The Stock Market 101: A Beginner’s Guide to Investing

Finance Club IITKGP

Published in

Finance Club IIT Kharagpur

8 min readMar 21, 2023

“The stock market is a reflection of the world we live in. It’s not disconnected from it.” — Mohamed El-Erian

INTRODUCTION

The stock market is a marketplace where stocks and other securities are bought and sold by investors. The Indian stock market, also known as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), is one of the largest stock markets in the world. It is regulated by the Securities and Exchange Board of India (SEBI) and operates five days a week, Monday through Friday. The market is open from 9:15 a.m. to 3:30 p.m. local time.

The stock market can be divided into two primary types: Primary and Secondary markets.

In the primary market, companies issue new stocks to raise capital. This process is known as an initial public offering (IPO) where the company sets the price of the stock and sells it to the public. Once the stock is issued, it can be traded on the secondary market.

In the secondary market, investors buy and sell stocks on exchanges such as the NSE or the BSE. The price of a stock in the secondary market is determined by the supply and demand of the market. When there are more buyers than sellers, the stock price goes up, and vice-versa.

Investors can make money from stocks through:

Capital gains, which occur when the price of the stock goes up, and the investor sells it for a profit
As well as Dividends, which are payments made by the company to shareholders, often as a share of the company’s profits.

In summary, the stock market provides a platform for companies to raise capital and for investors to buy and sell ownership in those companies.

WHY INVEST?

While investing in the stock market involves some degree of risk, there are several reasons why investing in the stock market can be a good decision for many individuals.

Potential for long-term growth: Historically, despite the short-term volatility, the overall trend has been upward, and many experts believe that this trend is likely to continue in the future.
Inflation-beating returns: The stock market has historically provided returns that have beaten inflation over the long term.
Access to a range of investment options: The stock market provides access to a range of investment options, including stocks, mutual funds, and exchange-traded funds (ETFs). This can provide investors with flexibility in terms of investment choices.
Diversification: By investing in a range of stocks across various sectors and industries, investors can spread their risk and potentially reduce the impact of market fluctuations.
Passive income: Some stocks pay dividends to shareholders, which can provide a source of passive income for investors.
Tax benefits: Investing in the stock market can provide tax benefits, such as lower tax rates on long-term investments or tax-free gains in certain types of accounts.

Now, as it is evident that investing in the stock market is highly beneficial for any individual, the major question which pesters a beginner is ‘How and Where to Invest?’

WHERE TO INVEST?

There are several types of securities available in the Indian stock market for investors to invest in. Depending upon one’s risk appetite and financial goals, one can choose a suitable financial instrument to invest in from the following:

Stocks: Stocks, also known as shares or equities, represent ownership in a company. Stock prices can go up or down based on the company’s performance, market conditions, and other factors.
Bonds: Bonds are debt securities issued by companies, governments, or other entities to borrow money in exchange for regular interest payments and the return of the lenders’ principal at maturity.
Mutual Funds: Mutual funds are investment vehicles that pool money from multiple investors to invest in a portfolio of stocks, bonds, or other securities.
Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds in that they invest in a portfolio of securities but, are traded on stock exchanges like individual stocks.
Derivatives: Derivatives are financial instruments whose value is derived from the value of an underlying asset, such as a stock or a commodity. Examples of derivatives include futures, options, and swaps.
Initial Public Offerings (IPOs): When a company goes public and issues its first shares of stock to the public, it is called an initial public offering.

The Indian stock market provides investors with the potential for high returns, but there are a number of associated risks one has to keep in mind before dipping feet into the markets. The Indian stock market can be volatile, with prices fluctuating rapidly in response to changes in the economy, government policies, or other factors. For example, in March 2020, the Indian stock market experienced a sharp decline due to concerns about the impact of the COVID-19 pandemic on the global economy. Investing in individual stocks in the Indian stock market can also involve company-specific risks. For instance, if a company experiences financial difficulties or the company’s management is found to be engaging in unethical or illegal practices, its stock price may decline, potentially leading to losses for investors. Along with these other risks like regulatory risks and currency risks also make the investing process more perplexing.

Despite these risks, by diversifying their investments, managing their risks, and staying informed about market and regulatory developments, investors can potentially benefit from the growth of the Indian economy and the companies that operate within it.

HOW TO INVEST?

To start with investing and trading, Investors can leverage the two most popular methods to analyze stocks and make investment decisions, which are: Fundamental analysis and technical analysis.

