How does the Stock Market Work? [Indian Context] 2023

Nowadays, one source of income is not sufficient. So, there are lots of earning methods but if you ask the most popular way of earning, you probably have heard about investing whether it is Mutual Funds, Fixed Deposit(FD), stocks.

By now you have understood we are going to talk about the stock market. We are not going to talk very deep, rather we will discuss just the basics for your understanding.

Basic terminology

To start with understand few basic terms, as you will come across them in Stock Market journey-

Stock- Stock is a form of security that shows fractional ownership of the company. Companies issue stocks to raise funds for research, infrastructure etc to develop their industries. Units of stocks are called Shares.
BSE(Bombay Stock Exchange)- Bombay Stock Exchange(BSE) is the oldest stock exchange in India as well as in Asia. BSE is located at Dalal Street, Mumbai.
NSE(National Stock Exchange)- National Stock Exchange was founded in 1992. It is the first stock exchange to introduce an automatic electronic trading system in India.
Demat Account– Dematerialization also known as Demat Account, it is an Electronic bookkeeping where all the transactions are recorded while trading. Physical stock certificates are replaced by electronic transactions.
Trading Account- Trading Account acts as a link between your bank and Demat Account. As an investor, you can add money from your bank to start trading.

What is the Stock Market?

Stock market is a platform where company’s shares are bought and sold. As an investor, you can buy and sell your shares. Stock Market provides you the opportunities to earn extra money through investing in stocks.

Let’s understand with an example-

Here we are Calculating no. of shares that can be purchased using Reliance Industries Ltd.

How does it work?

Now you have an idea, what stock Market is? Let’s move to how it works by understanding the types of market in the stock market?

Markets

Primary Market

Primary Market where companies sell new stocks and bonds to the public for the first time as an initial public offering or IPO. An IPO opens for a particular period.

Secondary Market

The last step involves listing companies on the stock market, where shares of the companies are freely traded after initially offered to the public in the primary market.

After the stocks enter into the secondary market, you can start trading. Buying and selling listed on the exchange are done by a brokerage firm or stockbroker. There are many brokerage firms which charge very less commission. You can also invest without a broker.

The transfer of shares from buyer to seller is called the settlement cycle. The settlement cycle for all traded instruments is T+1, where T is Trading day. So for example, If your shares are sold today, then by tomorrow the amount will be credited into your trading account.

When you buy stocks of any company, you are purchasing a small piece of that company. Which means if the company is in profit your stock price increases, you earn profit but if the company is performing poorly your stock price could decrease which means you are in loss.

Demat Account and Trading Account

Dematerialised Account or short for Demat Account. As I told you earlier, all the transactions are recorded here when you buy or sell stocks. Demat is not limited to stocks but provides facilities to other instruments like bonds, mutual funds etc.

Trading Account acts as a link between your Demat Account and bank Account. You can add money from your bank into a trading account and start investing.

Free demat accounts from where you can start trading-

Zerodha
Upstox
Sharekhan
Angelone

Pros and Cons

We have discussed the Stock Market? How does it work? Now let’s discuss there pros and cons-

Pros-

As we started with, it’s an extra source of earning.
Stock Market allows you to create your portfolio. Where you can buy different stocks and are not obliged to invest every month.
Helps in the growth of the economy.

Cons

There are risks of losing money. But with proper research and understanding this risk could be minimized.
Before buying any product you research about it, the same goes with stocks. With proper research you can invest in better stock but research is time consuming.
You have heard market down, market up. There is factuality, but always be calm and focused.

FAQs

Question arrive before Investing in Stock Market

Q1. Is the stock market risky?

When you Invest in a business, there is a possibility of risk. But with proper research and knowledge, risk can be minimized.

Q2. How much return can I expect?

There is no fixed criteria. That’s why you invest in a portfolio of stocks like at least 4-5 companies. So, if one company is not performing well you will not lose all your money.

Q3. How much should I start with?

You can start with any amount. Instead of thinking about how much to invest in the share market it is very important what type of shares you are investing.

Q4. What is the process of investing?

Three things are required -Aadhar Card, PAN Card, Bank Accounts. Nowadays all processes are online. There are online discount brokers which take almost zero brokerage. Zerodha is one of them. After opening an account you can start trading.

Q5. Can I invest without any commerce background?

Yes! Your academic education doesn’t influence much while investing. With knowledge of trading and stock anyone can do it. Nowadays, there are courses which can guide you through every step.

Q6. Where do I learn about the stock market?

There are books which can help you learn more in depth.

Investonomy by Pranjal Kamra,
Rich Dad Poor Dad by Robert T. Kiyosaki and
Learn to earn by Peter Lynch,
The education of value investor by Guy Spier.