What is the Stock Market? How Does It Work

What is the Stock Market?: If you want to learn everything about the stock market, you’re in the right place. After reading this post, you’ll get answers to all your questions about the stock market. Even if you’re a complete beginner, you’ll understand everything clearly.

I promise that once you finish this post, you won’t have any doubts about the stock market. Today, I will provide you with basic knowledge of the stock market, and also explain all the essential basic and advanced concepts in detail, so you can truly understand what the stock market is.

What is Share Market?

The stock market is a place where shares of companies listed on Indian stock exchanges like BSE and NSE are bought and sold. Through the stock market, even a regular investor can become a shareholder by investing in top companies listed in Nifty or Sensex.

How does the Stock Market work?

A market is a place where things are bought and sold. Similarly, the stock market is a place where many companies are listed, and they issue shares (for sale) at different prices.

People buy these shares, and when the price of the shares goes up, they sell them to make a profit. However, if the share price goes down, they may face a loss when selling.

It’s important to know that stock prices keep changing (fluctuate), so today the price might be different from tomorrow.

Most people invest in the stock market hoping to get higher returns in the future and become rich quickly.

But understanding the stock market isn’t easy. There are many basic terms you need to know, like SEBI (Securities and Exchange Board of India), which plays a big role in the stock market. You also need to understand terms like IPO, Demat Account, Sensex, Nifty, Equity, Commodity, Currency, Derivatives, Dividends, and Bonus. If you’re new to the stock market, let’s understand it with an easy example.

Share Market for beginners

To understand how beginners can learn about the stock market and take their first step, let’s look at an example.

Example

• Suppose you started a company, and for a while, it was doing really well. But now, you need 10 lakhs to grow your company further, and you don’t have that money, nor can any of your family or friends invest that much. So, what will you do?

• You might think about taking a loan from the bank and investing it in your company, but you know you’ll have to pay a lot of interest. So, what else can you do?

• One option is to list your company in the stock market and issue shares. Then, people can invest in your company.

But now the question is, how does a company get listed in the stock market?

How does a company get listed in the stock market?

If you need 15 lakh rupees, you can easily raise the money by listing your company on the stock market. First, you need to get your company listed on stock exchanges like BSE (Bombay Stock Exchange) or NSE (National Stock Exchange).

BSE has over 4,000 companies listed, and NSE has more than 1,500 companies listed.

To list your company on the stock exchange, you first have to go to SEBI (Securities and Exchange Board of India). You need to provide all your company’s details to SEBI, and once they verify and approve your company, you can list it on the stock exchange.

Now, if you’re selling shares for the first time and need 10 lakh rupees, you would issue 10,000 shares at ₹100 each. This is called an IPO (Initial Public Offering), which is when a company first issues its shares and gets listed on the stock market.

After that, when people buy your company’s shares and all the shares are sold, you will receive 10 lakh rupees in your bank account.

You have understood what the stock market is, now let’s move on to understanding the next part.

What is a Share?

A share means your ownership in a company. If you buy a share of a company, it means you own a part of that company. This means your money is invested in the company, so if the company makes a profit, you also make a profit, and if the company suffers a loss, you also face a loss.

For example, if a company has 100 shares in total and you own 10 shares, you own 10% of the company. Similarly, shareholders of any company own different percentages of it.

Today, you can buy and sell shares from home through brokers online. Brokers are websites or apps that allow you to buy and sell shares. In India, there are many brokers like Zerodha, Upstox, Angel Broking, and Sharekhan. You can go to these brokers’ apps or websites to buy and sell shares.

After getting complete information about what the stock market is, you now know that.

How do share prices increase or decrease?

In the stock market, the price of a share changes based on demand and supply. The price of a company’s shares is determined by how much demand and supply there is for them.

If a company’s shares have high demand and low supply, the price of those shares goes up. On the other hand, when supply is high and demand is low, the share price goes down.

Each company’s share price is different. Every small or large listed company does business daily, sometimes making a profit and sometimes a loss, which causes the share prices to fluctuate over time.

When a company’s business grows and it makes a profit, many investors start buying its shares, causing the price to rise. Conversely, when a company faces a loss, people quickly sell their shares, which causes the price to fall (so they don’t face more losses if the price drops further).

Let’s understand this with an example.

Example

From 2007 to 2016, the price of one share of Reliance Industries stayed around ₹500. However, after Jio was launched in 2016, the company took many initiatives, and its business started growing steadily. Today, the price of one Reliance share is around ₹2000.

As more and more people buy Reliance shares, the price continues to rise every day. So, if you’re new to the stock market and unsure which company’s shares to buy, you can start by buying Reliance shares.

Now that you have a basic understanding of what the stock market is, let’s learn how to buy and sell shares.

How to buy and sell Shares

In the stock market, shares are bought and sold through bidding, which is like an auction.

The seller who is willing to sell the shares at the lowest price and the buyer who is willing to buy at the highest price will exchange the shares between them.

The highest bidder gets to buy the share. This is called the “Bid Price” and “Ask Price.” The price at which the seller is willing to sell is the “Bid Price,” and the price at which the buyer is willing to buy is the “Ask Price.”

How to buy Shares of a Company?

To buy shares of any company, you need three things:

1. Saving Account or Bank Account: You need to have a savings account in any bank to make payments for buying shares.
2. Demat Account: When you buy shares of a company, you own a part of it. To keep proof of this ownership, the shares are stored in digital form in your Demat account. This way, if anything happens in the future, you can prove that your money is invested in the company. When you sell the shares, they are transferred back from your Demat account to the company. Most brokers who open trading accounts for you also offer a free Demat account.
3. Trading Account: In India, stock exchanges like BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) don’t directly buy or sell shares. To trade shares, you need to use discount broker companies like Angel Broking, Zerodha, etc. You open a trading account with these brokers, where you can buy and sell shares. This account is called a trading account or broker account.

