Before you get into how to open an account and actually buy stocks you need to understand what they are and how they work. What is it actually that you are buying, where do you get it from, where do you keep it and so on.
- 1 What Are Shares And Stocks ?
- 2 Where Do You Read About The Stocks ?
- 3 How Do Stocks Create Wealth For Investors ?
- 4 What Is A Stock Market ?
- 5 Stock Market Success, Failures And Scams
Think of shares as a loaf of bread which you buy from the market. It comes with 2-3 dozen slices. Each slice is a small part of the bread. If the whole loaf costs Rs. 30 and has 20 slices then each slice costs Rs. 1.5. It’s the same thing with a company and shares. Each and every company listed on the market is divided into such slices which is called a share. A stock is group of shares from same company or different companies.
Another term used collectively for shares or mutual fund investment is equity. Equity investment means investing in shares or mutual funds.
Now you cannot buy a slice of bread from the market but you can buy a single share of a company. Have you ever seen these photos on news :
The above photo shows the share price movement over a period of time.
The above photo shows daily change in the share price
When a company is listed and creates shares, it’s ownership is also split into numerous parts. So when you buy a share you are someone who owns a part of the company’s ownership. While you can’t affect decisions with just one share (you can vote though) if you own something like 1% or 2% then you can affect their brand a lot. For eg : Rakesh Jhunjhunwala owns 6% of Titan shares (8 Crore “shares” – not shares worth Rs. 8 crore but 8 crore shares, and I don’t even have a net-worth of 8 Crore :D, as of April 2018).
Now what happens is if he starts exiting from this company (selling his stocks) everyone will panic because he must be selling for a reason. Is the company’s dream run over, has it now become worthless, is it not going to increase production in future? Just his act of selling the shares can affect that company’s brand value.
History Of Stock Market
You see the concept of shares is not new for human beings. According to Google, The Dutch East India Co. was the first company to issue shares (back in 16th century). Shares are issued by company, which does business or trading. Trading has existed for thousands of years and so has money. Shares as a concept came into existence when companies wanted more people to get involved in the ownership for some mutual benefits.
These benefits would include payment of dividends, or increase in value of the shares which could be sold by the holder for profit. Like real estate, gold or any other imaginable commodity, shares can be bought and then sold for profit (or loss). So even back in 16th or 17th century merchants would buy shares because they knew that even these could create wealth for them.
Of course back in 16th century you had no computers, so shares were papers with signatures and guarantees and all. You would keep them safe in a locker. Now shares are present in electronic form for which you need a demat account where they are stored. You buy them on internet through net banking (I will explain this in detail later) and then sell them later for profit (or loss) on internet only. No need to visit any offline location or company branch etc. to get information or buy shares (although in India, during the early days people used to buy physical form of shares).
Companies create shares to raise money from the market. There are multiple ways of building up the capital needed to build a business. You can borrow money from from bank through loans, or use your own money. Other available options include reaching out to private investors or list company in public. Either way both will need something in return as they are not doing charity. So while the banks have their own ways of making deals, investors or shareholders get shares in return.
We won’t go into the specific details of initial value of the shares and all, but when the company is first listed (also known as IPO), you will get some shares of that company for some value. Also the owners get to keep a large part of the shares with themselves (as they are the ones who will manage the operations and build the business). When the company increase it’s business, the value of the shares also increase and then when you sell them you make profit. So everyone get’s something out of it.
It is all about diversity. Everyone buys a house (some for living in it and some with mindset of investing). Generally it is not advisable to invest a lot of money in one asset (because that property could get damaged and maybe you will lose your money). Be it gold or real estate or shares. Ideally one should diversify, so in worst case scenario should something go wrong they will have some backup.
Assuming you will buy little gold and someday your own house (or already have taken a loan to buy a house), it is advisable to hold little equity too (in form of mutual funds or shares). So if the value of the gold goes down, maybe your shares will go up or vice-versa. And if both gold and shares go down in value then you have your house (and maybe your job) to rely on.
Data suggest that equity investment has generated more returns than gold but then gold has had value for longer period of time, and so has land. One can argue that while Indian markets have given average of 10%-11% return in past 15 years, any stock that you buy, can lose all it’s value the moment a company dies. So over a longer period of time, of let’s say 5,000 years, gold might have given more returns as compared to any company (none have existed for 5000 years).
Important tip : Do invest some money in equity as you will get good returns over next 10-15 years and while it is difficult to assume that Gold can help you buy your house or fund your world tour, equity (stocks and mutual funds) can. Also there aren’t that many cases where real estate has grown at 15% year on year. So you can buy land but it’s just that equity does not cost that much and buying land is not as easy as buying stocks.
