturday and Sunday. Along with that, the share market also remains closed on Public Holidays.