Beginners guide to Stock Market

This Beginners guide on Stock Market will walk you through step by step how to start investing without feeling completely overwhelmed.

Lets start with understanding the term Investment.

What is Investing?

Investment means purchase of something with an expectation of Profit from it in future.

Example : You invest in a Business, Real Estate, Stocks, Mutual Fund or Lend money in exchange of Interest as profit.

Stock Market: Meaning and Basics

  • Stock market is an arrangement where shares of companies are bought and sold by its participants. The participants can be investors which are investing for long term with capital appreciation motive and traders which are buying and selling on same day to earn profits with small price changes.

Main Stock Exchanges

  • In India there are two exchanges BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) where majority of trading of stock happens. The buyers and sellers have to place orders through brokers who have to place them online on behalf of clients.
  • BSE exists since 1875 whereas NSE was founded in 1992 and started trading in 1994. However, both exchanges follow the same trading mechanism, trading hours, settlement process, etc.
  • Almost all the significant firms of India are listed on both the exchanges.

Stock market Settlement Cycle

  • The settlement cycle for stocks is of T+2 days (T refers to Transaction) example an investor buys shares of IRCTC on Monday the broker will debit the investors account for total cost of buying immediately but the participants receives shares/earnings & becomes the shareholder in IRCTC’s records on Wednesday (weekends and public holidays are not included in day count).

Stock Market Terminology

Before going further please read the common and basic terms which are used and will be used further in this guide for stock market Stock Market Terminology

Stock Market Terminology

Stock Market Trading Mechanism

Trading platform is completely electronic driven by super computers, buying and selling orders matching is done by computer so that buyers and sellers remains anonymous and emphasis transparency in the stock market system. All orders needs to be passed through brokers, many of them have provided trading apps or online platforms for trading and placing orders directly to stock markets.

Stock Market Trading Hours & Days

Complete trading on stock exchange in India takes place between 9:15 AM to 3:30 PM IST (GMT+5.50 Hours) between Monday to Friday.

Share Delivery

With effect from 1st April 2019 all shares must be held in dematerialized form and each exchange has its own clearing house which assumes all settlement risk by serving as a central counter party.

Market Indexes

The two prominent Indian market indexes are SENSEX and NIFTY. SENSEX is the oldest market index for equities which includes shares of 30 firms listed on the BSE, which represent about 45% of the index’s free-float market capitalization. It was created in 1986 and provides time series data from April 1979, onward.

Another index is the Standard and Poor’s CNX Nifty; it includes 50 shares listed on the NSE, which represent about 62% of its free-float market capitalization. It was created in 1996.

Market Regulator

The market regulator, supervisor and developer is Securities Exchange Board of India (SEBI) which was formed in 1992 which lays down rules in market for best practices to be followed and levies penalty in case of breach in its rules and regulations.

Who can Invest in India in Stock Market?

 Not only Indian nationals but foreign nationals can also invest in Indian Stock market. Indian Nationals needs to open a trading account with a brokerage house and start trading in stock market which is explained below in Demat & Trading accounts heading.

Foreign Investment in India / Foreign Institutional investors

In 1990 India started allowing outside investments. Foreign Investments can be classified into 2 types : Foreign direct Investment (FDI) and foreign portfolio investment (FPI) All investments in which an investor takes part in the day-to-day management and operations of the company are treated as FDI, whereas investments in shares without any control over management and operations are treated as FPI.

For making portfolio investment in India one should be registered either as a foreign institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both types of registrations are granted by SEBI. Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, and asset management companies etc. At present, India does not allow foreign individuals to invest directly in its stock market. However, high-net-worth individuals (those with a net worth of at least US$50 million) can be registered as sub-accounts of an FII.

FII and their sub accounts can invest directly into any stock listed on any stock exchanges .

In case FII wants to invest in unlisted shares he can do so but subject to approval of reserve bank of india (RBI) which will approve the price.

FII other than debt only FII must invest a minimum of 70% of their investment in equity and balance 30% can be invested in debt.

Restrictions on foreign investment

There are several restrictions imposed by government of India with different ceilings on investment in different sort of sectors which at present varies from 25-100%.

How to invest in Stock Market?

Demat and Trading Accounts

  • Select a Stock Broker
  • Open a Demat and Trading account.
  • Get your Demat and Bank account linked.

Now, you are ready to go for investment in stock market.

But before start of your investment, check and ask yourself following questions:

  • What are your life goals
  • Do you know about word financial assets
  • Do you want to invest regularly

Types of Stocks to invest in Stock Market

On the basis of market capitalization stocks can be divided into i) Large Cap Stocks ii) Mid cap Stocks iii) small cap stocks.

Here Market capitalization stands for = Share price * No of shares outstanding

  • Large cap stocks

These companies are well established and have a strong presence in the market. Companies like Reliance, TCS, Infosys and Wipro fall under this category. Investing in these companies are less risky.

  • Mid cap stocks

These companies have the potential to grow big and are relatively riskier compared to the large cap companies.

  • Small cap stocks

Start ups fall under this category and are highly risky compared to the above two. On the upside, they can become a runaway success overnight.

Financial instruments traded in Stock market

  • Equity Shares
  • Mutual funds
  • Bonds
  • Derivatives

Emerging & fast developing countries like India are fast becoming engines for future growth and investment hub. Currently, only a very low percentage of the household savings of Indians are invested in the domestic stock market, while growing at 6%-8% p.a. we might see more money joining the race with the leadership of PM Modi. Maybe it’s the right time for outside investors to seriously think about joining the India which has already taken steps to become a tax heaven and lowest taxed nation in southeast Asia.

We further advise you to take expert advice before investing in Stock market and doing your own study and research before trusting on anyone’s advice.

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