Home Finance 5 Basic Share Market Concepts | How to invest in share market

5 Basic Share Market Concepts | How to invest in share market

Do you want to invest in the share market? If yes, then you must know some of share market basic concepts and how does it work before investing.

In this blog we will talk about some of these concepts:

  1. What is share market
  2. Comparison of investing in shares with other methods of investing
  3. Market participants
  4. SEBI Market regulator
  5. Market intermediaries
  6. How to invest in share market
  7. Conclusion
  8. Q&A

What is Share Market?

Share market is a marketplace where you can buy and sell shares of publicly listed companies.

But the share market does not exist physically like an ordinary market where you go for buying, it exists in electronic form which you can access electronically through your computer, mobile, etc, and this marketplace is called stock exchange.

There are mainly two stock exchanges in India: Bombay stock exchange (BSE) and National stock exchange (NSE).

BSE (stock exchange) building - share market

NSE official website: https://www.nseindia.com/

BSE official website: https://www.bseindia.com/

The next thing which will come into your mind is “What is a share?” A share is a portion of ownership in a company. The owner of shares in a company is called a shareholder.

Comparison of investing in shares with other methods of investing

You must be wondering that there are already so many options to invest your money in like gold, real estate, FD, PPF (Public Provident Fund), savings account, etc.

So, why should you also invest in the share market, so in this section I will be comparing the returns of your money invested in shares VS other methods.

S.No    Type of investment Ways of investing in it   RisksReturns
       1FD(Fixed Deposits)1. Bank FD
2. Bonds issued by government of India.
3. Bonds issued by government agencies eg. NHAI, NTPC etc.
4. Bond issued by private companies eg. Mahindra Finance, Muthoot etc.
Low risk7%-10%
       2 Real estateApartments, farmland , commercial buildings etcHigh riskNo official metric to measure the returns
       3Share market       (equity)Buying shares of a companyMedium to high risk14%
       4Gold and Silver                         1. Jewelry
2. Government issued gold bonds 3. Exchange Traded Funds (ETF)
Low risk7%-8%

Now, by looking at the table you must be amazed by the returns you can get by investing in the share market.

They have generated returns close to 14% CAGR (compound annual growth rate) over the past 15 years. Some companies have even generated a 20% CAGR in the long term. To identify such opportunities you require skills and patience.

Another thing which you learn from the table is higher the risk higher will be the return and vice versa.

Market Participants

Any individual or corporate that buys and sells shares in the stock market is called a market participant. They can be classified into the following categories:

  1. Retail Individual Investors
  2. NRI’s and OCI’s
  3. Qualified Institutional Buyers (QIB)
    1. Domestic Institutions
    2. Asset Management Companies
    3. Foreign Institutional Investors

I have explained each of them below:

Retail individual investors

These are the people like you and me transacting in the share market

NRI’s and OCI

These are the people of India but they are living in foreign countries and they transact from there in the market.

Qualified institutional buyers  (QIB):

There are three types of QIB’s as discussed below:

1. Domestic institutions

These are the large corporate of India ex. LIC etc.

2. Asset management companies (AMC)

These are mutual fund companies ex. SBI mutual fund, Axis asset management company, Franklin, etc.

A Mutual Fund company

3. Foreign institutional investors (FII)

These include foreign hedge funds, pension funds, investment banks, mutual funds, asset management companies.       

Market regulator- SEBI

The Securities and Exchange Board of India (SEBI) regulates the securities and commodity market in India. Currently, it is owned by the government of India.

Why it is formed? 

In 1992, Harshad Mehta scam took place. The scam took place in Mumbai and was the biggest market scam of India.

Harshad Mehta was a well-known stockbroker, he made the prices of stock high through fictitious practices, and then he sold the stocks that he owned in those companies whose share price he inflated.

Due to the scam there was a sharp fall in share prices, the index fell from 4500 to 2500 representing a loss of 1 lakh crore rupees in market capitalization. Meanwhile, if you want to know about market capitalization you can read my blog on basic share market terms.

Watch this video to learn more about Harshad Mehta scam

So, to avoid such scams, a new regulatory board known as securities and exchange board of India (SEBI) was formed.

The objective of SEBI is to protect the interest of people in the stock market, prevent malpractices, and keep a close check over the activities of financial intermediaries such as brokers, stockbrokers, etc.

