What is stock or share?

A stock or share is a financial instrument that signifies ownership in a company or firm. Having stocks of the firm indicates that the investor has a part of the company which is equal to the number of shares held by the stock owner.

Companies issue shares to the public to raise capital for business expansion, operational cost, etc.

What is the stock market?

Stock market refers to the public forum that includes different markets and exchanges where investors buy and sell shares of listed companies, including the issue of new shares by a company.

The Securities and Exchange Board of India (SEBI) has laid down extensive guidelines, laws and rules for regulating the exchange of securities in the stock market.

Primary and Secondary Markets

The two major functions of the stock market are to act as the primary markets and secondary markets.

In the Primary market, companies issue and sell their shares to investors, including public for the first time through Initial Public Offering (IPO). The underwriters review the securities and determine the risk and price of the securities. Interested investors then purchase the securities directly from the company.

After they list the stock on the exchanges, investors and traders can engage in buying and selling of the listed shares. This is called as the secondary market. However, you have to understand that the listed company doesn’t take part in the buying and selling of their stocks unless it is a buyback or issue of shares. The stocks simply exchange hands.

Who can invest in equity markets?

To invest directly in the Indian equity markets, the individual must be an Indian citizen. However, NRIs and other eligible entities can invest in stocks through Portfolio Investment Scheme (PIS) that RBI developed.

There is no age bar for investing in the stock market in India. However, you need to be above 18 years of age to create a demat account, trading account, and apply for a PAN card.

However, individuals below 18 years can apply for PAN, open Demat and trading accounts through their guardian.

How to invest?

Following are the requirements and steps involved in starting an investment in the Indian stock market:

• The foremost documentary pre-requisite is PAN card and Aadhaar card. These are necessary while opening a Demat account and to comply with the SEBI’s one time KYC process.
• You cannot directly trade in the stock market. Buying and selling of securities are done through individuals or companies called stockbrokers. Find a SEBI registered stockbroker to carry out your transactions in the stock market. You need to place your sale or purchase of your security orders to the stockbroker. In exchange for their service, you need to pay the brokerage fee to the stockbroker.
• To trade in stock market, you need to have a separate trading bank account called ‘Demat Account’. A Demat Account holds your securities in an electronic form. The securities are dematerialised (hence the name ‘Demat’) or converted to a digital format and stored in the account. Dematerialisation enables the investor to hold the shares in electronic form instead of holding a physical share certificate.

Who is an intermediary?

An intermediary is a person or an entity that acts as a bridge between two parties in securities transaction in stock market. Hence, they act as middlemen between sellers and buyers of shares. According to definition provided in the SEBI (Intermediaries) Regulations, 2008, intermediaries include stockbrokers and sub brokers, share transfer agents, merchant bankers, investment advisers, underwriters, custodian of securities, credit rating agencies etc. Each intermediary plays its defined role and facilitates a smooth transaction in the stock market.

Major Stock Exchanges - BSE and NSE

A Stock Exchange is a part of the stock market. It is in the stock exchanges where the actual transaction of securities take place. In India, there are two major equity stock exchanges: The National Stock Exchange Ltd. (NSE) and the BSE Ltd (formerly known as the Bombay Stock Exchange).

NSE introduced the system of fully electronic trading in the country. There are over 1600 companies listed in NSE, while BSE has around 5000 companies listed in its exchange. However, the NSE has larger trading volume than BSE.

Things to be keep in mind before investing in stock market?

You need to think prudently to make a smart investment. Here are a few points you must be keep in mind before investing

• First, make a financial plan for yourself. List down your financial goals for future, be it long term or short term. A roadmap on your money matters will help you estimate the amount of savings and investments you need to make in order to fulfill these goals. Perhaps the most significant aspect of the financial plan is to understand your financial capacity. This will enable you to plan your investments within your capability.
• Determine your appetite for risk. Investments in stock markets entail varying degree of risk. While few stocks such as blue chip stocks may be a safe bet, investing in a smaller company may be riskier. Research on the different risks involved in the stocks you are eyeing. Whether you are risk averse or open to risks, plan your investments accordingly. Generally, securities with high risk potential yield impressive returns, but it can also lead to loss of capital.
• Do not plunge blindly into the stock market. Educate yourself about the fundamentals of stock markets. Learn about the securities, compliances, market capitalization, operation of the market etc. Understand the terminologies of the stock market. Being financially literate will prevent you from getting hoodwinked and help you ease your way into the stock market.
• Diversify your investments. A well-spread investment portfolio insulates you from markets shocks. Even if few stocks underperform, your investment in other securities may be secure from such market turbulence. However, an over-diversification of investment may not impart required momentum to grow in the market.
• Many investors strategize their investments wherein they buy and sell the securities by predicting the movement of stock prices. This is called ‘market timing’. Stock market is very volatile, and it is not possible to time the market accurately for carrying out the desired moves. Hence, follow a more consistent and disciplined approach for making timely investment.