Where Do You Read About The Stocks ?
Any share falls into two main categories : Market capitalization and sector. These terms are used to gather basic information about any company. So a company like TCS has a market capitalization of Rs. 6 lakh crores and belongs to the IT sector.
Sectors are like categories. A share represents a company, which does some business. Hence, it needs to be classified to make things clear for the investors. Like when you go for grocery shopping in a mall, you will find all the items arranged according to their type. This makes buying a lot easier for the customer.
For those who read news and current affairs, this categorization helps them find opportunities in the market. For eg : If the government has decided to boost agricultural productivity, it will allocate more funds to fertilizers, tractors and such sectors which will help companies in terms of revenue.
Similarly shares are categorized into large cap, mid cap and small cap which represents their total market capitalization. Market capitalization is like the valuation of that company which is total number of shares outstanding multiplied by price of one share.
- Large Cap : Companies whose market cap is more than Rs. 20,000 crore. Eg : TCS, Infy, Eicher Motors, Reliance
- Mid Cap : Companies whose market cap is between Rs. 5000 crore and Rs. 20,000 crore. Eg : Rain Industries, HEG
- Small Cap : Companies whose market cap is less than Rs. 500 crore. Eg : Sanwaria Consumer, Alankit, Morepen Labs.
If you notice some of the examples given above are in codes, like TCS. It stands for Tata Consultancy Services. Because the names are big and sometimes companies can have same first few words or letters, all companies are given codes. If you want to search for a company you will need it’s code (ofcourse you can search by company’s name too). Eg : If you type HSCL in moneycontrol you won’t get the info on the company. You will have to type Himadri Speciality Chemicals in the search box.
How Do Stocks Create Wealth For Investors ?
Think about trading in simple life – You buy a mobile for Rs. 5,000 and then sell it for Rs. 5,500 to someone else. You made a profit of Rs. 500. Similarly in the stock market, you buy shares at low price and sell them at high. Ofcourse it is easier said than done. You won’t find that many people who will buy a phone from another person without checking the price.
In the stock market too, there are traders available. People think they buy stocks from companies, but often they actually buy shares from a seller in open market. So assuming someone is selling shares at Rs. 80, which he bought at Rs. 40, you will buy from him at Rs. 80 thinking that this company can grow more. So while the first person has already made profits of Rs. 40, you are yet to make any profit from it.
Whether a share price goes up or down depends on multiple factors :
a) Market sentiments : Does the market think that the general situation is favorable to investors or will it harm them?
b) Political developments : Will a political party remain in power or will it be replaced (both at center or state levels).
c) Company news : Is the company reporting sales and profit growth every quarter, or is it facing problems ?
d) Sector News : Is the sector of the company (like IT, pharma etc.) facing some pressure ?
e) Economy changes : Where is the national economy heading ? Are we growing every quarter or facing issues ?
f) Global developments : Is the world economy heading for a slowdown or will it grow?
I will explain these in detail later in a separate post. Right now you need to understand that when these factors (and many more) positively affect a share price, you can sell it and make profits. If they affect it negatively then you will make loss (you can continue holding it and your loss won’t be real loss because maybe in future it will rise again).
Short Term Gains And Long Term Gains From A Stock Market
The gains from stock market are usually categorized as short term gains and long term gains. Imagine you buy shares of TCS at a price of 3000 and after a week it posts results which are phenomenal and share price jumps up by 10%, if you sell all your shares at that time then you would have made 10% profit on your investment and it will be considered as short term gains.
However if you continue holding all your shares for a year or more and then sell with 40%-50% profit then your gains will be long term gains. You need to know these things for calculation of taxes. Short term taxes are calculated differently from long term ones.
Those who want to hold for long term should also be aware of these terms :
a) Stock Split : Companies usually divide the shares into more shares to create more liquidity (which means more shares available for people in the market). So if you buy 10 shares of TCS at Rs. 3000, and it goes for a split of 1:1 then you get 20 shares of Rs. 1500.
b)Bonus : Sometimes companies which pay dividends don’t have enough cash to pay the investors so they give them bonus shares. It works the same way as split and if you have 10 shares at Rs. 3000 you will have 20 at Rs. 1500 (depends upon the amount of bonus, in this case 1 on 1). So the investor can sell the additional shares and get some money if they need it.
c) Dividend : When companies get extra income they pass on this money to their investors in terms of dividends. Some like to use that money to expand their business while others give this money to investors as dividend.
