Mar 15, 2020
The basics of stock market — Part 1
You might have heard this, at least once from at least one person in your early age — “There is lot of knowledge out there. You need to go grab it!”. Trading in stock market made me realise that — “There is lot of wealth out there. We need to go grab it!”
I believe that a good understanding of stock market and its concepts are as important as other fundamentals that we learn in our academics. So, here is a small chunk of chapters from your missing semester.
What are stocks & shares?
Let’s say that me and you start a new company called Axiom Private Limited. Me, you and 8 other friends of ours pool in the money that is needed for the initial funding. Me & you are the founders (or better said — ‘promoters’ in the stock market terminology) and other 8 friends of ours become the first investors of our company.
When they have contributed their hard earned money for the success of our company, believing our goals and business strategy, it is very certain of them to ask, what’s in it for them. That’s exactly when we founders issue a certain number of stocks and share them among the investors proportional to their investments. Then, they become the share holders of our company.
The stocks issued like this will be considered as a record for their investment and it will be in the form of a share certificate. The share certificate will hold several information like the name, date of purchase, price of purchase, number of units and other information. This is in physical form for now.
There are a few things that are important to understand here:
- A company issues a fixed number of stocks that circulate in the market via trading. No matter how many share holders the company would have but the number of stocks of a company in total will remain the same.
- The price of the stocks at the time of its issue becomes the face value of the stocks and this is constant until the promoters/the company decides to change. This change is usually done by what is known as stock split.
- Whatever the price gets listed in the trading index is the market value of the stocks. The stocks are bought or sold at market value. The profits that are distributed among the share holders in the form of dividends and bonuses are always calculated with respect to the face value.
- If the market value of the stocks is more than the face value of the stocks, it is said that the stocks is at a premium of whatever the difference amount is. If the market value is same as the face value of the stocks, it is said that the stocks is at par with the face value. If it is below then it is said that the stocks is at discount of whatever the difference amount is.
Why don’t you go check for yourself and think for a while, whether the stocks of the company Britannia are at premium or at par or discounted by comparing the current price (or market price) and the face value? Link to ease your search — https://www.screener.in/company/BRITANNIA/
When do companies go public?
Now, let’s say that our company, Axiom Private Limited grows big and we need huge funding to expand the business. This is when we go public. We issue an IPO, Initial Public Offering.
An IPO is when, for the first time the stocks of the private company are offered to the public and get listed on the stock exchange like National Stock Exchange and Bombay Stock Exchange. Now, our company becomes Axiom Limited from Axiom Private Limited. Do you see the difference? The stocks now are distributed & traded through a demat account or dematerialised account in digital form. The buying and selling records of stocks will be maintained in the passbook of this demat account hereafter.
This whole thing of buying and selling stocks of a company is called equity trading. You trade via a broker. Understanding which is the next sub heading!
Who is a broker?
A broker is someone who is authorised or licensed to buy or sell stocks associated with an exchange. Stock broker can be a human or an online platform like Zerodha, ShareKhan, etc.
You can purchase/sell stocks from the stock broker for some brokerage and exchange taxes.
Market and trading
Indian market on a working day, opens at 9:00 AM and closes at 3:30 PM. The price of the stocks when the market opens is called the opening price. The price of the stocks when the market closes is called the closing price. Through the session, the stocks also hit two more values of importance which are the day’s highest price and the day’s lowest price.
A market is where trading of stocks happen. Traders are of two kinds. Trader who buys stocks and a trader who sells stocks. Sellers offer the stocks and buyers bid the stocks. If there is buying pressure and buyers bid at a higher price and the stock prices rise, we call this state of market as bullish.
If there is a selling pressure where the sellers want to sell off their stocks at whatever price it is and get their money back, we call this state of market as bearish. This is when the stock prices fall.
So, the traders who are optimistic about the market are called the bulls and those who are pessimistic are called the bears.
How to choose what company to invest in?
This is always tricky! You would have certainly heard stories about the fall of empires that once ruled the business industries.
However, the aspects that we must look for in a company while researching about it before we decide to invest are collectively referred to as the fundamentals of the company.
These mainly include —
- The balance sheet with their revenue, profits, debts, reserves and other asset details.
- The returns, dividend payout and bonus payout history.
- The growth chart of at least 5 years.
- Understand the company’s business and market.
- Compare with the competitors.
- Also, see their future prospects.
Let’s jump to the last question of everybody’s interest —
How to make profits?
Once you have chosen the company of your interest after the fundamental analysis, the question is how to make profits out of it. Profit clearly implies that you own a certain number of stocks that you sell at a higher price than what you bought at.
Some say that you must buy stocks when they are at their lows & sell them when they are at their highs and ask you to wait until the stock price falls. Makes sense, sounds good but it is an absolute bullshit theory! For two reasons —
- This whole theory is easier said than done.
- Do you even know that the price at which you’re buying is the least? What is the guarantee that the price won’t fall further tomorrow?
So, you must buy the stocks at whatever price it is today, if, you are very sure that the company will grow in future and the stock price of that firm will rise. Thus, helping you achieve your profit target! That’s it.
Also, look forward to buy the products of the company you have invested in. If the company’s revenue increases, its profit does and in turn improves the stock price and you will be in profit! :P
Stock markets aren’t risky. It is just the platform to test your patience, aggressiveness and brilliance at the same time!
I believe, now you have at least some basic understanding about what stock market is all about and a few aspects which will help you get started. In the next part of this series, I am looking forward to explain intraday trading, delivery trading and some concepts of technical analysis like comprehending the market sentiments from a candle stick chart.
Till then, read this article again to understand better, read related articles on other websites, discuss with those who trade and gain confidence.
In part-2 of this series, I am going to tell you all about the technical analysis of stock market.
Disclaimer — This article is for educational purpose only. The author is not responsible for any loss/profits of anyone.
Thanks & regards,
Teddy Winters (aka Samarth Deyagond)
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