Stock Market basics for beginners
Stock Market basics for beginners
Let us start this stock market course with Stock Market basics for beginners.
This Chapter covers few basic words and terms you keep hearing by most stock market veterans as well as beginners. I am deliberately not including the Fundamental analysis and investment ratios jargons in this chapter which will be dealt later and sticking only to basic words which investors talk in general speaking.
In this Chapter you will learn
- What are Shares in a company
- What is Stock market exchange NSE and BSE
- Important Financial intermediaries of stock market
- Demat and Trading account
- What is Sensex and Nifty
- Bull Market vs Bear Market
- Small Cap vs Mid Cap vs Large Cap Stocks
- Stock Trading vs Stock Investing
- CNC vs MIS
- Fundamental and Technical analysis
- What is Mutual Fund
- Few other Stock market investing and trading jargons
Value Investing Growth Investing Stock Market Course Financial Independence
So what are shares in a company mean ? What are the benefits of buying a share or stock ?
In very simple terms share is a like a partnership in a company if you buy and hold a company share you are called the shareholder and you hold part ownership of the company. The company in turn needs to inform all shareholders about company decisions and reports since you are an actual owner of a small part of the company.
Why company issues share ?
Companies issue share with their IPO listing so that they can get money from investors like us. This money in turn helps the company to grow and obviously the shareholder gets benefit of dividend as well as rising price of share if the company is doing good. We have discussed this in details at why share price rise and fall ?
Shareholders are classified into different categories depending on who is holding companies shares like
- Promoters - Owners and related investors who started, running or are affiliated with the company.
- FII shareholders - Foreign institutional investor
- DII shareholders - Domestic institutional investors like Mutual Fund groups, LIC etc.
- Retails Share holders - That is probably you and me.
Listed companies who issue shares are required to detail the Share holding details called Share holding Pattern (SHP) intermittently to the Stock Exchange. Stock Exchange in turn make these Share holding pattern details on their website.
Shares are classified in to different types depending upon the benefits they have to the shareholder like
- Preference shares
- Differential Voting Right (DVR) shares
- Employee stock ownership plan (ESOP) shares
- Equity shares
Lets see now what is Stock Market exchange NSE and BSE
So once we know what are shares in a company, let us understand what is stock exchange and what does NSE and BSE stand for ?
BSE or Bombay stock exchange was set up in 1875 and was the first stock exchange in Asia. It is located in Mumbai and boasts of fastest online trading speed of 6 microseconds. At the time of writing there were nearly 4056 actively traded companies at BSE. The 1992 scam in Bombay Stock exchange made investors loose trust in investing. This not only resulted in formation of SEBI but also NSE.
NSE or National stock exchange was established in 1992 and is presently fourth largest stock exchange by trade volume. NSE too is located at mumbai and boasts being the first stock exchange to start online trading. At the time of writing there were nearly 1738 actively traded companies at NSE.
Once you want to buy or sell a share of a listed company you cannot do that yourself ! These transaction of shares is done through Stock brokers at stock exchange. Stock Exchange facilitates transaction of stocks and connects a buyer and seller. Stock exchange allows these investors to transact through a stock broker.
While few years back BSE and NSE had different charges for transaction at their respective Stock Exchange, these days both charge almost same nominal fees. However, you can sometimes get good advantage, specially if trading in large quantity, by checking any difference of trading price at each Stock Exchange. Sometime you get few rupees difference which would certainly cover your broker charges and other tax expenses !
Stock exchange and stock brokers are not the only ones involved in a transaction, there are more intermediaries too. Lets move ahead in our stock market course to understand them at Financial intermediaries of stock market.
Let us discuss some important financial intermediaries of stock market now.
Yes YOU, without you, the investors, no investment will start. The investor in itself is an important intermediary of a stock market. Some one like you and me want to sell a share and at the same moment someone wants to buy that particular share. However you and me cannot do any transaction directly and you need a stock broker for any business with Stock Exchange like NSE and BSE .
2. Stock Broker
Stock Broker is a corporate entity registered directly as a trading member by stock exchange. Stock brokers provide you trading account and help you with your basic stock market documentation. Initial days retail investor used to call a stock broker on telephone for buying and selling of shares. Obviously this resulted in delay of transaction. These days it is done online instantly. Most stock brokers these days provide online trading platform for instant transaction orders of buy and sell.
3. Depository and depository Participants
In olden days shares used to be transferred in paper format. This paper served as a proof that you held a certain amount of shares of a company. Later this format was changed to digital format or dematerialized format. For holding a dematerialized share you need a demat account. We have detailed about Trading account and Demat account in another post. These demat accounts are provided by Depositories like NSDL and CDSL. When you open a trading account with any stock broker they will ask your preference which depository you want to open account with ?