Fundamental analysis involves analyzing a company’s financial statements, industry trends, and management team to determine the company’s overall health and potential for growth using its intrinsic value. The following steps can be followed in conducting a fundamental analysis to invest in a stock:

Analyze the company’s financial statements: The first step in fundamental analysis is to analyze the company’s financial statements, such as its balance sheet, income statement, and cash flow statement. It’s important to review these statements for the past several years to identify trends and patterns.
Evaluate the company’s profitability: Profitability is an important metric to evaluate a company’s financial performance. Profitability can be measured using financial ratios such as the price-to-earnings ratio (P/E ratio) and return on equity (ROE).
Assess the company’s financial health: It’s important to evaluate a company’s financial health to determine its ability to generate profits and pay off debt. Financial health can be evaluated using financial ratios such as debt-to-equity ratio, current ratio, and quick ratio.
Evaluate the company’s competitive position: It’s important to analyze the company’s market share, competitive advantage, and industry trends. This can provide insights into the company’s ability to grow and remain competitive in the long term.
Analyze the company’s management team: It’s important to evaluate the management team’s experience, track record, and leadership style for insights into the company’s ability to execute its strategies and generate profits.
Compare the company’s intrinsic value with the market price: Once the above analysis has been conducted, the company’s intrinsic value can be estimated which can be compared with the market price of the stock to determine whether the stock is undervalued or overvalued.

By following these steps, investors can conduct fundamental analysis to identify stocks that are undervalued and have the potential to generate positive returns.

Technical analysis is a method of evaluating securities, such as stocks or currencies, by analyzing past market data, primarily price and volume data. The goal of technical analysis is to identify patterns and trends in market data that can provide insights into future price movements. Technical analysis is often used by traders and investors to make short-term trading decisions.

The following are some of the main techniques used in technical analysis:

Charting: Technical analysts use charts like line charts, bar charts etc. to visualize past price movements and identify patterns like trendlines, support, resistance etc.
Indicators: Technical analysts use indicators, such as moving averages, oscillators etc. to analyze past price and volume data for identification of overbought or oversold conditions, trend changes, and potential price reversals.
Trend analysis: Trend analysis is done to identify the direction of the market and potential future price movements through identification of patterns in the charts.
Volume analysis: This is done to evaluate the level of buying and selling pressure in the market by finding patterns in volume data, such as increasing or decreasing volume.
Pattern recognition: Technical analysts use pattern recognition to identify common chart formations, such as head and shoulders patterns or double bottoms, that can provide insights into future price movements.

However, it’s important to note that neither of the two; fundamental analysis and technical analysis is a foolproof method of investing and should be used in conjunction with each other investment strategies. It’s also important to conduct ongoing analysis and review investments regularly to adjust the portfolio as needed.

OTHER FACTORS AT PLAY

Along with company-specific data & metrics with past trends, Macroeconomic factors play a crucial role in influencing the Indian stock market. Government Fiscal policies, monetary policies, and foreign trade all directly or indirectly have ripple effects on the stock markets. The Reserve Bank of India (RBI) controls interest rates in India. An increase in interest rates raises the cost of borrowing and impacts the spending pattern of consumers, leading to reduced demand for goods and services which can result in lower corporate profits negatively impacting the stock market. On the other hand, a decrease in interest rates stimulates borrowing and increases consumer spending, leading to higher corporate profits, which can drive the stock market upwards. Also, A high inflation rate can reduce the purchasing power of consumers and impact the profitability of companies. On the other hand, low inflation rates can stimulate consumer spending and boost corporate profits, leading to an increase in stock prices. The performance of the stock market is also closely linked to the country’s GDP growth rate. A higher GDP growth rate indicates a growing economy and increased corporate profits, leading to higher stock prices. Conversely, a lower GDP growth rate indicates a slowing economy and can lead to lower corporate profits and a drop in the stock market. Not only the domestic participation moves the stocks, but the influx of foreign capital into the Indian stock market can also drive-up demand for stocks, leading to an increase in stock prices. However, the withdrawal of foreign capital can lead to a decline in demand for stocks and result in lower stock prices.

In conclusion, macroeconomic factors have a significant impact on the Indian stock market. However, it’s important to note that many other factors, such as global events, political conditions, and company-specific news, can also impact the stock market.

CONCLUSION (& a word of advice)

So, to summarize, although the stock market is a place believed to have created numerous rags-to-riches stories and vice-versa, as an individual investor beginning to invest in the stock market, it is one’s duty to be mindful, cautious, temperate, and patient. While the stock market can be volatile and unpredictable, by following some basic principles, conducting thorough research, and keeping a long-term perspective, you can make informed investment decisions and achieve success. Remember, investing in the stock market requires patience, discipline, and a willingness to learn and adapt. Everyone has a different aspiration, a different financial goal, and thus a different investment strategy. So, take your time, start small, and keep learning, and you may be on your way to achieving financial success through stock market investing.