Fundamentals of Stock Market by Vikas Maurya
What is the Share Market?
Share Market is nothing but a shop from where you can Buy/Sale Shares of Different Companies.
Stock markets have existed for centuries. The oldest stock exchange was started in Belgium back in 1531. The brokers and moneylenders used to meet there to deal with the businesses. However, they never used actual stocks but traded in promissory notes and bonds. Later, the Amsterdam Stock Exchange was established in 1602 by the Dutch East India Company and regarded as the first real stock exchange.
Ever think of that, Why does the Share Market come into existence?
Stock Market Helps Companies raise Capital (Money).
There are different companies out there that want to expand their businesses because they require money. From these needs of money Investors come into the picture.
What are investors?
Investors are those who invest money in the company and get a share of profit if the company performs well.
Stock markets exist to serve the wider economy. It helps individuals earn a profit on their income when they invest in the stock market and allows firms to spread their risks and receive large rewards. It also enables the government to increase spending through the tax revenue they earn from corporations that trade on the stock exchange. The government uses the revenue to increase reinvestment and employment capacity.
The stock market plays an important role in the economy of a country in terms of spending and investment. Without stock markets, many countries would not be as developed as they are. Alongside this, it has helped individuals become wealthy and increases the overall standard of living in many economies.
- Stock market helps create personal wealth.
- It helps increase investment in the economy.
- Market serves as an indicator of the state of the economy.
- Stock Market also affects non-investors in the economy.
Why do we need Share Market?
The stock market gives opportunities to the businesses and the public to transfer capital and ownership in a controlled, secure and managed environment. In addition to providing a convenient way for companies to raise capital and for individuals to increase wealth, the stock market helps keep a check on corporate regulation and increases the economic growth and prosperity of the nation.
As we can see that is why Share Market exists. It is beneficial for everyone. Companies get Money to do business with low risk, the Government gets Tax, and as individuals we get some part of profit if we invest in profit based companies.
Do you know the conventional way of investment?
Gold Investment, Real Estate Investment (Land), Bank’s Fix Deposit, LIC, etc.
Every Investment strategy has some risk involved within it. In terms of return we can say that higher the risk more the return.
The conventional way of investment always gives low interest of return since it involves low risk.
Hence the Share Market and other investment Policy comes into the picture for middle class people like you and me.
Share Market is tricky to understand but if we understand the basics of it we can do long term investment and can earn more profit than conventional way of investment.
Every person invests their money in different ways so that it can help in a financially tough time or any medical emergency.
Many people invest money to save taxes and get profit.
So if everyone invests why not invest in Share Market?
People always think the Share Market is a Gamble but this is a myth. People have to understand it’s the same like other investments but it just involves higher risk but if we understand the basics we can take calculated risk and earn a good amount of money and achieve financial independence.
Some Famous Personality Who makes a huge amount of money from this Stock Market.
After seeing this Example We can say that you don’t require commerce degee OR finance background to ace the Share Market.
- Porinju Veliyath (Law)
- Ramesh Damani (HR)
- Radhakishan Damani (UG)
- Rakesh Jhunjhunwala(CA)
- Ramdeo Agarwal(CA)
- Parog Parekh(MS in Commerce)
- Vijay Kedia (Bcom)
Top 3 names are not related to Finance Background. Instead of that they have Law, HR, UG as their degree of study but they make unbelievable amounts of money in this share Market.
Note: Radhakishan Damani is the owner of DMart.
Myths of Stock Market
- The Stock Market is risky.
- You need financial background
- Small investors like you and me cannot make money from the stock market.
- Renowned companies will not give profits.
Famous Stock Brokers
- Angel Broking
And Many More……
My personal favorite is Zerodha.
There are 3 Accounts you require to start investing in the Stock Market.
- Saving Account: The Money in the bank to buy shares.
- Trading Account: To Trade the Share i.e. Buy/Sale.
- Demat Account: To hold the share.
For Example when you go on Amazon website to buy a cloth then you require an Amazon account to start the online shopping and add in the cart. Here After selecting which cloth to buy using your Bank account or Credit Card you will pay the money. After that when you receive the cloth then you will put that cloth in the cupboard.
Here in the above example cupboard acts as Demat account, Cloth acts as share and Amazon Account can be related with Trading Account.
We can have 2 or more Demat accounts.
There are 3 types or versions of the above 3 accounts.
Type 1: Demat Account, Saving Account, and Trading Account with 3 different Providers.
Type 2: Demat Account and Trading Account with one Provider. Saving Account with other Providers.
Type 3: Three in one Account. Demat Account, Saving Account, and Trading Account in one Account. This type of account is generally by a Bank which turns into a broker.
There can be many other variants but I will mention only the famous ones. Type 2 is the most popular.
Since Handling 3 different accounts is tedious that is Type 1 and in Type 3 Bank charges high brokerage for trading. So it is always advisable to go for Type 2 Option. (Just My opinion)
What is Market Time?
Market opens from Monday to Friday. No Trade on Saturday, Sunday and Public Holidays.
Note:-But on Laxmi Poojan market opens for 1–2 Hours in the evening which is known as Muhurat Trading.
Stock Market Opens from 9 AM to 4 PM.
9:00 to 9:15 — Pre Open Market Session
9:15 to 3:30 -Trading Time
3:30 to 4:00 -Brokers Time
4:00 to 9:00 -After Market Time
After Market Time is for those people who are not able to trade in market time that is from 4:00 to 9:00. (Working People like me and you). But all the orders will get executed when the market opens at 9:15 AM.
Pre Open Market Session is to absorb the heavy fluctuation in the market.
In After Market Time everyone places orders for stock but it will execute when the actual market opens. So if the market directly starts before executing these After Market Order then there is a huge fall or rise in the market could be seen at the start of market everyday.
