Do you know the answer?
Most of us tend to feel that we know answer of above question. The most common answer is Stock Markets are the place where we sell and buy shares. This answer is perfectly fine there is no issue with it.
But in this article we will go into more details of this simple answer. Understanding the answer of this question will help you immensely. The best part is I will not use any technical or business jargon or heavy words. So lets get started without wasting any time.
What is a Share?
Lets understand it with a real life example. You want to start a business of selling mangoes. You do not have sufficient money. So you borrowed 100 INR from your friend. With your 100 INR and 100 INR from your friend you bought 20 mangoes (of 10 INR each).
Instead of asking for 100 INR your friend said I want 50% of profit or loss you make in business.Your friend only gave you money he will not go and sell mangoes. You will take care of the business part selling and buying mangoes.
So if you are able to sell mangoes at higher price then you friend will earn money. If you sell mangoes at lower price your friend will lose money. So the profit and loss of your friend depends on you. He is taking risk by trusting your business knowledge.
With 100 INR you own 10 mangoes. If we use term share for mango then for 100 INR you have 10 shares. Your profit and loss depends on price of mangoes. If the price increase that is if they are sold for 12 INR each then you make 20 INR profit. If they are sold for less then you make loss.
So shares are part of your ownership in a company. If the company performs better then prices of shares rise and you make profit. If it performs poorly then prices fell and you make loss. This is the simplest yet fundamental principle of market.
Understanding NSE and BSE
Every country has Exchanges where shares of companies are traded. It is just like vegetable market in your locality. Every locality has a market. We often say that locality has bigger market. It is bigger because there are too many sellers having different kind of vegetables.
The vegetable markets where things are cheaper and of quality attract most of the buyers. In fact buyers from near by also visit the market and but things from there. Similarly Stock markets with good quality companies which can give more profit than others attract more buyers.
These big markets are place where most of the trading takes place. Every country has one or two major exchanges.In India there are two popular exchanges called NSE and BSE. NSE stands for National Stock Exchange and BSE stands for Bombay Stock Exchange. Most of the companies are traded on NSE and BSE.
Note it may be the case that one company is listed on NSE but not on BSE and vice versa. Much like one vegetable seller may have shop in one market or more.
What is a Stock?
Before understanding stock market it is better to understand the concept of Stock. As of previous example vegetable vendors set of shops in different markets. Similarly companies can set themselves in various exchanges.
The process of setting one company in a exchange so that shares of company are bought and sold in that particular exchange is called IPO. We will discuss IPO later in the guide. We will use term listed if a company can be sold or bought on a exchange like NSE and BSE.
Now every company which can be sold or bought on exchanges have unique code assigned to them. These unique codes help you identify the companies. Most of the time Exchanges also show detailed name of the company so that you can easily recognize it.
Now every company listed on NSE and BSE or for that matter any exchange is called Stock. You will use term like I bought this stock or that stock. You can think of stocks as Companies. The shares you buy are the ownership you are taking in that company.
Some key points
Now that you have fair idea of Stock market lets understand some key terms and entities we will use regularly in next articles. These entities help Stock market function. You may have heard these terms. Here we will provide brief details of these terms so that you are clear about them.
Note most of these terms are for academic purpose only. You just have to know then so that you do not get confused or taken back if you hear in future. They do not have anything to with your success as a investor.
SEBI
SEBI is regulatory body. You can think of SEBI as RBI or Stock Market. It regulates and checks if there is any wrong or malicious trade on any of the exchanges. It keeps the place healthy.
You will not have to interact with SEBI in your trading journey.I have not yet interacted with them for any matter. But in case you find anything suspicious then you can get in touch with them.
NIFTY
If you follow news then you may have heard about Nifty. Nifty is not a separate body like SEBI. You can think of Nifty as collection of 50 top stocks. These top stocks together form Nifty. The rise and fall of Nifty value is sum total of rise and fall of these 50 stocks taken together.
Since these are top 50 stocks of Indian market the rise and fall of these stocks govern market sentiment. Lets understand this with an example. For example if 30 of the stocks rise by 1 point and 20 stocks decrease by 1 point then Nifty will rise by 10 points.
Note things are not as simple as I pointed above. But the basic principle is the same. We will cover Nifty and other sectors in great details later in this guide.
Sensex
What we discussed above about Nifty applies for Sensex as well. Nifty is on NSE stock exchange and Sensex is on BSE stock exchange. The rise and fall principle of Nifty and Sensex are same.
These two reflect mood of investors on a large.If both of them fall then market sentiment is down and if both of them are up then market sentiment is high.
Bear and Bull
You will hear these two terms very much. If you follow news channel specially business news you will hear these two terms. People often tend to complicate things very much. New comers get confused hearing these terms.
It makes their entry barrier high.In market one person is buyer and one person is seller. In real market you see the person face to face. For example one vegetable shop owner may give you tomato at 50 INR per kg and other may give you at 45 per kg.
In stock market it is same. But you do not see the people. Also the number of people is also large.It is not a transaction between two people. There are many you are buying and selling. You are one of them.
Bears are people who think market will go down or in other words prices will decrease. Bulls are people who think market will go up or in other words prices will increase. Stock market is battle field of these two people.
The prices increase or decrease depending upon who wins the battle. If bears win the battle the prices will go down. If bulls win the battle the prices will go up. You are either on one side or the other side always.
Demat account
At the beginning of article I discussed stock market is different than normal market. You need demat account to buy and sell shares on NSE and BSE. Demat account are must. You can not transact on stock exchanges without Demat account.
We will dedicate entire section on Demat account and compare each Demat account and facilities given by them. We will help you select the best Demat account as well.As of now you can think of Demat account as Bank account.
In bank account you have money and in demat account you have shares. As of now I will not encourage you to open a account. You can read the next few chapters and then decide to open an account.
I have written separate article on Demat Accounts. You can read that article for more details on this topic.
Next Steps
Now that you have basic understanding of the market in the next section we will discuss about reasons you should invest in market. Note I will present pros and cons in next chapter and depending upon them you can decide if you want to invest in market or not.
The next chapter will help you decide if you want to invest in market or not. So I will recommend you read next couple of chapters before making a mind. It is not recommended to open an account for sake of it. You should weigh in the pros and cons before making a decision.