Understanding Option Chains

The equity market, also known commonly as the stock market or the share market, is an important segment of the financial market in India. If you are comfortable taking on a higher level of risk in your investment portfolio in exchange for the possibility of creating wealth, the stock market may be a suitable investment option for you. 

However, to plan your investments well, you need to have a clear understanding of the stock market basics, such as its meaning, how it works and who the key market participants are. In this article, we’ll take a closer look at the above aspects, as well as other details of share market basics for beginners, such as how you can earn returns from the market.

What is the stock market?

The stock market or the share market is the common marketplace where individual and institutional buyers and sellers trade in the shares of publicly listed companies. A share in a company represents a unit of ownership in that company. These units of ownership are commonly issued to the public in the form of equity shares. 

Once you have some basic knowledge of the share market, you’ll be better equipped to start trading or investing in equity shares in the primary and secondary markets. 

The types of share markets

Depending on how the shares are available to investors and traders, the share market can be any one of the following two types. 

1. Primary market

The primary market is that segment of the equity market where a company issues its shares to the public for the first time. This is typically done via an Initial Public Offering (IPO), where a private company offers its shares to the public for the first time. It involves a detailed process of due diligence and regulatory compliance. Companies generally use IPOs to raise funds for business expansion, debt repayment or other such corporate purposes.

As an interested investor, you can subscribe to the newly issued shares in the primary market by submitting applications. You will have to subscribe to a specific number of shares at a predetermined price. Generally, the process of subscribing to an IPO remains open for a fixed period. At the end of this period, the issuing company allocates shares to investors according to various factors, like the demand for the shares and the size of the offering. 

Once the shares are allotted, they are listed on stock exchanges like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). The shares can then be traded freely in the secondary market. 

2. Secondary market

In the secondary market, investors buy and sell the securities that were previously issued in the primary market. This provides liquidity to investors who wish to exit their current positions or purchase new shares of the company. The secondary market operates through stock exchanges like the BSE and the NSE, which provide a platform for buyers and sellers to trade equity shares freely. 

As an interested trader or investor, you can place buy and sell orders in the secondary market, specifying the quantity and the price of the equity shares that you wish to purchase. These orders can be limit orders or market orders, as outlined below. 

• Limit orders

In a limit order, you need to specify the number of shares you wish to buy, as well as the price at which you wish to buy them. The order will only be executed at the predetermined price set by you. 

• Market orders

In a market order, you do not set any specific price at which the order must be executed. Instead, the order is executed at the price prevailing in the market then. 

Another important aspect of share market basics that you should know is that the secondary market operates during the regular trading hours specified by the stock exchanges. Some exchanges may offer after-hours trading, allowing you to trade in equity shares beyond the regular hours. 

that the secondary market also operates during regular trading hours specified by the exchange. However, some exchanges also offer after-hours trading, allowing investors to trade securities beyond regular hours.

The key players in the Indian stock market

Another important aspect of gaining basic knowledge of the share market involves getting to know its key players. Here is a closer look at the main participants in the Indian share market. 

• Stock exchanges

Stock exchanges like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE) offer a platform for the buying and selling of equity shares among traders. 

• The market regulator

The Securities and Exchange Board of India (SEBI) is the market regulator tasked with the responsibility of overseeing the functioning of the market and protecting investors’ interests. 

• Depositories and Depository Participants (DPs)

Depositories are central entities that hold securities in the electronic format and facilitate easy settlement of trades. India has two key depositories — the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). 

Depository Participants (DPs) are agents of depositories. These entities are authorised to help investors open demat accounts to hold securities in electronic format. 

• Stockbrokers

Stock brokers are intermediaries that connect investors and traders with stock exchanges. To trade in the share market, you need to open a demat account with a DP and a trading account with a stockbroker. Today, most leading stock brokers are also registered DPs, so you can open demat-cum-trading accounts with your preferred stock broker. 

• Clearing corporations

Clearing corporations, such as the National Securities Clearing Corporation Limited (NSCCL), ensure the settlement of trades by guaranteeing the performance of obligations. They manage risk and maintain the integrity of the market.

• Listed companies

These are corporate entities whose equity shares are listed on stock exchanges in the secondary market. Such companies are heavily regulated by the market regulator SEBI to protect the interest of investors. 

• Investors

Lastly, the most important participants in the market are investors themselves. This category of market participants includes both individual investors as well as domestic and foreign institutional investors. 

How do traders and investors earn returns from the share market?

Getting to know how to earn returns from your equity holdings is one of the most important aspects of share market basics for beginners. As a trader or an investor, you can earn returns from the share market through various strategies. Here is a closer look at the most common ways in which you can benefit from the share market. 

• Capital appreciation: 

One of the primary ways to earn returns is through capital appreciation, which occurs when the price of a stock increases over time. Here, the key strategy is to buy stocks at a lower price and sell them at a higher price, capturing the difference as a profit. You can achieve this more easily by identifying undervalued stocks, conducting thorough fundamental analysis, and making well-planned buy and sell decisions.

• Dividend income: 

Many fundamentally strong companies distribute a portion of their profits to shareholders in the form of dividends. If you hold dividend-paying stocks, you can earn regular income through these dividend payouts. Dividend income can also be an attractive option for you if you are a long-term investor seeking stable and consistent returns, particularly in companies with a history of dividend payments and strong fundamentals.

• Trading strategies: 

You can also benefit from short-term share price movements by employing various strategies to generate returns. These strategies include day trading, swing trading and momentum trading, among others. Day traders aim to profit from intraday price fluctuations, while swing traders hold positions for a few days to weeks, capitalising on short-term trends. Momentum traders, on the other hand, focus on stocks with strong upward or downward price momentum, aiming to capture profits during price surges.

• Growth investing: 

Growth investors focus on identifying companies with high growth potential. To follow this strategy, you must invest in stocks of companies that are expected to experience above-average earnings growth in the future. By investing in such growth stocks, you can participate in the growth story of successful companies and benefit from capital appreciation over the long term. This approach requires diligent research and analysis to identify companies with sustainable growth prospects.

• Value investing: 

Value investors seek to identify undervalued stocks trading below their intrinsic value and take a long-term perspective, expecting the market to eventually recognize the underlying value of the stock and drive the price higher. To benefit from this approach, you must look for companies with solid fundamentals and positive future prospects that the market may have overlooked. Keep in mind that value investing requires patience, careful analysis and a contrarian approach.

Conclusion

This sums up the most important details of share market basics for beginners. You can use this basic knowledge of the share market to plan your equity investments and align them with your financial goals. The first step, of course, will be to open a demat account and a trading account, since these are essential prerequisites to buy and hold equity shares in the electronic format. 

Once you get better acquainted with the share market, you can try advanced trading strategies and use fundamental or technical analysis to plan your investments better. In case you require further assistance, you can always reach out to a financial advisor for expert guidance on how to invest in the share market.