You need to keep a constant check on your equity investments. There are few things that you need to understand. It is a general practice in the stock market to remain patient because your stocks won’t give you high returns in short duration. At the same time you will have to keep reading news and remain in touch with as many things as possible because sometimes news like demonetization or LTCG can be announced by the government and all your holdings can go down by 30% in value. Of-course if you can hold for 3-5 years period no need to worry but if you want to book profits in short term then you need to manage your portfolio period.
Also for those who hold for longer duration, 2008 type scenarios are best avoided. Although no one can predict such events but still if you ever witness one in your lifetime, it would be advisable to exit and then re-enter at lower costs. Some people argue that you can keep holding and add more. While this could be done with mutual fund holdings, it’s not recommended to do this with stocks, especially mid-caps. I personally have read so many cases where the companies could never recover even after recession was over.
This is because there is a difference between stock market collapse and economy collapse. A stock market can recover from crashes because it is a concept. As long as there are companies stock markets will exist, although certain companies can go down and never recover. You just have to make sure that you move away from such companies in a timely manner.
What Is A Stock Market ?
A stock market is just like any other market where traders can buy and sell shares. In India after a company is done with issuing shares through IPO, it is listed on stock exchanges. The two main ones are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Majority of the companies are listed on both the exchanges. But still traders prefer NSE because it is easy to execute orders there. When there are more buyers and sellers then the chances of a trade being completed are higher and they are quicker (because more traders are present there).
Both the exchanges allow brokers to sell and buy shares. The brokers (eg : Zerodha) will help you open a demat account and place buy or sell orders on any stock. When you open an account with a broker, you transfer some money to your account with them. And then when you place an order, the broker will debit your account and try to find another trader who wants to sell at your buy price. Once he/she is found, the order is confirmed at the exchange and the shares are transferred to your demat account while the money is transferred to him. Your purchased stocks are then stored in your demat account until you decide to sell.
So the main players in securities exchange are investors or traders, brokers, exchange and then there is SEBI which stands for Securities and Exchange Board Of India. SEBI is a market regulator (police of the stock market).
How Does One Know The Direction Of Market Movement ?
How do you tell if the market is going up or down? When you watch news they use some terms such as Sensex or Nifty. These are called indexes and are used to sense the movement of the market and the market sentiments (whether it is bearish or bullish).
Sensex is a collection of 30 companies and is used to measure BSE. It consists of large cap companies which are financially very stable. You can check the list of 30 companies here : BSE Sensex
Similarly Nifty consists of 50 companies and is used to measure NSE. It also consists of companies which are financially sound. You can check the list of those companies here : NSE Nifty
When either Sensex or Nifty climbs up then the market sentiment is said to be bullish, and when it goes down then it is said to be bearish (it can be bearish or bullish for short term, mid term or long term). On TV when the reporters say that the market is up, they mean that the Sensex or Nifty has gone up (which can happen because of multiple factors).
How A Trade Happens In The Stock Market
It is very similar to a vegetable market. There are multiple vendors in a vegetable market selling a particular vegetable. You can approach them and bargain a little bit for lower prices. Maybe they will agree, maybe not. But once you do little bit of searching you finally make up your mind and buy that particular vegetable from a vendor and give him money.
Similarly in a stock market, there are multiple vendors who sell a stock and multiple buyers who want to buy that same stock. But of-course no one has to contact anyone to buy or sell a stock. You don’t have to visit each and every seller to bargain or buy something. Both the buyers and sellers place their BUY / SELL orders on their brokerage account, which then sends these orders to exchange where the actual trade happens.
Take a look at this picture from Zerodha to understand :
On the left side you have bids (buy orders) for Reliance shares and on right you have offers (sell orders). As you can see from multiple orders, everyone wants to buy and sell at different prices. The reason is simple – PROFITS.
If someone bought Reliance at a price of 800 he wouldn’t mind selling at 926,925 or even 924 because still he is getting a lot of profit, whereas someone who recently bought Reliance (let’s say at 920) would want to sell at a higher price for more profits, hence so many sell order prices.
The moment a buy price and sell price matches, the trade gets executed. Usually this happens very fast (for those stocks which have many shares and traders) and you might not notice the buy-sell price matching in the window. A trade usually happens in few milliseconds. Once a trade happens the shares are removed from the seller’s account and are added to buyer’s account, while the money is transferred from the buyer’s account to the seller’s account.
How Do Prices Move In A Stock Market ?
