Deconstructing the Stock Market: Dummy Edition

stock market decoded
Image/Graphics: Nayana Dhanya for ManipalBlog

“Money can’t buy you happiness.”

Having heard this phrase from a ‘know-it-all’ uncle, a ‘concerned’ neighbor, or a ‘well-meaning’ stranger is a universal human experience. Often, these scholars-of-life fail to complete the quote. Yes, money can’t buy you happiness, but it will go a long way in helping you. 

And what better helper than money? 

The evolution of society and technology has inevitably increased the cost and standards of living a relatively stable life these days. A majority of the Indian population takes hefty loans and working multiple jobs to live a financially secure life someday. However, of late, investing in the stock market has gained a lot of traction as a steady source of alternative income. 

Typically, the image one has of the stock market consists of phones ringing off the hook, handsome suited men chattering and yelling at graphs and numbers, stacks of papers and desks chaotically arranged; but what is it actually? 

What is a stock market, and how does it work?

The stock market can be defined as a giant, organized marketplace where buyers and sellers trade crores of rupees daily. Like how you would head to a vegetable market to buy potatoes and carrots, you head to the stock market to ‘purchase money,’ i.e., shares

‘Shares’ refer to the share of the company that you are buying when you trade on the stock market. Let me elaborate with an example:

When asked what they would do if they had the ability to time travel, one of the common answers that people give is to invest in Apple’s stocks when it went public in the ’80s. The reason behind this is because if you had brought shares worth $1000 from Apple back in 1980, as of 31st August 2020, they would now be worth $1,274,000.

When you buy a company’s shares, you invest and fund them in exchange for a certain amount of their profits. Over time, as the company grows and expands, your share’s value increases in tandem with its profits. Therefore, if you brought approximately fifty shares that cost you about 1000 dollars in 1980, those same shares would now cost a million dollars to purchase. 

stock market trading

Investing in the Stock Market

Companies like Apple, Facebook, Google, and Amazon entered the investor’s market through the primary market where shares and securities are ‘created’. They do this by offering their shares to the stock market via an IPO (Initial Public Offering). 

Say Apple priced its IPO at $22 apiece. As an interested investor, you can directly purchase these shares from Apple and contribute to their capital resources.

These shares enter the secondary market or the stock market when the shareowners trade the directly issued shares without the issuing company’s involvement. If you wanted to sell your Apple shares, you would do so by trading them in the secondary market where other investors can purchase it directly from you. Once the shares enter the secondary market, the company is no longer involved in its pricing. The shares’ market price depends on other investors’ demand and at what price sellers will settle. 

Then what is the Stock Exchange?

The secondary market is a large market area filled with investors from all industries who own shares of different companies. The stock exchange takes on the duty of connecting stock buyers with stock sellers to eliminate the hassle of finding an investor whose demands match your specific supply of stocks. There are two major stock exchanges in India: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). 

The BSE was established in 1875 and is India’s first and largest stock exchange. It lists approximately 6000 companies and includes trading platforms for SMEs (Small and Medium Enterprises).  On the other hand, the NSE was set up in 1992. It holds the title of being the country’s largest financial market with approximately 2,000 share listings.  There are other regional markets in cities like Bangalore, Kolkata, and Chennai. But the first two exchanges are much more significant for stock market transactions. 

When trading, it is crucial to keep track of your investments; its values are susceptible to economic events (global or national) and other market changes. Investors use terms like ‘Bull market’ and ‘Bear Market’ to label these changes. When the economic conditions are favorable and the demand for stocks is on the rise, it is termed as a bull market. Inversely, when economic conditions are on a downturn and investors are looking to liquidate their shares for money, it is called a bear market.

For instance, the ongoing COVID-19 pandemic reduced share prices in the BSE market by 23% in May 2020. Although experts say that this drop is relatively better off, this is still a significant loss for investors, as it often is in a bear market.

Keeping track of the share prices and performances for each of the 7000+ listed companies can get tiring for ordinary investors who have other jobs and commitments to hold. Therefore, to simplify things for the investor, stock exchanges have gathered a list of companies with the highest weightage in the market share. These are called indexes or indices. They help you view the overall direction of the markets. 

The BSE offers the SENSEX (Sensitive Index) as a method to track its overall performance. Thirty of the BSE’s largest and most traded stocks ranging 12 sectors. It broadly represents the compositions of the Indian market as a whole. It is also known as the BSE30. Similarly, NIFTY/NIFTY50 is the index for the NSE and tracks 50 of the top stocks traded. 

How can I get started? 

Although indexes make it easier to focus on the top companies in the market, each of them requires focused analysis on economic factors like inflation rates, changes in import and export taxes, and budgetary announcements. Alongside this, an investor is expected to be up-to-date with a plethora of key factors to make wise decisions and turn a profit. These include changes in the company’s finances, fiscal policies, and management styles (called fundamental analysis) and following the price and volume of shares in the market to predict future prices and trends (technical analysis).

