Understanding the Stock market basics is very important for participants. the market has seen an exponential rise by the retail participant.
In three months, Indian brokerages have added over 24 lakh new Demat account holders in the quarter to June 2020. That is like 10 percent of the total account holders.
The reasons can be many, like Work from home; Good returns post corona correction, ease of operation, and many more.
As new customers and investors are jumping into the markets searching for better returns, there is a lack of fundamental knowledge on the subject.
Investing in the stock market can be a satisfying journey, provided one has a fundamental concept covered and well understood.
This blog post will help you in understanding the various fundamental concepts to smoothen your Stock investment journey.
Before diving into the Stock market, let’s first understand what stocks are?
Stock is ownership certificates in the company that one holds.
These stocks are issued by a business to raise capital for growing their business or getting new owners on board in place of existing owners.
The price movement of stocks depends upon the demand and supply of stocks. The demand and supply, in turn, depend upon business fundamentals and prospects.
Depending upon the stock market price and the number of stocks, the stocks are classified as Large-cap, Midcap, or small-cap.
As the name suggests, Large-cap stocks have stable revenue and profitability compared to mid or small-cap stocks. Small-cap stocks’ investment returns can be expected more than Mid or large-cap in that order as risk is more in small-cap stocks.
For more on Stock and Mutual Fund classification do read.
What is the Stock market?
The stock market is a platform where an exchange of ownership happens in exchange for money.
In INDIA, Nifty and Sensex are the two biggest Stock markets.
The stock exchange is a marketplace where one can buy a wide range of Financial instruments in a deal of money, such as financial instruments like shares, bonds, futures, derivatives, etc.
One has to understand that in the stock market, information is the biggest asset. Those who have the correct and fast information regarding investment opportunities get the maximum benefits.
The resources you require to succeed in the market are rights information from the correct source.
Time is the biggest virtue which one should have to get maximum gains.
Do remember the Stock market is an investment vehicle and not a quick rich platform.
There are two ways through which one can enter the market.
The First time when stocks or security are created in the market is called the primary market.
The issuance is done through Stock exchanges for either Government or private businesses.
It is also known as the New Issue Market, a part of the capital market that deals with new securities to investors directly by the issuers.
In the Primary market, the investors buy securities that are traded the first time.
The primary market creates new securities and offers them for sale to the public.
The securities or stocks issued in primary are again available in the secondary market to exchange ownership again.
In the secondary market, stocks’ prise is dynamic and changes according to the securities’ demand and supply.
Then demand and supply are primarily depending on the company’s business performance and future business prospects.
The information is vital here; those who get first quality information will get better price discovery than those who get news later.
SEBI – Regulator
The regulator ensures the safety and fair play at the exchanges: Security and Exchange Board of INDIA.
The Securities and Exchange Board of India (SEBI), constituted in 1992 under the SEBI Act, regulates and monitors India’s stock markets.
Along with the overall administrative control of stock markets, SEBI is responsible for conducting inspections and formulating stock market rules.
Why the Stock Market?
Like any other market places, Stock exchanges also help in the exchange of resources. Money is an exchange in place of ownership in the business entity in the Equity market.
The Debt market is used for borrowings for the short or long term by the business.
Derivative markets are used for hedging future volatility.
The exchanges have evolved and provided an efficient electronic platform for real-time price discovery and exchange of ownership.
The movement of financial resources from one source to another helps inefficient allocations of resources.
Since companies’ performance also depends on the economy’s performance, the overall Stock market performance reflects the economy’s state.
The stock market is also a measure of economic performance; its trends can help people understand cycles, how businesses are doing, and make future policy predictions.
We need to understand a few indicators to make better-informed decisions while investing in stock markets.
As an investor, I would recommend the following indicators better to understand the Equity Stock markets
Like any marketplace, the price movement depends upon demand and supply.
And we need to understand that everywhere 80/20 rule applies. In the Stock market, the 80 percent movement in stock price depends upon 20 percent buyers.
When we talk about 20 % buyers, we are not talking about buyers’ number but buyers’ quantity.
As numbers of shares bought by an investor have to be determined by the financial resources one has, Institutional players are the ones who have the most in-depth financial resources.
Therefore, they are the guys who move the stock market in general and individual stocks in particular.
Investors must watch Foreign Institutional Investors (FII) and domestic institutional investors (DII) data to see broad trends.
The quantitative data is available through exchanges every day on their buying and selling. One can easily infer from the data that when Both buy together, the markets go up and vice versa.
Before making investment decisions, one has to see these numbers to gauge the mood of the market.
We can also see the stocks these big players are buying to validate your stock picking or get a general trend in the market. The bulk deals data can be accessed from public forums.
We are always looking to get value buying in the market place. In Stocks, to judge a stock value it offers is indicated by the Price to earning ratio.
The ratio value of individual stock in particular or benchmarks, in general, indicate its value compared to its peer group or benchmark.
Suppose, A stock has a P/E ratio of 20, and its peer group is trading at 15, then the stock is costly or richly valued, whereas if the peer group is selling at 25, then the stock is undervalued.
Whether a P/E ratio is considered to be high or low depends on the sector. For instance, the IT and telecom sector companies have a higher P/E ratio than companies from other industries like manufacturing, textile, etc. P/E ratio is also dependent on external factors; a merger and acquisition announced by a company will increase the P/E ratio. So, it is indispensable to examine the company’s backdrop, considering all constituents, before investing.
Price earning multiples of a broader market like Nifty or Sensex can give mood and sentiment of the stock market. A high P/E indicates high valuation indicating risk and possibility of a market correction and vice versa.
Trading / Investment mindset
The mindset is the essential aspect, which we need to understand and implement.
We need to put money in stocks considering it as investment avenues and not a trading platform.
There is no get rich quick formula in the market.
Search and research quality business and ideas and be patient to yield results.
Trading is done with the mindset to make quick returns riding market momentum and trends. This type of trade is more dependent on information.
Retails investors are more often than not invest in information gathered from family and friends. This information is more often than not either not correct or priced in the current valuation.
Investment decisions are depending on considering fundamental aspects of businesses. The time horizon should be long term (5 years+) to iron out volatility in the investment.
Keep an investment mindset while investing in the stock market and not a trading mindset.
There is no get rich quick formula in the world. To make a good return on your investments, you need first to understand the business fundamentals and do your homework.
Give proper attention to details and have an investment mindset.
Do remember making wealth is more of a mind game than a money game.