Since there is a rule by SEBI if the market falls for 10% before 1PM then there is a halt in the market. If it falls by 20% then Market close for the day. Hence the Pre Open Market Session comes into the picture.
Brokers Time is tricky to explain first we have to understand short sells then we will understand the essence of Broker Time or Auction Time.
Because of the Pre Open Market Session market always opens at different prices of closing price.
Pre Open Market Session coins 2 terms
1) Gap Up Opening:- If Share price opens at price higher than previous day closing price. It is known as Gap Up Opening.
2) Gap Down Opening:- If Share price opens at price lower than previous day closing price. It is known as Gap Down Opening.
How to select the company for which we want to buy stocks?
Company has the different data available with it which is publicly available.
Like Turnover, Profit, Expenses, Revenue, etc. Which should be seen before selecting any company’s Stock.
If we say Turnover (Sales) a Top Line and Profit after Tax a Bottom Line. You always should compare these lines. If Bottom Line is higher or increasing in the current year compared to last year then go for the Stocks.
It is the general thumb rule for buying any stocks.
There are also 2 broad terminologies which are considered while selecting a stock of the company.
- Fundamental Analysis
- Technical Analysis
This is an advanced topic which we might touch upon after we understand the fundamentals of the Stock Market.
So let start Fundamentals of Stock Market by Understanding different basic terminology used while trading in stock market.
We have to understand in the stock market we just buy or sell the shares/stock.
One person/buyer buys the share and another person/Seller sells it. This is known as Trading.
How do we get profit by Trading?
Let take one Scenario Suppose Person A buys the one share at 100 Rs. and Sales it at the price of 120 Rs. Then the profit will be of 20 Rs.
As this there can be different use cases or scenarios in which buyer or seller can make profit.
There are 2 terms which you always listen to that are as follows.
LTCG (Long Term Capital Gain)
If a person holds a share for more than a year and earns a profit. This is for long term investors and involves low risk.
STCG (Short Term Capital Gain)
If a person holds a share less than a month or even for a single day and earns profit. This is for Traders or Intraday investors and it involves higher risk.
You always heard about dividends given by companies. It is nothing but return on investment in shares.
Previously Dividend and LTCG were Tax Free for individuals (subject to limits).
Limit of Dividend is 10 Lac. Below this Tax free but if we earn more than 10 Lac then we have to pay taxes at a rate of 10%.
Limit of LTCG is 1 Lac. Below this Tax free but if we earn more than 10 Lac then we have to pay taxes at a rate of 10%.
Note:-Up to 1 Lac profit there is no Tax but as Modi’s government Changes Taxes Policy also changes and declares different rates at which we have to pay tax if we earn profit.
Dividend always given by the company on the face value of Share.
What is Face Value?
The Original Price at which Promoter (Who Starts the Company) bought the share.
What is Share Certificates?
When we buy any share we get the Share Certificates which shows that you are the owner of that particular share.
Share Certificates consist of Name of Share Holder, Face Value, Number of Shares bought, and other Information.
What is Demat?
Demat also known as Dematerialized Security. Before technology all the shares existed in physical format and it was very hard to handle it. It leads to many scams also in Share Market.
Scam 1992 by Harshad Mehta is one example of Share Market.
When we convert physical shares into Electronic form we call it Demat form.
Most of the Shares are converted in Demat form but for today also many shares of the company exist in physical forms.
If we want to know how many shares of the company are in Demat form and how many in physical form we have to see the Annual Report of the Company.
What is the Annual Report of the Company?
It is the report which is released by the company every year after the financial year ends.
It consists of various information about the company it also shows all the info about Demat Shares and Physical Shares.
Face Value and List Price
The Face value is the initial price at which the promoter decides the prices of one share. It is also called Issue Price.
After the issue price of shares once shares get listed on stock market. It is known as listing price or premium shares.
Price Of Share > Face Value
Issue Price could be 2 Rs. and Listed price can be 299Rs. It will increase in a long time as the company performs well.
What is Stock Split?
This term should be understood by people like me and you. Since many of the time companies declare the stock split.
In stock split Face Value/Listed value decreases and Number of share increases.
In the Share split Number of shares increases proportionally.
Suppose original Face Value is 2 Rs and Person A has 5000 shares then its total value of share will be 2*5000=10000 Rs.
After the Stock Split Revised Face Value is 1 Rs. Then Person A will be having 10000 Shares and its total will be 1*10000= 10000 Rs.
If we see the share value is intact. Just Face value proportionally (inversely) changes with Number of Shares.
Why do companies do the Share Splits?
Company do the share split because it wants to decrease the price of share so that more people buy the share.
Tips:-Many of the time people don’t understand this concept and when they hear stock split they start selling their shares. Since they think that company is in loss hence the share price decreases. But this is totally wrong so be aware of the news if stock price decreases because of stock split. Instead of selling, just buy more shares and then you will get more profit. (Just My opinion).
Research the past with their future Plans. (While selecting any Company).
Money Control is one of the websites where you can go and see movement in the stock market.
There are 2 main Stock Exchanges in India.
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
There are different exchanges in India but only these 2 are the most famous one others stock exchanges have a very low number of companies listed.
So always buy shares of companies which are listed in BSE and NSE only.
Since this has more number of traders/Investors also.
We have to understand the concept of demand and supply.
Suppose we want to buy a share that is there is a demand of stock
So there should be someone who is selling that supply of stock.
This demand and supply will not meet if we have invested in the market which has a low number of companies listed and a low number of users. Hence always trade on BSE and NSE only.
Demand and Supply is the main reason which causes stock prices to differ at Stock Exchange.
There are many Point which we should understand before start Trading and Investing Stock Market.
Remember Investing in anything without understanding is gambling in life.