Stock Market Basics: Guide for Beginners | Angel One (2024)

Investing is a way to grow your money over time by putting it into various assets. One of the popular investment options is stocks. When you invest in stocks, you become a shareholder and can benefit from the company’s profits and growth. However, the stock market can be volatile. Understanding the stock market basics can help you make informed decisions and potentially earn returns on your investment. In this article, learn about the share market in detail.

What Is a Stock?

A stock is like a piece of a company that you can buy. When you own a stock, you’re a shareholder, which means you have a tiny ownership stake in that company.

As a shareholder, you can make money in two ways: if the company’s value goes up, your stock can be worth more, and you might sell it for a profit. Plus, some companies pay their shareholders a portion of their profits as dividends. Stocks can be bought and sold on the stock market, where their prices can go up and down based on how well the company is doing.

The share market, also known as the stock market, is a platform where buyers and sellers come together to trade publicly listed shares of companies. The market is regulated by the Securities and Exchange Board of India (SEBI), which oversees the functioning of stock exchanges and ensures that listed companies comply with regulations and disclosure requirements.

If a company has issued 100 shares and you own 1 share, you own 1% stake in the company. The share market is where shares of different companies are traded.

How Does the Stock Market Work?

The stock market is like a big marketplace where people buy and sell stocks. When a company wants to grow, it can sell stocks to raise money. Investors who buy these stocks become shareholders, which means they own a small piece of the company. If the company does well and makes a profit, the stock price might increase. People can then sell their stocks at a higher price and make money. On the other hand, if the company doesn’t do well, the stock price might go down, and people could lose money.

For example, imagine you buy 10 shares of a company at ₹5 each. If the company does great and the stock price goes up to ₹10, you could sell your shares for ₹100, making a profit of ₹50. However, due to some external or internal factors, if the stock price drops to ₹3, your shares would only be worth ₹30, and you would lose money if you sell them.

Who Determines the Price of a Stock?

The market determines the price of the share as per the usual rules of demand and supply. Normally, share prices go up when the company is growing very fast, it is earning very good profits, or it gets new orders. As demand for the stock picks up, more investors want to buy the stock, which increases the stock price.

Assume that the company’s products received a backslash, reducing the demand for the products. This can not only negatively affect the company’s revenue but also the stock price can drop as the stockholders want to sell their shares due to the fear of losing more.

What Are Stock Indices?

From the companies listed on the stock exchanges, a few similar stocks are grouped together to form an index. The classification may be based on company size, industry, market capitalisation, or other categories.

The Sensex is the oldest index comprising shares of 30 companies and represents roughly 45% of the free-float market capitalisation. The Nifty includes 50 top companies on the NSE based on their market capitalisation. Others include sector indices like the Nifty IT, Nifty FMCG, etc., and market cap indices include BSE Midcap or the BSE Small cap, and others.

25 Important Stock Market Terms for Beginners

There are several terms in the stock market, and every stock market investor must be aware of those terms to make informed decisions. Here’s a list of basic yet important stock market terms for beginners.

1. Demat Account: An electronic account used to hold, trade, and manage shares and securities in digital form, eliminating the need for physical share certificates.
2. Bull Market: A market characterised by rising stock prices, usually associated with investor optimism.
3. Bear Market: A market characterised by falling stock prices, often driven by pessimism and economic downturns.
4. Portfolio: A collection of stocks and other assets held by an investor.
5. Diversification: Spreading investments across various asset classes to reduce risk.
6. Market Capitalisation: The total value of a company’s outstanding shares, calculated by multiplying stock price by the number of shares.
7. Dividend: A portion of a company’s earnings distributed to shareholders.
8. Blue Chip Stocks: Shares of large, well-established, and financially stable companies.
9. Volatility: The degree of variation of a stock’s price over time.
10. Initial Public Offering (IPO): The first sale of a company’s stock to the public.
11. Broker: A person or firm facilitating stock trades for investors.
12. Bid and Ask: The highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a stock.
13. P/E Ratio (Price-to-Earnings): A ratio comparing a stock’s price to its earnings per share, indicating its valuation.
14. Market Order: A buy or sell order executed immediately at the current market price.
15. Limit Order: An order to buy or sell a stock at a specified price or better.
16. Index: A benchmark representing a group of stocks used to measure market performance.
17. ETF (Exchange-Traded Fund): A fund that holds multiple assets like stocks, bonds, or commodities and is traded on an exchange.
18. Day Trading: The practice of buying and selling stocks within the same trading day.
19. Liquidation: The sale of a company’s assets to pay off debts.
20. Resistance Level: A price point at which a stock typically faces selling pressure.
21. Support Level: A price point at which a stock typically experiences buying interest.
22. Dividend Yield: The annual dividend a company pays compared to its share price.
23. Capital Gain: Profit from selling a stock at a higher price than the purchase price.
24. Stock Split: A corporate action increasing the number of shares in circulation, reducing their price.
25. Earnings Per Share (EPS): A company’s profit divided by the number of outstanding shares.

Conclusion

Stocks are one of the most popular investments that can help grow your wealth. However, there are certain risks involved. Before investing, along with understanding stock market basics, it is important to consider your investment objectives, risk appetite and investment horizon. Go through the financial statements of a company and analyse its future prospects. To start, open a Demat Account now on Angel One for free and analyse stocks in detail.

FAQs