Stock Market Basics
Essential concepts for understanding stock investing
What Are Stocks?
Stocks represent ownership shares in a company. When you buy a stock, you become a shareholder, which gives you a claim on the company's assets and earnings. In India, stocks are traded on major exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Indian Stock Exchanges
NSE (National Stock Exchange): Established in 1992, NSE is India's largest stock exchange by trading volume. It uses electronic trading and is known for its benchmark index, Nifty 50.
BSE (Bombay Stock Exchange): Established in 1875, BSE is Asia's oldest stock exchange. It uses the Sensex (30 stocks) as its benchmark index.
How Stock Markets Work
Stock prices are determined by supply and demand. When more people want to buy a stock than sell it, the price goes up. When more people want to sell than buy, the price goes down. Prices are influenced by company performance, economic conditions, market sentiment, and various other factors.
The Investment Process
- Open Accounts: Open a demat account and trading account with a registered broker
- Fund Your Account: Transfer money to your trading account
- Research: Study companies, read financial reports, and understand market trends
- Place Orders: Buy or sell stocks through your broker (online or offline)
- Monitor: Keep track of your investments and market developments
- Review: Periodically review your portfolio and make adjustments if needed
Understanding Market Indices
Sensex: BSE's benchmark index comprising 30 well-established companies. It reflects overall market sentiment.
Nifty 50: NSE's benchmark index comprising 50 stocks from different sectors. It represents the performance of the Indian stock market.
These indices help investors understand overall market trends and compare individual stock performance against the broader market.
Investment Risks
Stock investing involves various risks that you should understand:
- Market Risk: Stock prices can fluctuate, and you may lose money
- Company Risk: Individual companies may perform poorly or even go bankrupt
- Liquidity Risk: You may not be able to sell stocks when you want to
- Regulatory Risk: Changes in government policies can affect markets
- Currency Risk: For foreign investments, currency fluctuations matter
It's important to invest only what you can afford to lose and to diversify your investments.
Investment Approaches
Long-term Investing
Buying stocks with the intention of holding them for years. Focuses on company fundamentals and growth potential rather than short-term price movements.
Short-term Trading
Buying and selling stocks within days or weeks to profit from price movements. Requires active monitoring and understanding of technical analysis.
Diversification
Spreading investments across different stocks, sectors, and asset classes to reduce risk. Don't put all your money in one stock or sector.