Basics of Stock Market, Middle class hacks, Part-2


As per the readers' request, we are going to start with a basic question that I had in my initial period. We will ramp up the density of contents in the consecutive articles.

Risk comes from not knowing what you're doing.

-Warren. E. Buffett

As the oracle of Omaha says it’s always important to know what we are stepping into before taking the steps. It’s the trespassing of this simple logic that leads to disasters in the stock market and this has what made the people believe that the stock market is risky which in itself is not true, It’s the people in it who are risky.

Keeping this in mind let’s start with simple questions or what I would call as Simp Q :)

What is NSE and BSE?

To put it simple it’s a place where we exchange stocks. We place the order and they deliver the stocks it’s as simple as that.

Who owns it?

The NSE (National Stock Exchange) is largely owned by banks and insurance companies while the BSE (Bombay Stock Exchange) is largely owned by brokers, outside investors, and domestic institutions.

Where to buy stocks then?

Most of the companies are traded in both the exchange. If you have a large volume to trade you can do it in NSE as it trades in large volume compared to BSE. Adding to it some stocks are only “listed” in only one exchange which forces us to trade in that exchange.

What does listed in Stock Exchange Mean?

When a company wants money to expand, what are its options? They can either borrow money from the bank or sell a portion of their asset or business for money. The first costs interest while the second one brings in more partners.

So, when a company sells a portion of its ownership of the business through the stock exchange for the first time it’s called Initial Public Offering. This process is also known as the listing of a company.

Similarly, if the company wants to get out of the exchange, the company goes through a process called delisting where the company buys the shares outstanding with the public. This does not happen usually as it’s a costly process.

The companies are also delisted by default if they are non-compliant to the stock exchange list of requirements. One such live example is the delisting of Vedanta (Parent of Sterlite). For further information about this skim the news about the same.

What is NIFTY and Sensex?

The NIFTY points and Sensex points that you hear in the daily news are numbers or values based on the top 50 companies. The weightage to each company is given by its free-float market capitalization i.e. the amount of stock owned by the public excluding the promoters, insiders, and government multiplied by the price of the stock.

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So why do people care about it? This is because it symbolizes how well the economy is doing to an extent. This in itself is a very big topic and we will see about this elaborately in the subsequent series.

What are the tools required for trading in the stock market?

We have banks for depositing our money similarly we need some mechanism to deposit our stock. The account we use for it is called a De-mat account (Dematerialized). We were using share certificates to represent the stock we purchased in the olden days (some have physical shares even today). The electronic version of vault which holds the dematerialized share certificate is hence called as a Demat account.

Ok, we have a vault now to store the share but how do we place the stock order to the stock exchange? This is where the Trading account comes into to picture. The trading account does the transaction between money and stock and vice versa. That’s ok but who provides all these facilities? This is where the stockbroker like Zerodha, Kotak etc,. Comes in. They provide you this facility and ease your trading experience by providing user-friendly interfaces.

In short, it’s a three-layer account comprising of a Savings Account (Has cash or money), a Demat account(vault for storing shares), and a trading account(Exchanging money from the user and the stock exchange).

How do you buy and sell a stock?

It’s fairly simple, the buyer bids for an amount say Rs.100 for a share and assume the seller tells he will offer a share for Rs.110.Therefore either the buyer has to spike up his bid or the seller has to put down his price in order to match. If the price of the buyer and the seller matches, the transaction takes place. Therefore the price varies according to demand and supply.

What is liquidity?

It is the ease of converting an asset into cash. For example, you can easily sell gold in an hour but you can’t do the same with land. Therefore we can safely say that the liquidity of gold is higher than land. Similarly, the stocks which can be easily bought or sold is said to be a liquid share while the stocks which are harder to sell or buy is called an illiquid share.

Hope this helps you.

If you have any questions regarding the stock market comment below as we are going to have a big jump in concepts in the subsequent articles.

Bella ciao,

Koushik Sundaram K

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