Eager to invest in the stock market but wondering if you can handle it? Of course you can! Once you learn how the stock market works and understand the jargon, you might start reading even stock charts with ease.
What is the stock market?
The stock market or stock exchange is where people buy and sell various kinds of financial securities. These may include shares, government bonds, debentures, mutual fund units, commodities, currencies, and lots more.
How does the stock market work?
Most investors in the stock market invest in the shares of public companies. So, let’s look at this from the beginning:
When a private company goes public, it makes an initial public offering (IPO). Hereby, the company issues shares for public ownership for the very first time. These shares are issued in the primary market. Those who are allotted shares of this newly public company become part-owners. The company can use the funds thus raised to fuel growth.
Upon completion of the IPO, shares of the company can be bought or sold in the secondary market (i.e. the stock exchange). One can buy shares at the market value from the shareholder. Or, the buyer and the seller could negotiate a mutually acceptable rate.
Anyone who holds the shares of a company enjoys certain benefits. They receive dividends, which is a share of the company’s profits. Sometimes companies also issue bonus shares in lieu of cash dividends. And on occasion, companies offer to buy back shares at a rate higher than the current market value.
But stocks can be traded only if they are listed on the stock exchange. The exchange tracks the supply, demand, and current market price of every stock. In India, the two main stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The Securities and Exchange Board of India (SEBI) is the market regulator. It monitors the workings of all entities on the primary and secondary markets.
How to invest in the stock market
Several years ago, stock trading would take place at a physical market. But all transactions are now carried out electronically through online trading platforms.
To invest in the stock market, you must open a demat account and a trading account with a registered depository participant (DP). A DP is an agent of the depository. It acts as an intermediary between the depository and traders who wish to buy and sell stocks. A depository, in turn, holds and maintains all dematerialised securities and ownership records. There are currently two depositories in India: National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
You could invest in mutual funds without applying for demat and trading accounts. But having a demat account simplifies the investment process and tracking your portfolio becomes easier.
To open a demat and a trading account, submit the account opening form and documents to the DP. Following verification, you will receive the account details. Link your savings bank account to these two accounts, and you are ready to start trading. You could also opt for a bundled 3-in-1 account from Kotak Securities that provides savings, demat, and trading accounts in a single package.
Once you have the tools in place, focus on building a diversified stock portfolio. Over time, this will gain in value and minimise the overall portfolio risk. If you need help, brokers like Kotak Securities offer extensive educational material for traders and investors, along with stock tips and multiple trading tools.