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How The Stock Market Works?

Welcome to the all-new blog about the basics of the share market. Share market is a very vast topic and it can not be summoned in a few words. Here we are going to learn about the most basic things about the stock market.

Everybody is keen to multiply their money at a lightning speed and share market is one of the best ways to so, but before investing, you should have thorough knowledge about the stocks you pick up. The past performance of the company, the current situation of the economy, etc.

One of the most important things to keep in mind while investing is that you should only invest money that you can afford to lose, as high gains come with a high level of risk, and the share market is one of the riskiest affairs to make money.

Moreover, You should be patient if you have invested here, and impulsive decisions can result in losses.

You can invest in the market for long as well as short durations depending upon various parameters like your age, risk-taking capacity, etc. the various options to invest in share market are shares, bonds, debentures, derivatives, commodities, currency, etc

SOME OF THE BASICS WE ARE GOING TO LEARN TODAY

TYPES OF SHAREHOLDERS IN SHARE MARKET

equity - share market basic knowledge
Share Holder

SHAREHOLDERS are the owners of the company who invest in the company, they can be individuals as well as institutions that hold the shares of any private or public company.

There are two types of shareholders 

i> EQUITY SHAREHOLDERS

 ii> PREFERENCE SHAREHOLDERS

EQUITY SHAREHOLDERS →

These are the common shareholders of the company. These are also called as the real owners of the company.

If you are an equity shareholder you have the right to a dividend. There is no fixed ratio in which this dividend has to be distributed, it completely depends on the profit or losses of the company.

You even get the right to vote in the affairs of the company if you have an evident share in the company.

In case the company gets bankrupt, you will receive your share of liquidation only after payment to all the creditors and preference shareholders.

PREFERENCE SHAREHOLDERS →

These shareholders have a preferential right over the dividend.

If you are a preference shareholder you will get a fixed amount of dividends every year, In case the company makes losses in a particular year then it doesn’t pay the dividend in that year but it is liable to pay the accumulated dividend amount the next year.

These shareholders have no voting rights.

TYPES OF STOCKS TO INVEST IN SHARE MARKET

analysis of diffrent stocks- share market basic knowledge
Analysis of different stocks – share market

There are 3 types of stocks to invest in

i> SMALL CAP STOCKS

 ii> MID CAP STOCKS

iii> LARGE CAP STOCKS

 SMALL CAP STOCKS

As the name suggests these are the small capital stocks, startups fall under this category. These are risky to trade but at the same time have the capacity to double or triple itself overnight.

These companies have a market capitalization below  ₹500cr. If you are willing to take huge risks then these stocks are for you.

MID CAP STOCKS→ 


These are the stocks with a market capitalization between $1billion to $5billion.these are comparatively safer than small-cap stocks.

If in case there is some economic crash, these companies have a greater chance to survive compared to small caps.

LARGE CAP STOCKS→

These companies have a large market capitalization, generally more than $5 Billion.

These companies are less risky to invest in. Some examples of large-cap stocks include Hul, HDFC Bank, ITC, etc

FINANCIAL INSTRUMENTS IN SHARE MARKET

KEY FINANCIAL INSTRUMENTS
1> SHARES/EQUITY
2>DEBENTURES
3>BONDS
4>MUTUAL FUNDS
5>DERIVATIVES
key financial insturments
financial instruments
Financial instruments

1>SHARES OR EQUITY →

shares-share market - share market basic knowledge
Shares

Shares show the unit interest of people in a specific company. They are the securities that are traded amongst various buyers and sellers in the share market.

If you are interested in buying or selling any security you have to appoint a stockbroker, a stockbroker along with helping you buying and selling shares, it also helps you guide about all the shares available and the best possible shares that can be bought for future gains. 

Some important terms related to shares include –

 i> FACE VALUE OF SHARES →

The face value of shares is the value that is mentioned on the share certificate when the company is formed or gets registered in the stock exchange in the share market.

It is the value of the share at the time when the company was commenced. It is also called the Nominal value of a share.

ii>BOOK VALUE OF SHARES →

The book value of a share is its value according to books of accounts.

It can be calculated by subtracting the company’s liabilities from its assets and then divided by total no of shares of the company.

 iii>MARKET VALUE OF SHARES →

The market value of shares is the value of the share at which it is traded in the market. It is decided by keeping in mind the future prospects of a company.

For a Well reputed company → MARKET VALUE > BOOK VALUE

For a not-so-profit making company –> MARKET VALUE < BOOK VALUE

EXAMPLE→ BRITANNIA INDUSTRIES LTD. has a FACE VALUE of RS.1/share but  has a BOOK VALUE of RS.160.65 whereas, Its market price on which this security is traded in the market is RS.2835.00 as in April 2020

ALSO READ MY BLOG – THE ULTIMATE GUIDE TO SHARES?

2>DEBENTURES→

debentures
Debentures- Debt For Companies

Debentures are a source of long term or short term finance for a company. It is an acknowledgment of the debt by a company.

Debentures are considered as a liability for the company, henceforth interest has to be paid on the money raised from this source for finance.

This money has to be returned after a fixed period of time as stated on the debenture certificate. 

There are various different types of debentures that can be issued which are as follows→ 

i> Redeemable and Irredeemable debentures.

ii> Convertible and Non-convertible debentures.

iii> Fully and partly convertible debentures.

iv> Secured(Mortgage) and unsecured(Naked) debentures.

v>  First mortgaged and second mortgaged debentures.

vi> Registered and unregistered(Bearer) debentures.

vii>Fixed and floating rate debentures.

viii> Zero coupon and specific rate debentures.

ix> Callable and puttable debentures.

x> Subordinated debentures.

xi>Participating debentures.