Technically both CDSL and NSDL operate as per guidelines of SEBI and their charges are also same. Since your stock broker aka depository participants helps you in opening of demat account, they may add their service charge over the charges While NSDL and CDSL charges are same but different brokers charge different demat charges to the customer e.g. Zerodha, even though does not charge any brokerage it does charge Rs 8 per stock (Total Shares of 1 company) over the DP Charge of 5.5 Rs everytime you sell a stock from your Demat account.
SEBI or stock exchange board of India was found in 1992 by the securities and exchange board of India act 1992. SEBI has regulatory authority and sets rules and regulations for various intermediaries in Indian stock market. Their function is defined as "it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market". So if you have any grievance against any of the financial intermediary of the stock market and they are not listening to your grievance you can always complain to SEBI through their SCORE or (SEBI COmplaints REdress System)
5. Clearing Corporations
An investor rarely hears about the clearing corporations but it is these organizations which improves the transaction settlement process e.g. match debit and credit process.
National Security Clearing Corporation Ltd (NSSCL) is clearing corporation of NSE and Indian Clearing Corporation Ltd (ICCL) is clearing corporation of BSE. You can check details from below links
6. Your Bank
Obviously most online platform links your bank account not only for transaction charges and cash transfer but also for keeping your holding companies informed for correct dividend payout.
There may be even more financial intermediaries of stock market and you can get the details of most Financial Intermediaries at SEBI Website by following https://www.sebi.gov.in/intermediaries.html .
To keep this stock market course simple, we are not getting into too much technicalities of these intermediaries, so lets understand basics of Demat and Trading Account now.
Once you decide to invest in stock market you will approach a stock broker for opening a Demat and Trading account.
What is a trading account ?
Trading account is an account provided by a stock broker for share trading. Most stock brokers, if not all, provide an Internet or Online trading account for easier buying and selling of Stocks. Generally your stock broker after completing formal requirements like KYC and linking bank account details will give you a user id and password.
Using this user id and password you can login to transact in your preferred stocks.
For Intra-day (buying and selling same day) and F&O (Future and Options) trading you do not need a demat account, however if you want delivery of your shares e.g. buying today and selling in future days, you need a demat account to hold your Shares. This stock market course does not detail about Intra-day trading or F&O .
What is a demat account ?
As told before in Financial intermediaries of stock market, Demat account or de-materialized account is where you keep your delivered shares. These days you cannot keep shares in paper format and Demat accounts are provided by depositories like CDSL and NSDL to hold them in digital format. Most stock brokers will link your trading account with bank account as well as the Demat account seamlessly while opening your trading and de-mat account. Thus, stock brokers themselves are referred as depository participants.
Most stock brokers will require you to sign a Power of Attorney (POA) so that they can SELL stocks from your demat account, on your behalf at any Stock Exchange like NSE and BSE.
Normal process of Buying and Selling of Shares using online Trading account
- Most discount brokers, wants you to first transfer funds from your bank account to them using online trading account before buying shares of a company.
- Once fund is transferred, you can go ahead and order a quantity of share at your required price through the trading account.
- Once you BUY the stock for delivery (Please refer CNC vs MIS), that day is called the trading day (T day).
- The stock gets delivered into your Demat account in T plus 2 days.
- Mostly you can SELL the stock only after the stock is in your demat account. e.g. after T plus 2 days.
- Once you SELL any stock it gets out of your Demat account in T plus 1 days.
- While the money received on selling gets displayed in your trading account immediately, it takes T plus 2 days to get to your bank account.
Many discount brokers want you to manually request for transfer of funds to your bank account. SEBI has directed Stock Brokers to clear the funds automatically on quarterly or annual basis. These days many stock brokers ask your fund clearing requirement while registering you for a new trading account with them.
CDSL AND NSDL both provide you a separate online interface on their website or as an app to track your holding. After the Karvy demat scam it is always advisable to cross check that your trading account stock portfolio matches with your demat account holding.
Let us now check a jargon you must have heard so many times Sensex and Nifty.
Whenever you hear people talking about stock Market in general terms like "stock market crashed today", "stock market is in the Bull run", "Bull Market vs Bear Market", what they are actually referring is BSE SENSEX and NSE NIFTY !
What is sensex and Nifty ?
Sensex and Nifty are two different indexes created by the two Indian stock market exchange BSE and NSE. Each stock market has its own way of creating its index, SENSEX (Stock Exchange Sensitive Index) created by BSE consists of 30 stocks in various industries while NIFTY (National Stock Exchange Fifty) created by NSE consists of 50 stocks in various industry.
Since each company in index is considered one of the leaders in its own industry, strangely, index is thus related to economy ! If the company or index is rising people consider this as economy of India rising and vice versa.