The latest price, right next to the share price (in above example 925.45) is the price at which last transaction happened. This keeps changing almost every second. The important thing is the number next to price (-0.13%) which shows how much the price has changed since markets opened. So if a share price shows +0.5% then it means since the markets opened, the price has gone up by 0.5%. This can of-course keep changing as buying and selling happens in the market.
The share price could be going up or down because of company specific news or because of market sentiments. There are few other variables that you need to understand in the above picture :
Qty. (Quantity) : Numbers of shares in buying or selling queue at that price.
Total : Total number of buying and selling order currently in queue.
Open : The price at which the share opened with the market opening.
Low : The lowest price till which the stock went during that day’s trading session.
Volume : Total number of shares traded during that session.
LTQ (Latest traded quantity) : How many shares were exchanged during previous trade
High : The highest price till which the share went during that day
Close : The price at which trading ended (when market closed) in previous day’s session
Avg. Price : The average price of trading during that session
The open price can be higher because of a positive news (a company winning a government contract) or it can be lower (a company reporting losses in latest results). The price can be high or low because of market sentiments too. If the market is in bullish phase then the stock price can go up and if the market is in bearish phase then the price can go down.
During that day the latest price can drastically go up. Take a look at the following picture :
This is sometime during Dec 2017 or Jan. 2018 and the market went down by 0.38% (I say market but it’s nifty which went down, and that is how investors or traders talk about market movements). Notice how so many other companies went down by 2%-3% along-with the market. This usually means that the general market sentiment is negative and no matter which share you want to buy, it can go down for that day, week or year, until the market sentiment become positive.
The Difference Between Trading And Investment
The main difference between trading and investment is the holding period (which means the duration for which you hold the stocks in your account). While such things need to be explained in greater detail, I will just go through these concepts within few words so that you get the basic idea behind it.
Trading Stocks : Trading means you buy some shares and when the share prices go up then you sell them for a profit. There are different types of trading :
a) Intraday Trading : When you buy the shares and sell them the same day then it is known as Intra-day trading. The psychological factor behind this method is that the moment you make 1%-2% profit then you should exit and save your capital. So if you have Rs. 1 lakh with yourself, you can make atleast Rs. 1000-2000 per day. Assuming you earn on 10 days and lose on 5 days then you will remain in profit and usually a 5% return every month means 60% return a year which is a lot. But it is not that easy to make that kind of return and most of the beginners are advised to stay away from trading and focus on investing, because the chances of a share price going up in a longer duration of time are much higher than in shorter duration. Besides most of the beginners lose their money in trading.
b) Short Term Trading : When you buy a share and hold it for longer duration, a week or a month before selling it, then it’s known as short term trading. This is usually done by those who are good at predicting a particular share price and have been tracking a company’s share price for a year or so. If you have been following TCS price for a year or two then you will know what kind of results it gives, what impact Rupee value (comparable to dollar value) will have on this company and whether it will go up or down in the following week. Based on this you can buy and sell, and make profit or loss.
c) Shorting : Shorting will sound like a strange concept to beginners. What it means is you first sell a stock and then buy it. But how do you sell something that you don’t own? Imagine you are a trader in a vegetable market. You setup your own shop at a distance and decide to sell tomatoes (which you don’t have right now) to someone at a price. Now assuming that you will be able to buy tomatoes from someone else at a lower cost, you will make profit and if you don’t you will book loss. This trading can be done because there will be tomatoes available in the marketplace. Similarly in the stock market, you can sell first and then buy later, and the supply of the shares means that the exchange can settle such trades. This can help someone who knows that a certain news will negatively impact a share price. So you sell it first at Rs. 500, and then buy later at Rs. 495 which means you bought at 495 and sold at 500, making a profit of Rs. 5 per share.
Investment is a different matter. If you have a capital of Rs. 10,000, you just do some research on some mutual funds or stocks (let’s say 5 companies) and put all your money in these companies. Then you leave that money invested in those companies for at-least a year (unless you decide to sell because of personal reasons or because you think that the market sentiment is bearish and you will suffer losses).
You must understand that there is a reason why most of the people prefer to invest in mutual funds (I will explain later what they are and why people prefer them) or stocks and not do trading. You just have to put your money there and watch it grow (at-least most of the times as any portfolio needs constant monitoring, like every week or month). While in trading you need to be involved all the time. The market can go down anytime and if you don’t exit timely, you will suffer heavy losses.
