Investment makes for a great way to grow wealth exponentially. And the stock market is one of the most popular avenues for investments across the world. A stock market is a place where you can buy and sell shares of publicly listed companies. It is not only a way for businesses to raise money but also for people to invest their savings.
In India, the stock market holds a significant role in the economy. It allows both companies and investors to grow their wealth. Let’s understand how all this happens. Here, we will learn what the stock market is and how the stock market works in India.
What is the Stock Market?
The stock market is just like any other marketplace. However, the major difference is that here you do not deal in buying or selling goods. Instead, you trade shares of publicly listed companies with the goal of registering profits.
The stock market is based on supply and demand, with prices of shares fluctuating based on the perceived value of companies and overall market conditions.
What is a Share in the Stock Market?
When a company sells shares to the public to raise money, it gets listed on the stock market. These shares represent the partial ownership of the company. So, it can be said that a share is a small piece of a company’s capital. People who buy these shares become small owners of the company and are called shareholders. When the company performs well, the share price goes up, and with this, you can make huge profits. But if the company underperforms, the share prices go down leading to losses.
For example: You buy a share of HDFC Bank Ltd, priced at ₹1680 per share. Now, if the price goes up to ₹2000, you can sell it and earn ₹320 as profit. But, if the company is not doing well and the share price drops to ₹1580, you would lose ₹100 if you sell it then.
How the Stock Market Works in India
Shares are listed on exchanges which facilitate trading. The primary exchanges in India are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) However, the stock market is regulated by SEBI (Securities and Exchange Board of India) to make sure the transactions are done fairly.
If you are looking to invest in the Indian stock market, then here’s what you need to do:
- Open a demat account, which is nothing but an account to keep your shares in digital or dematerialised form.
- You also need a trading account to buy and sell shares. You can open this account with a stockbroker like Tradejini at lower fees.
- Next, you need to connect your bank account to your trading account so you can pay for the shares you buy and receive money when you sell shares.
- Once everything is set up, you can place an order to buy or sell shares.
- After you place an order, the stock exchange matches your order with someone who is willing to sell or buy the same shares. Once matched, the transaction is completed.
Why Do Share Prices Go Up and Down?
As mentioned earlier, the prices of shares in the stock market keep fluctuating based on the overall market conditions and perceived value of companies. So, if the company is growing and making good profits, the share price usually goes up. But if the company is facing problems like a drop in sales, then its share price can go down.
The share price also depends on other factors including the overall economy of the country, government policies and global events. Hence, if the government reduces taxes for companies, share prices may go up as businesses now can make more profit. And, during an economic crisis in the country, the share prices may fall.
Types of Stocks in India
Here are the major types of stocks you can invest in:
1) Large-Cap Stocks (20,000 Cr+ market capitalisation):
These are shares of big and well-established companies like Reliance Industries and Infosys. These stocks are more stable but may grow slower than others.
2) Mid-Cap Stocks (5000 to 20,000 Cr market capitalisation):
These stocks are from companies (IRCTC and Tata Power) that are bigger than small-cap and smaller than large-cap companies.
3) Small-Cap Stocks (0 to 5000 Cr market capitalisation):
These are shares of smaller companies that have the potential to grow faster but are riskier.
How to Make Money in the Stock Market
There are two main ways through which you can earn money in the stock market: Capital Gains and Dividends.
Capital Gains: This is when you buy shares at a low price and sell them at a higher price.
Dividends: Several companies pay dividends to their shareholders when they register profits annually. So, if you have shares in those companies, you can earn money from dividends.
Also Learn: What Are Dividends? The Complete Guide to Growing Wealth
How to Choose Stocks in India
It is strongly advised that you do not invest in a random stock listed on the market as it may result in losses. If you are serious about investing and wish to grow your wealth, then it is important to do some research before you invest in any company. So, make sure you analyse stocks and choose them wisely. You must:
- Check the company’s profits and sales growth. A company that makes good profits and grows is usually a better choice for investment.
- Consider the management of the company. Keep in mind that a company with experienced and trustworthy management is more likely to succeed.
- Be aware of the industry trends. It is often seen that some industries (like IT) often grow faster than others.
- Consider economic conditions, as the health of the economy affects all companies.
Risks Associated with Investing in Stock Markets
Here are the major risks associated with investing in stock markets:
- You may face market losses due to fluctuations as the stock prices can go up or down suddenly due to news or events.
- If there is inflation, then an increase in interest rates can influence the stock prices and the market.
- There is also a liquidity risk as small-cap stocks may be harder to sell at the right price.
- If the company you have invested in is not performing well, then you may lose money due to a drop in its stock price.
Conclusion
If you invest wisely and have the right information on the financials of companies, then the stock market is a great way to grow your money.
Are you looking for an easy way to trade and invest? Download and check out the Tradejini CubePlus App.
With the help of the Tradejini, you can make buying and selling shares quite easy. Moreover, with this app, you can also track your investments and get investment advice - all from your phone!
Also Read: CE vs. PE in the Stock Market: Definitions, Calculations, Strategies, and Risks
