Everyone has the brainpower to follow the stock market. If you made it through fifth grade math, you can do it.Peter Lynch
A stock market is a place that works exactly like a vegetable market.
Just like in the vegetable market, when you buy the vegetable, you look for the cheapest vendor along with the quality, many times we agree to pay a higher price for the quality vegetables. At the same time, the seller tries to sell at the maximum possible prices. A vegetable market
So to regulate transactions in vegetable prices, we have a vegetable market, where buyers and sellers come together to transact with each other.
Just on the same line, shares (Acts as vegetables) are offered by the companies (Vegetable sellers) to investors/traders (Vegetable buyers) for a price.
This is the primary function Stock Markets perform,
“They provide a platform for the exchange of shares between the companies and the buyers at the price decided by forces of supply & demand.”
Now let’s understand the following terms.
What is the stock market?
A stock market brings together the money savers (investors) & the money seekers (companies) in one place, wherein companies issue shares to the investors in exchange for their monies.
Companies use these monies to grow their businesses, and shares, entitle the investors to participate in the profits of the company by way of dividends.
So basically it serves two purposes:
- Raising of capital by the companies via issuance of shares* (Primary Market)
- Buying & selling of shares* for income generation (Secondary Market)
*Share – A share is an indivisible unit of capital, expressing the relationship between the company & the shareholder.
One doesn’t need to worry about the seller or the buyer for the shares in Stock markets, as these markets have a high number of participants making shares a highly liquid instrument and are highly regulated by regulatory boards.
For example, Securities and Exchanges Boards of India
Who regulates the stock market of India?
SEBI stands for the Securities & Exchange Board of India. A statutory regulatory body that regulates the Indian Capital Markets. It was founded on April 12, 1992, under the SEBI Act, 1992, and comes under Govt. of India. SEBI enforces the rules & regulations to ensure the smooth functioning of the Indian capital markets & to protect investors from financial frauds. It is because of SEBI, we can say, that one can deal in a stock market without being worried about the risk of default by the other party in a transaction.
After understanding the markets, about its regulators, let us move onto the next section.
What is a stock exchange?
Stock exchanges are the formal institutions that provide the necessary infrastructure to facilitate the transactions in shares. They lay down the regulations governing the transactions, which makes the dealings in the stock market secure with almost no operational risk. In India, right now there are 9 recognized stock exchanges. Out of these, NSE & BSE are leading the pack of the stock exchange.
People often use the terms stock market & stock exchange interchangeably. However, the latter is the subset of the former. All the nine stock exchanges in India forms a major part of the overall Indian stock market.
What is Index? What is Nifty and Sensex?
An Index is used to give information about the price movements of products in the financial, commodities or any other markets.
Financial indexes are constructed to measure price movements of stocks, bonds, T-bills and other forms of investments.
Stock market indexes are meant to capture the overall behavior of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value.
Stock market indexes are useful for a variety of reasons. Some of them are:
- They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt.
- They can be used as a standard against which to compare the performance of an equity fund.
- It is a lead indicator of the performance of the overall economy or a sector of the economy
- Stock indexes reflect highly up to date information
- Modern financial applications such as Index Funds, Index Futures, Index Options play an important role in financial investments and risk management. (Source: NSE)
In India, we have two main and popular stock market indexes:
BSE SENSEX: The term Sensex is a combination of two words: Sensitive & Index. Named by a stock market analyst Mr. Deepak Mohoni, Sensex is a flagship index of Bombay Stock exchange. It comprises of the 30 largest & most actively traded stocks on BSE, being representatives of various industrial sectors (like auto, pharma) of the Indian economy.
Nifty 50: The term Nifty has been coined by combining two words: National & Fifty. It is a stock index introduced by the national stock exchange on April 21, 1996. It comprises of 50 largest & most actively traded stock on NSE, being representatives of various industrial sectors (like auto, pharma) of the Indian economy.
Here we cover the basic definitions of the stock market, regulatory boards, exchanges, and indices.
The next chapters will take you to the definitions of the Demat account, how to open it, about brokers & their charges, and so on.
Before closing on our article, we want to answer which many of you might be curious about
“Why to invest in the stock market?”
“Stock market is the place where you can make your money work for you”
When you put your savings in the stock market, it has the potential to grow at a much higher rate than the interest you get on your savings account. We would say, when it comes to the rate of returns, you won’t find any other investment options better than equity in the long run.
Warren Buffet, the legendary stock market investor, has already made a fortune of whopping 71 Billion dollars solely by investing in the stock market till date.
However, remember the adage, higher the rewards, higher the risk. You carry more risk on your investment in the shares as compared to almost no risk when your money is in your savings bank account. You get rewarded by a higher rate of return for bearing that risk.
Following this, we complete our first chapter.