Stock markets have emerged as one of the best places for investment. If you have idle funds, then instead of putting them in a low yield Fixed Deposit or in a bank account, you can choose to deal in stock markets. You can yield considerably higher returns by investing your money in corporate stocks. However, the higher returns come with higher risks. Stock markets are not the playground for rookies. You need to understand the fundamentals of stock market and stocks in order to make money out of them. Stock investment is both an art and a science. Proper research helps in getting higher returns.
If you are interested in taking a plunge then start by understanding the working of stock markets and stocks.
Stock investment involves buy company stocks. You can buy or sell stocks in a stock exchange through a broker. Following are the main components of stock investment.
What are Stock Markets
In simple terms, stock market is a place where stocks are bought and sold. It is like a marketplace for corporate stocks. You can trade in only those shares which are registered in a stock exchange. In India, the two most important stock exchanges are Bombay Stock Exchange and National Stock Exchange. Besides these two major exchanges, there are other regional stock exchanges such as Ludhiana Stock Exchange and Ahmedabad Stock Exchange. Bombay Stock Exchange has more than 5000 companies listed, which makes it one of the biggest stock exchanges in the world.
Stock Markets let various brokers trade in the securities. As the result of such trading and other factors, the prices of the securities fluctuate. Depending on the purchase price and selling price, investors either make money on stocks or lose. Brokers charge brokerage for providing their services to the investors. These charges form the part of transaction costs.
Retail investors cannot directly buy or sell on stock exchanged. In order to keep the operations regulated and transparent, stock exchanges allow only their registered members to trade in the stocks. Retail clients can trade through such members by paying brokerage charges. The stock exchanges are regulated by Stock Exchange Board of India or SEBI.
What do you mean by “Stocks”
Stocks represent a share of a company. When a company sells its capital to the public, it does so by selling its shares. Each share represents part ownership of the company and it is a part of the company’s entire stock. Shares derive their value from the net worth of the company. A company generally has various types of shares such as equity shares, preference shares etc. However, in stock markets, only equity shares trade.
Additionally, the share prices are impacted by the operations, profits and revenue of the company. There are several other factors which determine the price level of a stock. Due to change in these factors, the prices keep fluctuating. The investor’s gain or loss arises from such fluctuations.
Ideally, investors would want to buy lower and sell higher. However, this is where most of the investors lose out. Stock prices are determined by a myriad of factors, most of which are out of the control of an investor or trader. In order to be a successful investor, it is important to have full grasp of these factors.
Who all are Stock Brokers
Public can invest in shares through the services provided by the stock brokers. These stock brokers are registered members of the stock exchanges and my trade shares on such exchanges on behalf of the investors. Normally, an investor can open a trading account with a registered stock broker. Such stock broker then trades in shares as advised by the investors. In return, it charges brokerage to its clients, which accounts for a percentage of the amount traded. Such brokers provide a number of services including advisory, in lieu of fee. The investor can decide to open a no-frill account, where the stocks are bought and sold as per the wishes of the client. Alternatively, the investor can opt for portfolio management services, where brokers provide specialist advice to its clients about the stocks to be bought or sold.
Heard about Analysts
Analysts are independent entities who provide an informed opinion about the likely performance of a stock. As explained above, the stock prices are determined by various micro and macro factors. Regular investors do not have enough time or expertise to properly track and analyze these factors. That’s where the analysts enter the scene. These highly qualified and experienced professional analyze the stocks and provide their Buy, sell or neutral opinion about the future performance of the stocks. Various broking firms also have their own teams of analysts. These analysts generate reports about the stocks. Such reports may be bought by the investors for proper guidance.
Overall, it is clear that stock markets are highly regulated. In this way, the markets are kept safe for regular investors.