Overview to Stock Market?

What is stock market?

The place where shares of a publicly listed company are traded is termed the stock market.

When the firm decides to go public, it announces an initial public offering (IPO). It lists a certain number of shares on the market (also known as the stock exchange) for the public to buy. This helps them raise capital to pursue their financial goals. Some may also do it for prestige or to create a good impression among their larger customer base. 

But this is just one company. Imagine if several companies go public on different stock exchanges. This results in an interconnected web of shares from all companies in the stock market.

How does the stock market affect the economy?

Importantly, the stock market is one of the many indicators of a ‘free-market’ and ‘democratised’ economy. Why? Because it provides existing and potential investors like you to invest in a company on your OWN accord.

When did the stock market start in India?

The Indian stock market did not originate in a 24-story concrete giant but under a Banyan tree. A group comprising three Gujarati and one Parsi man used to meet under a Banyan tree in front of the Mumbai Town Hall in the 1850s. 

They used to trade in cotton, but something needed to be formal and legitimate. 

Historically speaking, Indians are fond of community gatherings. And so, this group of four gradually expanded into an association and was named “The Native Share and Stock Brokers Association”. 

And in 1975, this very association was renamed into our beloved Bombay Stock Exchange (BSE). The BSE and the National Stock Exchange (NSE) make up the Indian stock market and other minor exchanges. 

How many segments in the stock market?

Each stock market is divided into two segments – primary and secondary. In the primary segment, a company sells its shares to the public for the first time. In the secondary segment, these shares are bought and sold between traders. 

Take the example of Company A announcing an IPO at Rs. X per share on the NSE. Investors purchase these shares, and the company successfully raises the capital required. This is precisely what a ‘primary market‘ represents in the stock market. As a primary market, the company was allowed to sell its shares for the first time to the public. 

Now, what happens to those shares? After Company A gets listed on NSE, investors who participated in the IPO sell their shares after their prices rise. Other investors may buy these shares, and thus, the cycle goes on. This takes place in the ‘secondary market‘. 

Sometimes, a company may offer additional shares through follow-on offerings or rights issues. On the contrary, it may decide to buy back or “delist” those shares. 

Who are the participants in the Indian stock market?

The members are – the regulator, stock exchange, public-listed companies, traders and investors, and of course, the market intermediaries. Let’s try to briefly understand each member’s role, particularly in the context of the Indian stock market.

Who controls the stock market?

The stock market regulator acts as the head of the family. Although, as an investor, you have complete freedom to decide where and when to invest, you still need to follow the regulator’s rule book. As mentioned before, the stock market in India is regulated by SEBI. It was established under Section 3 of the SEBI act in 1992. 

Food for thought: Imagine a market without any rules. How would that impact the market scenario? (H4)

Stock exchange

The platform where settlement of trade in stock market happen i.e., buy or sell shares. In addition to BSE and NSE, Calcutta Stock Exchange and India International Exchange are other exchanges in India. 

Public listed companies 

You can invest in private companies as well through other financial instruments. All companies in the share market are “listed”, i.e., they are available for trading by the common public. Such firms are known as publicly listed companies. 

Traders and investors

What is the difference between a trader and an investor? The differences exist in their timelines. Usually, traders buy and sell assets within a day, week or month. On the other hand, investors hold onto their investments for extended periods, i.e., for years, if not decades. 

Market Intermediaries 

On paper, investing in the stock market is just buying or selling shares of stock. But in reality, there is a pathway followed. If you still need to do so, create a Demat account through a stock broker and create an account in a recognised bank. These are termed “market intermediaries”, helping you invest in a listed company. 

What are the common stock market myths?

As a kid, you must have heard of this saying, “Satta bazaar mein satta khel raha hai”, which never invoked an excellent feeling. But why? Because there were several myths floating around about the market. Let’s debunk some of them – 

Investing in stocks = gambling

This is the most common myth that everybody believed until Rakesh Jhunjhunwalla proved otherwise. Gambling is primarily based on chance – if stars align, you win and if they don’t, better luck next time. But investing in stocks has little involvement of luck and more to do with what’s happening around you. 

Take the case of the Russia-Ukraine conflict. A conflict happening elsewhere caused a significant jolt to the Indian stock market. Suddenly people became risk-averse and started investing in safer instruments. On the flip side, when the great Indian festival rolled out, the stock market got back on track. There are a gazillion examples to prove that the stock market is more research and trends-oriented than a mere game of luck. 

The kids can’t play. 

Remember, as a kid, you were not allowed at the adults’ table because something important was being discussed. Luckily, the same logic cannot be applied to the stock market. Gone are those days when investing in shares was an “adult game”. Yes, as per the rules, you can open a Demat account under your name only 18 years or after. But learning the art under adult supervision is still allowed. Parents are actively teaching their children to invest after they finish high school. So clearly, the world is evolving. 

More money = profit 

This is, again, an age-old belief that you can only make a profit if you invest a considerable sum of money in the stock market. But in reality, the stock market is versatile and caters to different risk appetites and budgets. So, irrespective of whether you invest Rs.500 or Rs.5 lakh, the right move will earn you a profit. The key is to identify the right company shares through research and strategy – not worry about the amount you invest. 

