Know the basics of Stock Market - Part I

Investing in stock market is always prime strategy of smart investor. But to become smart investor in stock market, it is important to learn about what the stock market is and how it works, i.e., Basics of stock market.

Basics of stock market is not a one day learning. So don't be hurry. Learn with focus. 

A stock or share (also known as a company's "equity") is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets (what it owns) and earnings (what it generates in profits).

Read: Learn to grow your pass income

A stock market is a gathering of buyers and sellers of stocks in a single platform.

How does it works:

Stock market/ capital market is a market for long term debt and equity shares. In this market both debt and equities are traded.it is further divided into:

• Primary market
• Secondary market

Primary market is the segment in which securities are offered to public, for investment. Through this platform corporate raise capital for further development of their ventures. Nothing but When a company comes out with an initial public offer (IPO) it is called the primary market. 

Once the share gets listed it starts trading in the secondary market.

Secondary market is the segment in which the listed securities are traded. It provides a platform for people to buy and sell shares, bonds and debentures etc. so this platform is ideal for corporate for raising money, and for investors to participate in the growth of companies through various investment options available in the market.

When a company establishes itself, it may need access to much larger amounts of capital than it can get from ongoing operations or a traditional bank loan. It can do so by selling shares to the public through an initial public offering (IPO). This changes the status of the company from a private firm whose shares are held by a few shareholders to a publicly traded company whose shares will be held by numerous members of the general public. The IPO also offers early investors in the company an opportunity to cash out part of their stake, often reaping very handsome rewards in the process.

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Once the company's shares are listed on a stock exchange and are bought and sold. Where, the stock exchanges are secondary markets. Apart from the regional exchanges, there are two major exchanges on which most of the trades are done:

Bombay stock exchange (BSE):

      It is the oldest stock exchange. It was the first exchange to receive recognition from Indian government, located in Dalal Street, Mumbai.

National stock Exchange (NSE):

NSE commenced its operations in wholesale Debt Market (WDM) in April 1994 and in Capital Market (Equities) segment in June 1994.

It formed first clearing corporation (NSCCL), which carries out clearing and settlement of trades executed in equities and derivatives segments.

Since then it has evolved to be the highest volume generating exchange in India. They also provide online trading facilities over internet.

What are Stock Indices?

Thousands of companies list their shares on the Indian share markets. From these, a few similar stocks are grouped together to form an index which have large liquidity and market capitalization.

Index

 An index is benchmark used for measuring the performance of a fund managers and is comprehensive measure of market trends, intended for investors who are concerned with general stock market price movements.

 The classification may be on the basis of company size, industry, market capitalization, or other categories. 

• The BSE Index- Sensex includes 30 stocks and
•  NSE index- S&P CNX Nifty comprises 50 stocks. 

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Others include sector indices like the Bankex, Market cap indices like the BSE Midcap or the BSE Small cap, and others.

SENSEX:

Sensex has become the barometer of the Indian stock Market. It is comprised of 30, well-established and financially sound companies.

Sensex first compiled in 1986, was calculated on a “Market Capitalization-Weighted Method”. Base year of Sensex is 1978-79.

NIFTY:

Nifty is well-diversified 50 stock index accounting for 22 sectors of the economy. It is launched in 1996. It is the first index constructed by NSE.

Nifty was first compiled in 1995 with base value of 1000.

It is used for variety of purposes such as bench marking fund portfolios, index based  derivatives and index funds.

As i said above, it is not a one day learning, So this is the first part of Basics of Stock market. Learn more in later posts.