In this article, you are going to learn the basics of the stock market, the terminologies which you need to know before you get into stock market and many more.
What is a Stock?
Well, simply put, a stock represents ownership in a company. When you buy a stock, you’re essentially buying a small piece of that company.
Now, why would someone want to buy a stock? The primary reason is to make money. Investors buy stocks with the hope that the company will grow and become more valuable over time, allowing them to sell their shares at a higher price than what they paid for them.
But keep in mind, investing in stocks comes with risks. The value of a stock can go up or down based on various factors such as company performance, economic conditions, or market sentiment.
Now, let’s talk about the different types of stocks. There are two main categories:
Common Stocks
Common stocks are the most common type of stock that investors buy. When you hear people talking about stocks, they’re usually referring to common stocks. Owners of common stocks typically have voting rights in company decisions and may receive dividends if the company distributes profits to shareholders.
Preferred Stocks
Preferred stocks, on the other hand, often don’t come with voting rights, but they have a higher claim on assets and earnings compared to common stocks. This means that if the company goes bankrupt, preferred shareholders are paid before common shareholders.
As a shareholder, you are a partial owner of the underlying company and have a set of rights, which are called shareholder rights.
According to Investopedia, These are shareholder rights.
- Voting Power
- Ownership in a Portion of the company.
- The Right To transfer ownership
- Dividends
- Opportunity to inspect Corporate books and records.
- The right to sue for wrongful acts.
What are Stock Tickers?
Stock tickers which are also known as stock symbols or stock codes identify a publicly traded company on a stock exchange.
It is a unique identifier formed with the combination of letters and numbers to identify a particular company.
Let’s see a few examples of Stock Tickers
For Reliance Industries, the stock ticker or stock symbol for it is RELIANCE
For Bharti Airtel, the stock ticker is BHARTIARTL
If you notice, Reliance has its name itself as its stock ticker but for Airtel, the stock ticker skips a few letters. It means that the companies don’t need to have their name as stock tickers. It’s their personal choice on which name they want to identify their company with on the stock exchange.
It is used to identify and track the performance of a particular stock. Ticker symbols can be used to look up a stock’s price, historical performance, and other information on financial websites and platforms.
How is money made with Stocks?
There are several ways to make money with stocks:
1. Capital Gains
When you buy a stock at a lower price and sell it at a higher price, the difference is your capital gain.
Let’s say there’s a company called ABC and its current stock price is 100 rupees.
You bought 10 stocks of ABC company at the current price which is 100.
After a week the stock price of ABC company went up to 130 rupees.
Now, if you sell the 10 stocks of ABC at 130 rupees, you will get a profit of 300 rupees. That profit is called Capital Gain.
2. Dividend Income
Some stocks pay dividends, which are a portion of the company’s profits paid out to shareholders. Dividend income can provide a steady stream of cash flow. This will be decided by the board of directors of that company on how much percentage of shares should be distributed among shareholders. This is an indication to show how strong the company is and it builds more trust in the company among shareholders.
3. Stock Splits
A stock split is when a company increases the number of shares outstanding by issuing more shares to existing shareholders. This can lead to an increase in the price of the stock. You might have seen this scenario may once or twice a year where companies split their stock to create more liquidity in the market which eventually results in the price hike of a stock.
4. Trading
Some investors make money by buying and selling stocks quickly, also known as day trading. There are different ways of trading in the stock market like intraday trading, swing trading, positional trading, etc.
5. Short Selling
This is a more advanced strategy where an investor borrows shares of a stock they believe will decrease in value, sells the stock, and then buys it back at a lower price to return to the lender and make a profit on the difference.
It’s important to note that these methods carry risks and you should always invest with caution and do your research before investing.
What is Market Capitalization?
Market capitalization (market cap) is a measure of a company’s total value. It is calculated by multiplying the number of shares outstanding by the current market price of a single share.
Let’s say there’s a company called ABC and it has 2 lakh shares listed in the stock market at 100 rupees. Then the market capitalization of company ABC is
2,00,000 x 100 = 2,00,00,000 (2Cr)
Market capitalization can be used as a way to categorize companies into different size groups.
1. Large Cap Companies
These are the largest companies listed on the Indian stock market, with market capitalizations of over Rs. 20,000 crores. These companies are typically well-established and have a long track record of financial performance. Examples of large-cap companies in India include Tata Consultancy Services (TCS), Reliance Industries, and HDFC Bank.
2. Mid-Cap Companies
These are companies with market capitalizations between Rs. 5,000 crores and Rs. 20,000 crores. Examples of mid-cap companies in India include Bharat Forge, Bajaj Finserv, and Dr. Reddy’s Laboratories.
