Indian Stock Market: The Basics

To a new investor, the Indian Stock Market is like a huge unclimbed mountain- It is scary, but one cannot stop oneself from being attracted towards it. Every individual is always advised to practice saving and investing in the stock market from a very young age. However, the concept and the basic understanding of the stock market are not provided at the early stages of learning. It comes into the syllabus of only those students who have selected finance or banking as their field of interest after their 10th or 12th class of education. It thereby becomes challenging for someone outside this circle to venture into this vast world, and an uninformed decision may lead to huge losses. However, this also does not mean that the stock market is unexplored since it has proven to be very beneficial to those who invest smartly and after studying the market. It is, therefore, essential that every individual get basic knowledge about the stock market and its components.

The great Indian Stock Market has the two most important national stock exchanges, namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), and the only operating regional stock exchange is the Calcutta Stock Exchange (CSE). Stock exchanges are the places where securities are bought and sold. This activity involves buyers, sellers, and the middlemen- the brokers. The brokers are the link between the buyers and the sellers, and it is their job to facilitate buying the stock for the buyer. They always have to keep the investor informed about the situation in the stock market. The National Stock Exchange and the Bombay Stock Exchange are the two most traded on exchanges in India. Almost all significant companies trade on the BSE and NSE. They also have their indices to show the performance of companies daily. NSE has its flagship NIFTY50, and BSE has the SENSEX. These stock exchanges are all registered and regulated by the Securities Exchange Board of India (SEBI). The SEBI headquarters are in the Bandra-Kurla Complex (BKC) in Mumbai, Maharashtra. Both NSE and BSE are also located in BKC, Mumbai.

The market is divided into Primary Market and Secondary Market. When stocks are first introduced to be traded, it is done through a process called the Initial Public Offering (IPO). This IPO is conducted in the Primary market. After the Initial offer, the stocks are then traded on the Secondary market. Various components, like equity, debt, commodity, futures, and options, make up the stock market. The entire market is divided into sectors for the stocks to be classified into based on their primary activity of the business. They include the Information Technology sector, the Health Care sector, the Financial sector, the Consumer discretionary sector, the Consumer staples sector, the Communication services sector, the Industrial sector, the Energy sector, the Utilities sector, and the Real Estate and the Materials sector. All financial trading instruments have varying risk levels for every type of investor. An investment can have high risk- high return, low risk- low return -high risk- low return, low risk- high return, etc.

The following are the most popular and common trading instruments that are found in the stock market.

Indian Stock Market Basics

Stocks/Shares

The company offers a small portion of the company as shares to the investor. These shares are released with a particular face value depending on volatility and market factors. Shares are entitled to a dividend. There are two types of shares that can be traded, namely equity shares and preference shares. Equity shares are ownership shares. The holder of these shares becomes the company’s owner up to the extent of his shareholding; this also gives the shareholder the right to vote in the company’s meetings. Equity shareholders receive fluctuating dividends depending upon the market performance of the shares of the company. It carries high risk. Preference shares do not have voting rights except for matters that concern them, and their dividend is fixed, thereby making it less risky than equity shares. In the event of the winding-up of the company, the preference shareholders are given preference over the equity shareholders in repayment of the principal amount.

Mutual Funds

Mutual Funds are based on the idea that an investor wishing to put his finances into multiple sectors and wider ranges of the market will be able to pool his money and invest in mutual funds. A Mutual Fund investor is known as a unitholder. His finances are put into the hands of a fund manager, who then invests into the range of instruments that the investor benefits from.

Debentures

Debentures are debt instruments that are issued to get capital by way of debt for the company. Debentures have fixed interests, and they are a liability for the company. Debenture holders are creditors for the company, and they have a preference over shareholders for repayment of principal in case of winding up of the company.

It is essential to have a basic knowledge of the stock market and its workings to make informed and intelligent financial decisions. It helps to take a decisive step towards a stable future.

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This post was last updated on October 31st, 2021 at 02:51 pm

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