Stock market 101 for the uninitiated Indian
Nykaa's stock reached a new high, while Uber and Ola continued to fall! Shell and Indian Oil investors are concerned about the progress of the war in Ukraine! A new IPO has been launched, making early investors richer than ever!
Tired of hearing all these boring stock market headlines, but eager to get started with investing? You've come to the right place.
Early investing is a great way to start increasing your income portfolio at a young age. But again, the stock market is very volatile in nature; it's essentially a gamble, and getting it right requires a great deal of knowledge and experience. Investing in stocks without much knowledge could result in significant losses.
If you're someone interested in starting trading or investing in stocks and increasing your income portfolio, then we have the perfect PowerPass course to help you, Finance Pass: Personal finance made easy. This comprehensive course will teach you how to save and invest money and grow your personal wealth.
PowerPass also includes more such courses where you can learn about everything from event planning and social media, to the nuances of digital marketing, and much more.
The following is a beginner's guide to the stock market and the basics of investing to help you get started.
Index
- What is the stock market?
- Understanding shares
- Why and how does a company list its shares?
- Nifty 50 & Sensex…what?
- Getting started with the stock market investments
- How to make the money in stocks
- The one with the taxes
What is the stock market?
Before you start your investment journey let’s first understand what the stock market actually is. Stock markets are marketplaces where companies and investors can list, buy, or sell a wide variety of securities, including equities, derivatives, bonds, mutual funds, and so on. Stock exchanges facilitate such transactions by listing financial instruments, whether formal or over-the-counter (OTC).
The Securities and Exchange Board of India (SEBI) is the primary regulator of the stock market. There are primarily two popular stock exchanges in India: the National Stock Exchange and the Bombay Stock Exchange.
Understanding shares
Shares allow you to own a portion of the company's worth. You can obtain ownership rights to a certain percentage of the company in proportion to the amount of capital you invest. If you own 5% of the shares on the market, you can claim 5% ownership in the company.
As a result, shares are ownership units in the company and its financial assets. Shares are also referred to as stocks, equity, scrips, and so on. You will be known as a stockholder or shareholder of the company after purchasing them.
Why and how does a company list its shares?
Let’s say you're going to make pancakes for breakfast tomorrow. To do that you will need certain ingredients like flour, sugar, vanilla extract, bananas, and utensils right?
Similarly, when a company is formed and growing, it requires a variety of ingredients, the most important of which is money, also known as capital. During these times, a company can go public, sell small pieces of its company (shares) to investors, and raise capital.
When a company is growing, it will require more capital. During such times, a company can enter the stock market and sell a certain number of shares based on its market value to investors.
Investors will pay the company money in exchange for a stake in the company. As a result, if the value of shares rises, so will the value of the shares owned by investors. On the other hand, investors are not creditors, because they are not lending money to the company.
An Initial Public Offering or an IPO is how a company lists its shares in the market. An IPO is the first time a company sells its stock to the general public. The companies have a few rules and regulations laid out by The Securities and Exchange Board of India (SEBI), that needs to be followed before the IPO release.
Nifty 50 & Sensex… what?
If you've ever watched the news with your parents, you've probably heard the terms Nifty and Sensex. It may have been irrelevant to you at the time, but now that you're considering investing in the stock market, you should be aware of these two terms.
In order to become listed, all companies enter the NSE, BSE, or both, where thousands of companies are already listed. For instance, sorting through this extensive list would be difficult if you had to pick the top 30 stocks or see the worst-performing stocks. This is where the Nifty and Sensex come into play.
The Nifty 50 index is made up of the top 50 companies listed on the NSE, while the Sensex index is made up of the top 30 stocks listed on the BSE in terms of market capitalisation. The top companies have the greatest influence on the stock market and the economy of the country. As a result, an index of the top and largest companies is the best predictor of how the entire stock market will perform.
Getting started with stock market investments
The first step to stock market investments or trading is to open both a Demat and trading account. These accounts are now readily provided by most big-time brokers or investment platforms. Buying and selling are the only transactions that occur on a trading account.
It is not necessary to open a Demat account if you want to be a trader since a trading account will suffice if you buy and sell on the same day. In a Demat account, your shares are stored electronically. Shares are typically dematerialised and transferred to your Demat account within two working days. So, if you buy or sell a share, the amount is deducted or credited from your account.
How to make money through stocks
Putting it simply, you earn capital gain when you buy shares at a lower price and sell them at a higher price. However, there are two ways to accomplish this, and if you are a beginner, it is critical that you understand the distinction between a stock trader and a stock investor:
- Stock investors are those who invest in stocks for an extended period of time, sometimes years. The returns are compounded over time. These investors use fundamental analysis. They look at the company's growth trajectory, because your investment literally grows with the company over time.
- Stock traders typically buy and sell during the same trading session. Traders use technical analysis to determine which stocks to buy. Traders seek out short-term gains. Technical indicators such as momentum oscillators, Bollinger bands, charts, and others will be required to learn the fundamentals of stock trading.
The one with the taxes
In order to reap the benefits of your stock market endeavour, you first have to pay taxes. Yes, just like everything else, stock market transactions are taxed.
The chart below will help you understand how much tax you must pay on capital gains.
Note: The following information is not professional advice; we advise you to conduct your own research and make your own decisions.
Tax Type | Tax Applicable |
Long term gains | 10% above Rs. 1 lac on the equity scale |
Short term gains | 15% when there is a securities transaction tax |
So remember to factor in your taxes when you’re drawing up your investment plans, and you’ll be good to go.
There you have it, that’s everything you need to know to get started with your stock market endeavour and grow your income portfolio. If you wish to learn more about how to invest and trade on the stock market, register for our “Finance Pass: Personal finance made easy” course to help you guide through your investment journey. We are also developing a number of other finance courses, such as budgeting, insurance, and emergency funds, to assist you in becoming your most financially independent self. Sign up with Kool Kanya today!
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