Returns directly proportional to the risk 

Despite the research and strategies, some risk is involved while investing in stocks. It is also wrong to deny that some highly-risky moves can yield high returns. But not all. And so, believing in this generalisation is itself a “risk”. Moreover, not everybody can afford to have a high-risk appetite. But they can still benefit from safer moves. So, the returns depend more on the existing market situation and geopolitical and inflation factors rather than the extent of risk. 

Mimicking moves pays off.

At the start of your investing journey, you take suggestions from people around you. You also tend to read stories of people who have made it prominent through investing. But mimicking those moves or sticking to specific suggestions may only help 1-2 times. Only sometimes. Because the market situation now may differ from when others made that move. So, it is always better to understand the stock market instead of blindly following suggestions.

What is volatility in stock market, and how should you manage it?

The term’ market volatility’ is defined by two aspects – frequency and magnitude. Frequency indicates how often the price fluctuates, whereas magnitude means how much the price has changed. But let’s not complicate things. The simple logic dictates that the higher the frequency and magnitude of price movement, the higher the market volatility.

Investing in stocks is a complex and challenging game. If it were so, everybody would be rich. The volatility factor is why you need to analyse the stock market carefully before investing. Knowing how the surrounding factors affect market movement will help you manoeuvre your way with minimal risks. 

How to measure market volatility?

To determine the market volatility for a particular stock, you need to calculate the standard deviation of price change over a specific period. Yes, this doesn’t sound very easy in theory, but you will understand it better using the following example. 

Let’s find stock ‘X’s market volatility over a day. 

Closing price on Day 1 = 570

Closing price on Day 2 = 575

Thus, the daily returns would be = (575 – 570) x 100/570

= 0.8% 

Now, the standard deviation over the day = square root of daily returns 

= 0.89% 

For example, how do you calculate the standard deviation over a year?

The total no. of trading days in a year is 252. Thus, the standard deviation over a year = 0.89 x square root of 252

= 14.12% 

What does this calculation tell you? That the share price of Stock X will deviate up to 0.89% on either side within a day. Similarly, the share price will increase or decrease by 14.12% within a year. 

The higher the standard deviation, the more your portfolio or share price likely fluctuates from the average value. Of course, standard variation is limited to the particular stock and timeline. You may need more than generalised market volatility. 

How much volatility is normal?

According to Forbes, market volatility of 15% from your average returns is the bare minimum you should, have during any year under consideration. But you can expect around 30-35% variation in returns approximately once in five years. 

This shows that while you perceive the stock market to be on a constant rollercoaster, the reality is simply not that exciting. The market is fairly calm, with short-lived periods of high fluctuations. These fluctuations are mainly brought about by external factors, e.g., the Russia-Ukraine conflict. 

If the market were as straight as an arrow, investing wouldn’t be so fun, right? Thus, while starting your investment journey, consider ‘market volatility’ as the new normal. Stay calm by it. 

Common stock market terms used in the markets 

Pay attention to the jargon! As investors or traders, you need to know the meaning of some standard stock market terms used in the market. These are – 

• Buy – It is a stock market action in which an investor bids money to purchase shares of a company at a specific price. 

• Sell – It is the stock market action in which the investor/trader sells the shares of a particular stock at a specific price. 

• Bid – It refers to the “highest” price a buyer would pay to purchase a specific number of shares at any given point. 

• Ask – Contrary to ‘bid’, ‘ask’ refers to the lowest price at which a seller would sell a specific number of shares at any given point. 

• Bull – A ‘bull market’ indicates an increase in the price of an asset, encouraging buying activity. A bullish market represents a thriving economy and a higher willingness of consumers to spend. 

• Bear – Contrary to the bull, a ‘bear market’ indicates a decline in the asset’s price leading to a sell-off. A bearish market represents an economic slowdown wherein consumers are hesitant to spend. 

• Market order – An investor places an order to either buy or sell a stock at the current best price that the stock market offers. 

• Limit order – It is a type of order used to buy a stock below the maximum purchase limit or sell a stock above the minimum selling limit. 

• Day order – If you submit an order for buying or selling a stock at a specific price on the same day, it is termed a day order. If not executed on that day, the order will expire. 

• Averaging down – It refers to a strategy in which an investor purchases shares of a previously-bought stock when the price drops to decrease the stock’s average price.

• Going long – In this position, an investor owns the stock and intends to keep it while expecting the price to increase. 
• Going short – It means selling the stock the person doesn’t hold on the same day of buying it. 

• Float – A figure indicates how many shares of a particular stock are available to buy or sell for the common investing public. 

• Portfolio – It represents an investor’s collection of funds, stocks, and other assets traded in the market. Usually, investors are advised to diversify their portfolios to manage risk and limit exposure to only one type of asset. 

Key Takeaways

• A stock market is defined as a place or platform place where shares of a publicly listed company are traded. 
• The stock market is one of the many indicators of a ‘free-market’ and ‘democratised’ economy because it provides existing and potential investors like you to invest in a company on your OWN accord. 
• Each stock market is divided into two components – primary and secondary. 
• The key participants are – the regulator, stock exchange, public-listed companies, traders and investors, and of course, the market intermediaries. 
• The term’ market volatility’ is defined by two aspects – frequency and magnitude. Frequency indicates how often the price fluctuates, whereas magnitude means how much the price has changed.

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