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An Introduction to the Stock Market in India

What is a Stock?

The ownership interest in the underlying business is known as a “stock” or a share. In other words, an owner of stock owns a proportion in the stake of the company, whose stock they own.

To understand this concept better, refer to the following example:

If A owns, say 1000 shares in a company XYZ, then A owns a said proportion of that company.

Types of Stocks: –

There are several stocks for one to choose to invest in.

  1. Growth Stocks

Growth Stocks are those companies that manage to consistently grow their profits much faster in comparison to their industry peers. This growth is generally due to some sustainable competitive advantages, and they typically pay out little or no dividend because they need to fund their development continually. In such companies, the appreciation in the stock price is returned to the investors as a reward.

Growth stocks are one of the risky categories because the competitors may emulate them and eliminate their competitive advantages.

  1. Value Stocks

Value stocks are those which are available at a special discount in comparison to their intrinsic value. These stocks are sound businesses that exist in the sectors which are not favoured by the market presently.

Few Value Stocks at times pay the dividend as a significant share of their profits or when their claims are out of favor, resort to share buybacks.

  1. Dividend Yield

These are companies that do not have enough profitable opportunities to deploy cash and generate a significant amount of money only in the business. Because of this, they return most of it to the shareholders in the form of dividends.

  1. Cyclical Stocks

The profits of these types of companies are linked to economic cycles. There is a significant profit to report when the economic growth is strong and not so strong when the growth slows down.

Why do companies sell Stocks?

As a company starts growing, it starts facing multiple speed bumps that make raising enough money to fund their ongoing expansion. To get these funds, they can either borrow the money from a bank or a venture capitalist, or else they can sell part of the business to an investor.

Typically, a company first prefers to take out a loan from the bank. The problem here is that banks do not always lend money, or the over-eager manager may borrow too much money that would accumulate into massive debt for the company. The alternative to these issues is to issue stocks. Going public helps provide the company with the funds to grow, and this money does not need to be paid back either.

What is the Stock Market?

The place where one buys or sells shares of a publicly listed company is known as The Stock Market. It is a platform that helps facilitate easy exchange of shares that takes place through an electronic medium.

To understand this term better, you may take into consideration the following example: If A is willing to sell some shares of his XYZ company, the stock market will help him meet buyers.

Stock Exchange in India

There exist two main types of Stock Market in India-

  1. Bombay Stock Exchange (BSE)

The BSE, established in the year 1875, is Asia’s first and oldest Stock Exchange that is in Mumbai, India and BSE Sensex is its flagship index. It measures the performance of the 30 largest, financially stable, and most liquid companies across key sectors.

Under the BSE, 3,972 companies, out of the 5,295 companies listed, are available for trading as of August 2017.

  1. National Stock Exchange (NSE)

The NSE, established in the year 1992, is the leading stock exchange located in Mumbai, where one can buy or sell shares of publicly listed companies. It has a flagship index referred to as NIFTY50, and its index comprises the top 50 companies based on the trading volume and the market capitalization. This index is widely used as the barometer of the Indian capital markets by investors in India and globally as well.

Other than these 2 exchanges, there are some other regional stock exchanges like the Madras Stock Exchange, and the Bangalore Stock Exchange, but they do not play a meaningful role anymore.

Who regulates the Indian Stock Market?

Another thing that one must cover while studying Indian Stock Market Basic for Beginners is that the regulatory body of the Indian Stock market is “Security Exchange Board of India” or SEBI. Its main objective is to safeguard the general interest of the retail investors, regulate the smooth-running activities of the financial intermediaries and the investors in the market, and promote the joint development of stock exchanges.

Here are a few things that SEBI ensures:

  • Fair business conduct by the Stock exchanges, Brokers, and sub-brokers.
  • Protection of small retail investors.
  • Prevention of usage of the market by Corporate houses to unfairly benefit.
  • Prevent Large investors from manipulating the markets.

What are the different types of Market Participants?

Anyone who sells or buys shares in the stock market is referred to as a Market Participant. In the stock market, there are a lot of individuals and corporate houses who trade. Some of the categories are:

  • Domestic Institutions- Large corporate entitled based in India.
  • Domestic Retail Participants- Individuals who transact in the markets.
  • Domestic Asset Management Companies- The market participants in the Domestic Asset Management Companies are mutual fund companies like SBI Mutual Fund, HDFC AMC, and many more.
  • NRIs and Overseas Citizens of India (OCI)- Indian origin people who reside outside of India.
  • Foreign Institutional Investors- Non-Indian corporate entities like hedge funds, foreign asset management companies, and other investors are FIIs.

Types of Financial intermediaries in the Stock Market

The corporate entities that ensure the smooth transaction of the transfer of to his/her Demat account from the time an investor places the order are known as Financial intermediaries. They work according to the rules and regulations laid out by the Security Exchange Board of India. Some of these corporate entities are:

  • Stockbrokers

A stockbroker is a professional who buys or sells shares on behalf of his/her clients. They are registered as a trading member with the stock exchange and hold a stockbroking license.

They work according to the guidelines laid down by SEBI.

  • Banks

They help the transfer of funds from the bank account to the trading account. The client must categorically mention, to the stockbroker at the time of opening the trading account, which bank account must be linked to the trading account.

  • Depository and Depository Participants

A Depository is a corporate entity that acts as a financial intermediary that offers the services of a DEMAT account. There are only 2 depositories in India which provide the DEMAT account services- National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL).

For an investor to open a DEMAT account, they need to appoint a Depository Participant first. These Depository Participants can be banks, financial institutions and members of stock exchanges that are registered with SEBI.

Fundamental Stock Analysis

Fundamental analysis is a key method that is used to measure security’s intrinsic value by merely examining its related economic and financial factors. The end goal here is to receive a number that can be compared with security’s current price, by the investor, to check whether the security is undervalued or overvalued.

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