Both trading and investing involve the concept of buying and selling stocks, it’s just that in trading you need to act a lot more while in investing you need to think a lot more. Hence most of the masses prefer investing. If you have a job you won’t get much time to actively trade and hence it’s better to read a lot and then plan your investment, buy them and then monitor them. That way you will still make a lot of money without actively trading.
Timing Of Stock Markets, Settlements And Holidays
The exchanges usually open at 9:00 am in the morning for 5 days a week (unless it’s a public holiday). You can find the holiday list here : Market Holiday. A trading holiday means you cannot buy or sell shares. A settlement holiday means you can’t sell the shares which you bought the previous day.
From 9:00 to 9:08 there a pre-open session. You can place order within these 8 minutes if you won’t get time later. You can start buying and selling stocks at 9:15 am. The market closes at 3:30 pm in the afternoon.
Please note that in India we follow T+2 settlement cycle. This means that if you purchase a share today, that share will get credited in your account after 2 working days. Of-course the share still shows in your brokerage account as T+1 and T+2. You can also sell that share the next day (T+1 day). You actually don’t own that share unless it is transferred to your account, but the exchange will settle it for you. As long as there is buyer at your selling price in the market, the trade will get executed. There is just one thing that you need to understand and that is called short delivery. You can read about it here in detail : Short Delivery.
Stock Market Success, Failures And Scams
There are some things that you need to be aware of, especially when you want to invest your hard earned money in the stock market. You need to read case studies, investment stories and many other articles to learn from other investor’s mistakes. There are so many things that happen in the market, it is like a whole universe in itself. Below mentioned are some case studies which will help you understand the difference between good companies and bad ones.
Examples Of Good Companies For Investors
Every-time someone asks me about good companies for investment I mention Tata companies – Tata Sponge, Titan, Tata Steel, Tata Global Beverages, Tinplate, Voltas etc (except Tata Motors). While you may suffer some loss in short term, in long term these companies can create a lot of wealth for you. See the returns of these companies in past 5 years on Moneycontrol.com. The reason is their brand – Tata. It is known for ethics and values which are hard to come by in the corporate world. Plus these companies have good management which is why many investors recommend them to beginners. What makes a company good in my eyes is their return rate over past 4-5 years. If the chart looks good then one should dig deeper into it. Does not mean you should invest in those companies immediately, but you should consider them as a part of your portfolio.
Examples Of Bad Companies For Investors
Check any of these companies on Moneycontrol.com – Reliance Communication, JP Associates, Reliance Power, Videocon. No dividends paid, negative return on investment, too much debt, bad business decisions, no innovation and for so many more reasons, these companies are to be avoided at all costs. Investing in such companies is like throwing your money down the drain. Sometimes there are turnaround stories, where a company does not perform for almost 2-3 years but all of a sudden because of too much demand, starts posting good results and generates lot of profits for investors. It wouldn’t hurt you to look into these companies but remain cautious while analyzing them.
Examples Of Scams
Now check these companies and their chart on Moneycontrol.com (or read about them) – Shilpi Cables, Gitanjali Gems, DB Realty, Satyam, Sahara, PNB (PNB scam). These are some of the companies that outright commit fraud. They cook up their data or are involved in cases of money laundering. It is not easy to predict a scam in the market. Investors depend on financial results (audited by some firm) to decide whether to invest or not. Now if that data is cooked up how will someone know about it? Maybe there could be ways to avoid such mishaps, but still hard to detect.
There is another kind of scam which happens in the stock market on a regular basis (I have seen 6.7 within past two years). This is also known as operator control or pump and dump schemes. The moment you get into the stock market you will start receiving SMS or emails about a possible life changing company (buy XYZ share at Rs. 30 and it will double within a month, or will go up by 40% within few days time etc.). Always stay away from such “golden opportunities”. This is why SEBI requires advisers to register themselves before they tell people what to buy and what to sell.
I remember receiving a message about a company called Steel Exchange Of India, when it was trading at 84-85 price range, that it will reach 120+ within few days. Turns out that company did touch a lifetime high of 130 within next few days, and then all of a sudden hit lower circuit (you can’t sell your shares when a company touches lower circuit). It kept hitting lower circuits for almost a week and went down to the price range of 33. Now it is an assumption that someone had bought a lot of shares and then spread the messages through operators (people who can spread such messages very fast) that this will go up. Retailers (people like you and me) fell for it and started buying it and then the main parties they exited from the market. Imagine the losses suffered by those who bought at 120+ price range.
Be very cautious in the stock market. You will meet both saints and snakes. It is your hard earned money and once you fall for such traps you won’t have anyone else to blame but yourself.