ALSO READ MY BLOG – DETAILED EXPLANATION ABOUT DEBENTURES?

3>BONDS→

bonds
Bonds

Bonds are a long-term or medium-term source of finance for a company. It is also an instrument that shows the indebtedness of bond issuer to the holder of the bond.

Bonds are usually confused with debentures, the main difference between the two is that bonds are government security whereas debenture is of a public company.

Various types of bonds are→ 

i> Municipal bonds

ii>Corporate bonds

iii> Zero-coupon bonds

iv> Mortgage-backed bonds

v> Fixed-rate bonds

vi>High yield bonds

viii>Exchangable bonds, etc.

ALSO READ MY BLOG – DETAILED EXPLANATION ABOUT BONDS?

4>MUTUAL FUNDS→

Mutual funds

Mutual funds are the funds that are managed by professionals.

The Mutual fund agency collects investor’s money and allocates this money into the stock market,  bonds, money market instruments, etc.

These mutual funds are a safer option as compared to direct investing in stocks. Although this money is also invested in stocks, the difference is that this money is allocated in 100’s of different stocks and with opinions of various big investors as hired by a mutual fund agency.

Different types of mutual funds are→ 

i> Equity fund

ii> Fixed income fund

iii> Index fund

iv> Balanced funds

v> Money market funds 

vi> Income funds

vii>International global funds

viii>Speciality funds

ix> Special traded funds

x> Exchange-traded funds.

ALSO READ MY BLOG – DETAILED EXPLANATION ABOUT MUTUAL FUNDS

5>DERIVATIVES →

derivatives
Derivatives

Derivatives are a type of contract between the seller and buyer in a market. There are two ways to use these derivatives to make money in the future

1>SPECULATION, where one party is in the hope that the price in which the deal is signed is different from that of the current share market price and hence they can make money from the difference.

2> HEDGING, where one party wants to make sure that the market price doesn’t go in a direction that would hurt his profits, so he makes sure that the price is agreed upon a long time before the transaction takes place.

For a seller, hedging means that he can be certain to receive the agreed-upon price, and for the buyer, hedging means that he can be certain not to pay more than the agreed-upon price.

some types of derivatives are forwards, futures, options, swaps, etc.

MAIN STOCK EXCHANGES OF INDIA

There are two main stock exchanges of India, they are as follows→ 

1> NATIONAL STOCK EXCHANGE (NSE)

2> BOMBAY STOCK EXCHANGE(BSE)

The indices of NSE and BSE are NIFTY and SENSEX respectively.

1> NATIONAL STOCK EXCHANGE (NSE) →

Nse
National stock exchange

This is generally called as NSE. The national stock exchange is the leading stock exchange of India. It is located in Mumbai, India. This stock exchange started in 1992, It is the first stock exchange in India that had introduced full dematerialization. Nifty is the flagship stock of NSE. The top 50 shares of NSE are called NIFTY 50

Various indexes of NSE are as follows → 

i>Broad Market Indices.

ii>Sectoral Indices.

iii>Strategy Indices.

iv> Thematic Indices.

 v> fixed-income Indices.

2> BOMBAY STOCK EXCHANGE(BSE) →

BSE- stock market
Bombay Stock Exchange

This is generally called as BSE. Bombay stock exchange is Asia’s oldest stock exchange.  It is the world’s 10th largest stock exchange. BSE is also located in Mumbai. The current CEO of BSE is Mr.Ashish Chauhan as of April 2020. The flagship stock of BSE is SENSEX. Sensex has a group of 30 top blue-chip companies.

CONCLUSION

Share market is one of the riskiest affairs to make money, you can earn huge money through this market by investing in stocks different companies.

There are 2 types of shares to invest in which

1 >Equity shares -These are the common shareholders of the company. These are also called as the real owners of the company.

2> Preference shares -These shareholders have a preferential right over the dividend.

There are 3 types of stocks to invest in which are

1>There are 3 types of stocks to invest in

i> SMALL CAP STOCKS

 ii> MID CAP STOCKS

iii> LARGE CAP STOCKS

There are 5 KEY FINANCIAL INSTRUMENTS in the market which are

1> Shares

2> Debentures

3> Bonds

4> Mutual funds

5> Derivatives

There are two main stock exchanges of India, they are as follows→ 

1> NATIONAL STOCK EXCHANGE (NSE)

2> BOMBAY STOCK EXCHANGE(BSE)

FREQUENTLY ASKED QUESTIONS (FAQ)

Q1. How can I increase my share market knowledge?

1>Take an informed decisions.
2>Invest in business you understand.
3>Don’t try to time the market.
4>Follow a disciplined investment approach.
5>Do not let emotions cloud your judgment.
6>Create a broad portfolio.

Q2. What is the minimum amount to invest in share?

While there is no minimum order limit on the purchase of a publicly-traded company’s stock, it’s advisable to buy blocks of stock with a minimum value of $500 to $1,000.

Q3. Which is the most costliest share in the Indian share market?

MRF. Ltd

Q4. What are the 4 types of stocks?

Growth stocks. These are the shares you buy for capital growth, rather than dividends. …
Dividend aka yield stocks. …
New issues. …
Defensive stocks.

Q5. What is blue chip share?

 Blue chip stocks are shares of very large and well-recognised companies with a long history of sound financial performance. … Blue chip stocks generally cost high, as they have good reputation and are often market leaders in their respective industries.

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