3. Small Cap Companies
These are companies with market capitalizations of less than Rs. 5,000 crores. These companies are often newer and may not have a long track record of financial performance. Examples of small-cap companies in India include V-Mart Retail, Shree Cements, and Emami.
In the Indian stock market, the division of companies into large cap, mid cap, and small cap is not as clear cut as in other markets, and different sources may use slightly different criteria.
In another way, if we consider the National Stock Exchange(NSE), the division of companies looks like this.
Nifty 50 Companies – Large Cap Companies
Nifty 50-250 companies – Mid-cap Companies
Nifty250+ companies – Small cap companies
It’s important to note that these categorizations are not fixed and the market capitalization of a company can change over time as its share price and the number of shares outstanding change.
Why Do Stock Prices Move?
Stock prices can move for a variety of reasons, both in the short-term and the long-term. Some of the main factors that can cause stock prices to move include:
1. Economic News and Data
Economic indicators such as gross domestic product (GDP), employment figures, and inflation can affect investor sentiment and cause stock prices to move.
2. Company-specific news
News about a particular company, such as earnings reports, product announcements, and management changes, can cause its stock price to move.
3. Industry news
News about an entire industry, such as changes in regulations or technological advancements, can affect the stock prices of companies within that industry.
4. Market sentiment
The overall mood of the market, as reflected by indicators such as the VIX index, can cause stock prices to move. When investors are feeling optimistic, stock prices tend to rise, and when they are feeling pessimistic, stock prices tend to fall.
5. Interest rates
Interest rate changes can affect stock prices in different ways, depending on the state of the economy and the sector of the company. Generally speaking, rising interest rates make borrowing more expensive, which can be negative for stocks, while falling interest rates make borrowing cheaper, which can be positive for stocks.
6. Global events
Political and global events such as war, natural disasters, and pandemics can also affect stock prices, as they can disrupt economic activity and change investor sentiment.
It’s important to note that stock prices are ultimately determined by supply and demand, and the factors that move stock prices reflect the changing perceptions of investors about a company’s future performance and the broader economic environment.
How Many Stock Exchanges Are There in India?
Majorly there are two stock exchanges in India where more transactions happen. They are
1. Bombay Stock Exchange(BSE)
The Bombay Stock Exchange (BSE) was established in 1875 and is the first stock exchange in India as well as the oldest in Asia. With a median trade speed of 6 microseconds, the BSE in Mumbai, India, is among the fastest stock exchanges in the world.
The BSE offers a platform for the trading of equity, debt instruments, and derivatives. It has over 5,800 listed companies and it is the world’s fastest stock exchange with a median trade speed of 6 microseconds. The exchange is also home to a number of indices, including the S&P BSE Sensex, which is considered to be a barometer of the Indian economy.
The index has a base value of 100 as of 1984 and it is calculated using free float market capitalization weighted methodology, where the level of the index reflects the total market value of all the stocks in the index relative to a particular base market capitalization value.
The BSE is also a member of the United Nations Sustainable Stock Exchanges initiative and it has been ranked as the world’s number one exchange in the “sustainability index” category in the Sustainalytics ranking. It is the first exchange in India and the second in the world to obtain such recognition.
2. National Stock Exchange(NSE)
The National Stock Exchange of India (NSE) is the leading stock exchange in India and the first demutualized electronic exchange in the country. It was established in 1992 and is headquartered in Mumbai. NSE offers a platform for trading in equity, derivatives, currency derivatives, and debt segments.
NSE operates on a fully automated screen-based trading system, which ensures fast and efficient execution of trades. NSE is known for its high-tech trading infrastructure and the use of advanced technologies such as co-location services, high-speed networks, and algorithmic trading.
NSE has several stock market indexes, including the Nifty 50 and the Nifty Next 50. The Nifty 50 is a market capitalization-weighted index that comprises 50 of the largest publicly traded companies in India, while the Nifty Next 50 is an index that comprises the next 50 large-cap companies after the Nifty 50. NSE also offers to trade in index options, stock options, and other derivatives products.
As of 2021, the National Stock Exchange of India (NSE) has around 1600 companies listed on it. This includes companies from various sectors such as banking, technology, healthcare, energy, and more. These companies represent a diverse range of industries and have varying market capitalizations.
NSE has international connectivity with exchanges in Singapore, Dubai, and other countries through its subsidiary NSE International Financial Services Limited (NSE IFSC).
It also provides various services such as index services, market data services, and other technological services to market participants and other stakeholders in the Indian capital market. NSE is also a leading provider of financial education in India, and it offers various certification programs and online courses to help individuals learn about the stock market and investing.