To buy shares, first, you need to open a Demat account through a broker (like Upstox, Angel Broking, Zerodha, etc.), link your bank account to the Demat account, and add some money to your bank account.

When you buy shares, the money is transferred from your bank account to the company’s account via your trading account, and the shares are stored as digital proof in your Demat account. When you sell the shares, they move back from your Demat account to the company’s account, and the money is transferred to your bank account.

Before investing in the stock market, you should understand the different ways to make money from it.

Till now, you have learned what the stock market is and how to use it. In other words, you have understood the full details of the stock market, and now let’s move on to understanding the next step.

Ways to make money from the Stock Market

We can make money from the stock market in many ways. Some of the ways are listed below:

1. Most people make money by selling shares when their price increases, and this is the most popular method. People also earn money through methods like:

1. Intraday Trading
2. Swing Trading
3. Option Trading
4. Scalping Trading

2. When a company makes a profit, it gives its shareholders a dividend (a share of its profit). Additionally, the company may also offer bonuses in the form of shares.

3. In Intraday trading, you can make money through short selling.

4. You can also earn money by trading in other segments of the stock market, like:

• Future Market Trading
• Option Market Trading

These are some ways you can make money by investing in the stock market. Now, let’s understand when you should buy shares of any company.

When to buy Shares?

Once you learn how to buy and sell shares, you’ll likely wonder when is the right time to buy a share.

Before buying any share in the stock market, you should keep these things in mind:

1. Research the company thoroughly before buying its shares.
2. Check the company’s profit and loss history over the past few years.
3. Look at the company’s assets and liabilities.
4. Learn about the company’s cash flow statement.
5. Read the company’s balance sheet carefully.
6. Also, stay updated by visiting websites like Economic Times and NDTV Business, where you can find the latest news related to the stock market.

As your knowledge and experience in the stock market grow, you’ll be able to buy more profitable shares.

In the stock market, there are also many scams, and the biggest reason why some people lose their money or become bankrupt is due to a lack of knowledge and experience. If you want to invest in the stock market, you need to have patience; otherwise, you could lose a lot of money.

If you are interested in the stock market, you must have heard about the Harshad Mehta scam and the Ketan Parekh scam. A few years ago, a web series called “Scam 1992” about the Harshad Mehta scam became very popular. After watching this series, even those who had no basic knowledge of the stock market started to understand it.

My suggestion is that before investing in the stock market, you should learn about how it works, and gain complete knowledge and experience about the stock market. Only then should you step into the Indian stock market.

You must have heard of Warren Buffett, the world’s richest investor. He made all his money by investing in the stock market and has been one of the top 5 richest people in the world for the past few years.

How risky is the Stock Market?

There is a common belief that

• “the stock market is very risky; don’t invest, you could go bankrupt,” and that the risk is so high that the money you worked hard for can be lost in a single day.

While the stock market does carry risk, it is mainly for people who invest in any random or poor-quality company’s shares without thinking.

• For example, imagine you have only ₹10,000 and you want to double it. Some beginners may think they should buy cheap stocks priced at ₹1, expecting the price to rise to ₹2, thus doubling their money (₹10,000 turning into ₹20,000). If the price rises to ₹5, their money would grow five times, to ₹50,000.

This is why many new investors buy shares of cheap companies, thinking they will make quick profits. However, later they realize that 99% of these companies are either fraudulent, go bankrupt, or have too much debt, which prevents them from making profits. As a result, instead of the share price going up, it keeps falling.

Therefore, if you’re a beginner in the stock market, it’s safer to invest in large-cap and blue-chip companies like Reliance, TCS, Infosys, Asian Paints, Pidilite, HDFC Bank, etc.

These are well-established companies where if you invest for the long term (5, 10 years, or more), you can expect good returns in the future. Additionally, instead of putting all your money into one company, it’s better to diversify your portfolio by investing in different companies.

How to understand the Stock Market?

To fully understand the stock market, it’s important to have complete basic knowledge of it. I hope by now, you have gained a thorough understanding of the stock market from this post.

In India, only 4% to 5% of people invest in the stock market, whereas in the USA, this number is around 30% to 40%. This means there is still a lot of room for small investors to enter the Indian stock market.

The main reason why so few people invest in the stock market is the “fear of losing money.”

90% of new investors in the stock market end up losing their money and later speak negatively about it.

However, the truth is that big investors like Rakesh Jhunjhunwala emerged from this market, and it is through stock market investing that Warren Buffet became one of the world’s most successful and wealthy investors.

I want to tell you that if you really want to make money from the stock market, you first need to understand it.

And if there’s the best book in the world to learn and understand the stock market, it’s “The Intelligent Investor.”

A living example of this is the world’s richest investor, Warren Buffett. He says that.

“This book changed my life, and it is the best book ever written on stock market investing.”

How to learn Stock Market?

If you are a beginner in the stock market and want to become a successful investor and build a career by making money from the stock market, the first thing you need to do is learn and understand the stock market properly.

Just like when you take a course and study different subjects, in the stock market, you need to learn different things. First, you need to clear the basics of the stock market, such as:

• How does the stock market work?
• What is Sensex?
• What is Nifty?
• What is an IPO?
• What is a Demat account?

Before investing in the stock market, research and learn as much as you can about these topics.

What is the Stock Market FAQ’s

Conclusion

I hope that after reading this article, you have gained a detailed understanding of Stock Market. If there’s any information missing, I will make sure to update it in the article. I hope you liked this post. If you did, please share it as much as possible. If you have any complaints or need more information related to this post, feel free to ask in the comments section.

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