When you’re first starting out, the share market with all its numbers, tickers and big words can seem daunting. However, the market is designed to be as simple and intuitive as possible. As soon as you know what the basics are, it’s pretty easy to understand the rest of it. Let’s start from the very beginning.
What is the stock market?
The stock market is a place where stocks or small shares of companies are bought and sold. These are usually big companies that have previously ‘gone public’, which is to say, they’ve opened up their company to investments from the general public instead of a more selected group of investors.
The stock market works on the principle of supply and demand. The basic idea is this — as shares of a certain company come to be in high demand, prices go up, and as demand falls, so does price. Traders use these price fluctuations to buy and sell stocks accordingly. The golden rule of thumb is to always buy low and sell high.
The exchange, which is a very important part of the stock market, works to bring buyers and sellers together. If you want to buy 1 share of company XY at ₹100, you’re going to need someone to sell it to you at that price.
That’s where the exchange comes in. By coordinating and matching buyers and sellers, both of whom want to enter and exit (respectively) at a certain price, they make a transaction go through.
When that order goes through, the exchange charges both parties a nominal commission. That’s one of the ways it makes money.
Stock markets in India
The primary stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Both these exchanges have their own featured indices – the NIFTY 50 and the SENSEX respectively – which provide a snapshot of the overall market performance.
The stock market in India, just like other markets around the world, is not just affected by supply and demand. It is also influenced by a variety of other factors including economic indicators, corporate earnings, global market trends, and government policies.
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Market participants
There are several different entities that are required for a stock market to function at its best.
- Listed companies – These are the companies that issue shares to the public. These shares get traded on the exchanges.
- Retail investors – Retail investors are individuals who buy and sell stocks for their personal investment portfolios. Different retail investors have different goals. These range from beating inflation to saving for retirement and everything in between.
- Institutional investors – Institutional investors include mutual funds, pension funds, insurance companies, hedge funds, private equity funds, or venture capital funds. These are financial institutions that command large sums of money and invest with specific goals in mind.
For instance, while a pension fund might exist to provide retirement benefits with stability, a hedge fund might solely be focused on maximising profits. - Regulatory authorities – These are institutions like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) that regulate and oversee the securities markets in India. They primarily use their influence to regulate monetary policy and the banking system to ensure everything stays toasty.
- The media – These provide information to the public, including stock analysis, latest reports, and trends. Some also study and analyse market behaviour, contributing to larger market understanding.
Although there are certainly other moving parts in the picture, these are the main components that form the barebone structure of the stock market.
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Why do people invest in the share market?
The reason the stock market is so popular is because it provides people with the opportunity to make their money work for them. Investing in companies that show promise can grow their money by doing virtually nothing. It’s like riding a giant wave on a surfboard – all you have to do is stay standing.
Historically, The stock market has offered higher returns than other investment options like gold or other commodities. Over the past few decades, the Sensex and Nifty indices have shown compound annual growth rates (CAGR) of around 15-16%. An investor doubles their money every 5 years at that rate. Use this to crunch the numbers yourself.
Compounding also creates wealth. India is full of success stories of people who identified the right investments at the right time and never had to work for a single penny ever again. Read more here.
The role of stock exchanges in India
The stock exchange, however, doesn’t solely exist to make money. There are several other functions that it performs:
- Aids in capital formation – By allowing companies to go public and raise funds openly, it allows them to invest in expansion, research, development, infrastructure, and other business activities. By providing companies with capital, the stock market aids in the broader development of the private sector.
- Wealth creation – The stock market gives opportunities to individuals who want to create long-lasting wealth. This could be in the form of capital appreciation, dividend income, and potential returns that often exceed those of traditional investment vehicles. This wealth creation has a positive impact on individuals’ financial well-being and contributes to overall economic growth.
- Corporate governance – Companies that are public and are listed on the stock exchange have to go through stringent regulatory and reporting requirements, which promotes increased transparency and accountability. The stock market acts as a mechanism for monitoring companies’ financial performance, corporate governance practices, and adherence to regulations. This accountability benefits everyone in the long run.
- Job creation – Companies access increased capital through stock markets, enabling expansion, job creation, and economic growth. The success of companies translates into economic benefits for employees, suppliers, and various other stakeholders, which is, again good for everyone.
Conclusion
The stock markets are indeed fascinating, but they’re also risky. Even though companies go through strict regulatory measures to get themselves listed, most stocks out there are bad investments.
Hence, you shouldn’t buy every share you come across. That would be the definition of frivolous investing.
Instead, you must invest more time in studying what makes companies successful, how investors make huge investing decisions, and how to manage risk properly.
By learning the art of diversification, fundamental analysis, and portfolio management, you can hope to make it big in the stock markets. Until then, happy learning!