Why was Sensex and Nifty created ?
At the time of writing, BSE had more than 4000 and NSE more than 1700 actively traded shares of company. Calculating the progress of each stock daily to know the movement and performance of the stock market will not only be time consuming but impractical.
So each stock exchange decided their own unique way to pick some of listed companies as a representative from its respective industries.
Below table gives Nifty and Sensex index constituents.
|1||Asian Paints Ltd||INE021A01026||YES||YES|
|2||Axis Bank Ltd||INE238A01034||YES||YES|
|3||Bajaj Finance Ltd||INE296A01024||YES||YES|
|4||Bajaj Finserv Ltd||INE918I01018||YES||YES|
|5||Bharti Airtel Ltd||INE397D01024||YES||YES|
|6||Dr Reddy's Laboratories Ltd||INE089A01023||YES||YES|
|7||HCL Technologies Ltd||INE860A01027||YES||YES|
|8||HDFC Bank Ltd||INE040A01034||YES||YES|
|9||Hindustan Unilever Ltd||INE030A01027||YES||YES|
|10||Housing Development Finance Corporation||INE001A01036||YES||YES|
|11||ICICI Bank Ltd||INE090A01021||YES||YES|
|12||IndusInd Bank Ltd||INE095A01012||YES||YES|
|15||Kotak Mahindra Bank Ltd||INE237A01028||YES||YES|
|16||Larsen & Toubro Ltd||INE018A01030||YES||YES|
|17||Mahindra & Mahindra Ltd||INE101A01026||YES||YES|
|18||Maruti Suzuki India Ltd||INE585B01010||YES||YES|
|19||Nestle India Ltd||INE239A01016||YES||YES|
|21||Power Grid Corp of India Ltd||INE752E01010||YES||YES|
|22||Reliance Industries Ltd||INE002A01018||YES||YES|
|23||State Bank of India||INE062A01020||YES||YES|
|24||Sun Pharmaceutical Industries Ltd||INE044A01036||YES||YES|
|25||Tata Consultancy Services Ltd||INE467B01029||YES||YES|
|26||Tata Steel Ltd||INE081A01012||YES||YES|
|27||Tech Mahindra Ltd||INE669C01036||YES||YES|
|28||Titan Co Ltd||INE280A01028||YES||YES|
|29||UltraTech Cement Ltd||INE481G01011||YES||YES|
|33||Bharat Petroleum Corporation Limited||INE029A01011||NO||YES|
|43||Indian Oil Corporation||INE242A01010||NO||YES|
|46||SBI Life Insurance||INE123W01016||NO||YES|
|48||TATA Consumer Products||INE192A01025||NO||YES|
There are many experts who predict where the index will go in coming years. I can assure you, after 15 years of investing and learning, I think nobody can tell you where the Sensex and NIFTY will be accurately, it is just a wild guess told mostly to create a sense of authority !
Whenever people talk in general about Bull market or bear market what they mean are 2 things
- Stock market or Sensex and Nifty Trend and
- Investor sentiment or faith in the stock market
When stock market e.g. Sensex or Nifty is rising with most stock prices rising we call it a BULL market. The investor sentiments is positive and they have faith in the stock market and economy in general. They are BULLISH.
The term is derived from bulls throwing their opponents UP by their horn !
What is bear market ?
When stock market is falling and the prices of most shares of company are falling, it is generally called the beer market. The investor sentiments is negative and they lack faith in stock market and are afraid in investing during such times. Investors are BEARISH.
The term is derived from bears bringing DOWN their opponents by striking claws downwards !
In very simple terms Investor sentiment is positive in a bull market and mostly shares are over-valued and in a bear market people are fearful and you may get good bargains with many shares being undervalued. Its GREED vs FEAR !
In 2017 SEBI defined rules to classify companies according to their market capitalisation. Listed companies were classified in three different categories
- Large cap
- Midcap and
Market capitalisation means total number of outstanding shares trading in the market for a company multiplied by price of each share. Market cap is used to estimate valuation of a company. SEBI categorised company basis below valuation
|Large Cap||Mid Cap||Small Cap|
|Market Cap||Above 20,000 Crores||Between 5,000-20,000 Crores||Below 5,000 Crores|
When you go to mutual funds and they say we invest in BLUE CHIP Shares mostly they mean these Large Cap stocks. Mid cap and small cap companies while considered risky, still investors have large growth expectations from such companies.
Many Small cap and mid cap stocks on the other hand are performing consistently and yet are undervalued. Since many are unknown to the masses you get good bargains in this category.
As for the risk factor I believe that risk is in not knowing what you are doing ! If you can value the stocks and can understand the probability in stock market to make estimates of the company growths your investments will perform better. So called large caps of today were, mid cap or small cap stocks a decade ago !