With demands like these, investing can be an overwhelming activity for people like you and me who often have other commitments like jobs and higher education. Here is where stockbrokers come in. 

Stockbrokers are intermediaries who can buy and sell stocks in a stock exchange on your behalf. Often, they work for companies that are authorized to perform such transactions on behalf of investors, but you can also opt for an independent stockbroker.

The words broker and stockbroker are frequently used synonymously. However, they perform different functions. While a broker buys and sells shares for a client, stockbrokers provide insights on shares in the market, advising clients to pick the best and most profitable one. In exchange for their services, stockbrokers often charge a commission or a fee. 

To ensure that stockbrokers remain ethical and professional, a regulatory body named SEBI (Securities and Exchange Board of India) governs all stockbrokers. All stockbrokers are expected to be registered with SEBI to begin trading and have to put their registration details on all official documents. Their names and registration numbers are available on the SEBI website.

Stockbrokers can be divided into two categories based on the services they provide: Full-service stockbrokers provide both trading services and investing counsel. Consequently, they charge a high fee for their services. Discount Stockbrokers are a more recent phenomenon. They provide their trading services on online platforms. They are faster and charge lesser fees than full-service stockbrokers. However, they do not offer any advisory services.

Once you have picked a stockbroking firm/individual stockbroker to invest on your behalf, the next step is to:

  1. Ensure you have a bank account
  2. A Demat and trading account

A ‘dematerialized’ account (Demat account) holds shares in an electronic format. A trading account acts as an intermediary between the Demat account and the bank account. It is also linked to your bank account.

For instance, if you decide to buy shares worth Rs.10,000, the same amount is debited from your bank account as payment for the shares. The shares are then deposited in your Demat account in electronic form. 

After the account is successfully opened, you can begin trading in the stock market with your stockbroker’s help. 

There are a variety of orders you can place in the stock market. Some basic order types are explained below:

The most basic form of order is a market order where the investor orders the shares to be bought or sold at the current price. Investors buy/sell shares using buy orders (placed when the price of a share is expected to rise) and sell orders (placed when the share price is expected to reduce).

Limit orders are placed when the investor wishes to buy or sell stocks only at a set price. A Buy Limit order happens only when a share price falls to the set number or below. Similarly, a Sell Limit order occurs when a share price rises to the set number or above.

Along with these, there also exist stop orders. Stop orders are generally market or limit orders with an activation price. When the stock reaches the activation price, it is executed according to its order types.

Buy Stop orders are placed when the investor wants to purchase stocks after they reach a particular price above the current ask price. Sell Stop orders are made to avoid potential loss in investment by beginning to sell their shares the minute it starts decreasing in value.

Clearing a few common misconceptions

Lastly, before beginning your investing journey, it is vital to understand what it means to hold stocks, with regards to people starting out in the stock market and not huge firms investing in the company.

 

A widespread misunderstanding is that you hold a position of power in that company if you own their shares. While it is true that you do own a percentage of the company, other than the financial returns on the shares, you do not have any say in how the company runs. 

 

If you are unhappy with the company policies or a particular employee in the organization, your only option to solve the problem would be to sell your shares and pick another company on the market. Additionally, a company’s physical assets like desks, chairs, and property, belong to the company. A portion of the profits the company makes using these assets might be owed to you, but the company itself owns the assets. 

If you are unhappy with the company policies or a particular employee in the organization, you can choose to bring it up on a shareholder meeting or bring it up on public forums, companies usually not wanting a negative review from their stakeholders usually listen. If that doesn’t work, there is always the option to solve the problem would be selling your shares and picking another company on the market. Additionally, a company’s physical assets like desks, chairs, and property, belong to the company. A portion of the profits the company makes using these assets might be owed to you, but the company itself owns the assets. 

Another misconception is that you get a discount on a company’s services when you own their shares. Not only is this false, but also harmful to the company itself as it is losing out on making profits with its customers. It would be much more profitable for investors if they were charged full price on products and services. 

To sum up

The stock market is nothing akin to gambling. It is a carefully calculated game of risks and profits that requires years of experience and a keen eye on the markets. 

With the rise in the standard of living and inflation, it is essential that people, regardless of age, begin investing. The earlier one starts investing, the better, as returns from these investments, meager as they may be, accumulate for longer. The introduction of online trading platforms and websites for stockbroking firms makes investing more accessible day by day. It is our choice to capitalize on the vast potential it offers! 

About the Author – Quirky and with a wicked sense of Humour, Nayana does it all. Her sense of responsibility is second only to her abilities in gfx and writing. Nayana is a second-year student at Manipal Institute of Communication where she is honing her content creation skills and pursuing a degree in media.

 

 

About Guest Blogger 1180 Articles
This post was written by a guest contributor. Please see their details in the post above. If you'd like to guest post for ManipalBlog check out our Write for ManipalBlog page for details about how YOU can share your thoughts with our readers.