SEBI official website: https://www.sebi.gov.in/

Market intermediaries

Depository

When you buy shares from the stock exchange, they are stored in a dematerialized form in your depository account, usually referred to as a Demat account until you sell them.

BSE has promoted Central Depository Services Limited (CSDL) and NSE has promoted National Securities Depository Limited (NSDL) where your Demat accounts are present where shares are stored.

Similarly, you can think it of the same way as banks store money depository store shares.

Depository participant (DP)

You cannot interact directly with the depository i.e. the NSDL or CSDL. But, you need to communicate with the depository participant (DP) to open or maintain your Demat account at either NSDL or CSDL.

A depository participant registers themselves with the depository to provide depository services to us. Most of the stockbrokers also work as a depository participant.

Stock Brokers

Just like depositories we cannot interact directly with the stock exchanges: NSE and BSE. Similarly as we require DP to open Demat account, stock exchanges have trading members also called the stockbrokers to provide services to us.

So to buy and sell shares we need to register yourself with the stockbrokers, so that you can use their platform for buying and selling shares. Some popular stockbrokers are Zerodha, upstox, etc.

Banks

The banks are used for transferring funds from your bank account to the trading account. Trading account is maintained with the stockbroker so that you can transact in the stock market

You can link a maximum of 5 bank accounts with your trading account, with one account being designated as the primary account. You can transfer money from your any of the 5 accounts to your trading account but you can withdraw money from the trading account only to your designated primary account.

bank

Clearing corporation

National security clearing corporation (NSCCL) owned by NSE and Indian clearing corporation limited (ICCL) owned by BSE identify the buyer and seller and match their debit and credits.

For example, you buy 10 shares of ITC for Rs.1800, there would be someone who has sold that shares, clearing corporation identify it so that you will be debited Rs.1800 and that someone would be credited Rs.1800 for the transaction.

Clearing corporation also ensures that the seller after selling the shares should not be in a position to back out.

How to invest in share market

As in the previous section we talked about market intermediaries, you there must have got to know that to invest in share market, you have to register yourself with a stockbroker, which opens your trading account and a Demat account so that you can use their platform to buy and sell shares.

However, to register yourself with a stockbroker you must have a pan-card, a bank account, and an aadhaar card which should have your mobile number linked to it.

I would recommend you to open your Demat account with a discount broker like Zerodha and Upstox because they charge very low brokerage fees.

Conclusion

Investing in the stock market for the long term is less risky and you can gain a good return, you only have to be patient and have the right skills and knowledge so that you buy a right share, but trading for short period can be a lot riskier and you also have to invest a lot of time in it.

share market timings
Timings of Share Market

if you want to invest in the share market for the long term, then it is necessary for you to learn about fundamental analysis. You can read my blog on fundamental analysis and if you want to trade stocks for a short period, then you must learn about technical analysis. You can read my blog on technical analysis.

However, if you are confused about choosing a trading style, you can read my blog on trading styles, it will help you to decide your trading style.

Q&A   

Q1. Are stock markets closed on weekends?

Ans. Yes, the stock markets are closed on weekends. Only, at the time when the budget is announced on Saturday, the stock market remains open.

 Q3. When stock market open and close?

Ans. The normal time for the share market is between 9.15 am to 3.30 pm.
There is also a preopening session from 9.00 am to 9.15 am. This pre-opening session is divided into three sub-sessions:

1.   9.00 am to 9.08 am: In this duration, you can buy and sell shares. You can also modify and cancel your orders.
2.  9.08 am to 9.12 am: This session is used for order matching and calculating the opening price of the normal session. In this period you cannot cancel or modify your orders
3.   9.12 am to 9.15 am: It is used for the smooth translation of the pre-opening session to the normal session.

The opening session is provided to stabilize heavy volatility due to some major events or announcements about a company before the market opens for trading. Basically, this session is conducted to discover the right price of the stock.  share market timings

Q3. Can stock market go up forever?

Ans. No, the stock market can’t go up forever. Because there might be some bad news around the country ex. Formation of an unstable government, crises like financial crises of 2008, etc. where investors try to take their money out from the market, due to which excessive selling takes place and prices of a share fell and as a result, the stock market also goes down.    

I am a student currently pursuing B-tech in electrical engineering from Delhi Technological university.

Tushar Gupta
I am a student currently pursuing B-tech in electrical engineering from Delhi Technological university.
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