You have always heard about the stock market—maybe a friend casually mentioned a great return on an investment, or you saw headlines about the Nifty or Sensex hitting new highs. Curiosity takes over, and you start wondering: What is the stock market, and how does it work? You are not alone in wanting to understand these stocks and shares. Let’s address your query in detail.
What Is the Stock Market?
The stock market, with its rich history of stock exchange, is where you, as an investor, can buy and sell company shares. When companies need funds to grow or pay off debt, they go public, offering shares to investors like you. In return, you own a part of the company and share in its journey, whether it succeeds or faces challenges.
The stock market is classified into primary and secondary markets. The primary market deals with new share issuance, made available to investors for the first time under Initial Public Offerings (IPOs). This is how companies initially raise funds directly from investors.
The secondary market is a place where existing shares are traded among investors. This market provides liquidity and enables investors to buy and sell shares through the stock market app without affecting the company’s capital.
How Does the Share Market Work In India?
How does the Primary Stock Market Work?
- Step 1: The company aiming to go public engages a group of underwriters or investment banks to assist with the IPO. These experts review the company’s finances, assets, and liabilities and develop a strategy to meet its financial requirements.
- Step 2: The next step involves drafting the Red Herring Prospectus (DRHP). This comprehensive document outlines the company’s business activities, financial details, and the reasons for seeking funds through the IPO. The DRHP is subsequently submitted to the SEBI for approval.
- Step 3: Following SEBI’s approval, the company files its offer documents with the stock exchanges where it intends to list its shares.
- Step 5: The next step is setting the price for the IPO shares. This is done through a method known as book building. In this process, the company and its underwriters establish a price range, and investors place bids within it. The final price is then set according to the level of demand and the bids received.
- Step 7: The IPO opens for bidding after the price is set. During the bidding window, investors can submit bids within the established price range. Once the bidding period closes, shares are allocated to investors according to the bids received.
- Step 8: The final phase of the IPO process is to list the shares on stock exchanges. Once listed, they are eligible for trading in the secondary market.
How does the Secondary Stock Market Work?
The secondary market works in the following manner.
- Step 1: As a trader, you place an order to buy or sell stocks through a stocks app. This order can be executed at the current market price (market order) or a predefined price (limit order).
- Step 2: The order you have placed will be matched on the electronic exchange. Once matched, the share transfer occurs from the seller’s Demat account to the buyer’s Demat account.
- Step 3: The settlement process involves updating the ownership records and ensuring that the buyer has paid for the shares and the seller has delivered them. This usually takes two business days (T+2).
What is a Stock Exchange?
The stock exchange is like a marketplace where these trades happen. In India, the two key stock exchanges are:
- BSE (Bombay Stock Exchange): Founded in 1875, BSE is Asia’s oldest stock exchange and one of the largest in the world. It is known for its benchmark index, the Sensex, which tracks the top 30 companies listed on the exchange.
- NSE (National Stock Exchange): Established in 1992, it is the largest exchange in India with respect to trading volume. Its primary index is the Nifty 50, which tracks the top 50 companies on the exchange.
How to Invest in the Share Market?
Here is the answer to ‘How can you invest in the stock market:’
- Direct Investment: It involves buying shares of companies listed on the stock exchange. To start trading, you can open Demat account with a registered stockbroker.
- Mutual Funds: They invest in various financial instruments by pooling money from various investors. Managed by experts, they offer a convenient option for those seeking a hands-off investment approach. Mutual funds can either be actively managed or follow a passive strategy like index funds.
- Exchange-traded funds: ETFs are similar to mutual funds. They track specific indices, sectors, commodities, or other assets, providing flexibility to investors.
- Initial Public Offerings (IPOs): When you invest in IPOs, you are buying shares in a company as it becomes publicly traded for the first time. This can be a unique opportunity to invest early, but it involves risk, as the company’s future success is not guaranteed.
- Derivatives (Futures and Options): Derivatives derive their worth from underlying assets such as stocks, indices, or commodities. In the stock market, futures and options are widely traded derivatives and are used for risk management or speculation of price changes.
Investment in the Stock Market: Key Strategies
- Diversify: Spread your capital across different sectors and asset classes to minimise risk. Diversifying reduces the chances of losing money if one stock or sector performs poorly.
- Invest for the Long Term: Consider long-term gains rather than quick profits. Historically, the stock market has given better returns over time, so staying patient helps you ride out short-term market volatility.
- Understand the Market Cycles: The stock market operates in cycles, with periods of growth (bull markets) and decline (bear markets). Recognising these patterns can help you make informed decisions about buying and selling.
- Conduct Thorough Research: Before buying any stock, thoroughly research the company’s financial health, market position, and growth prospects. Analysing a company’s fundamentals helps you make informed decisions rather than speculating.
- Avoid Emotional Trading: Avoid letting emotions like fear or greed drive your investment decisions. Emotional trading can lead to poor choices, such as selling in panic during downturns or buying at market highs.
- Use Stop-Loss Orders: A stop-loss order helps protect your investments by automatically selling a stock when it reaches a certain price. This strategy limits your losses and prevents further downside during volatile markets.
- Reinvest Dividends: Reinvesting dividends allows you to compound your gains over time. Rather than taking the cash payout, you can buy more shares, significantly boosting your returns in the long run.
- Monitor Economic Indicators: Pay attention to key economic indicators like inflation, interest rates, and employment data. These factors impact the stock market, and knowing them helps you anticipate potential market shifts.
Conclusion
The stock market in India offers an exciting opportunity for wealth creation, but it requires knowledge, discipline, and a clear strategy. By understanding the basics—how stock exchanges work, the ways to invest in the market, and what strategies you can employ—you are better equipped to make informed decisions.
Whether interested in day trading or long-term investment, start your journey today with HDFC Sky.