Basics you need to know about Investing in Stock Markets in India

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Basics you need to know about stock market

Investment is one of the best ways to earn passive income. But investment must be done with the right mindset and the right attitude. Only then will you be able to earn a return from the market and only then will investing be fun.

During this lockdown, people actively invested in the stock market since their job was in danger. Add to that the famous TV series that rocked each and everyone, “Scam 1992” was released in October 2020 and it only added more fuel to the fire.

So instead of investing without any prior knowledge, this blog tries to explain some basic terms with relation to the stock market. Terms such as Primary market, Secondary market, company type, buyer, seller, shares/stocks, IPOs are explained in this blog.

There are 2 major stock exchanges in India. Bombay Stock Exchange(BSE) was established in 1875 and National Stock Exchange(NSE) was established in 1992. BSE is the oldest stock exchange in Asia. NSE is the exchange with the largest transactions in the country. To know more about exchanges, visit our All you need to know about Organisations in Stock Market blog.

So let’s now start and understand some of these terms related to the stock market.

What are Stocks?

To understand about stocks/ shares, we will look at an example to understand it.

Consider two friends who have started a company,ShareExp Pvt Ltd. The two friends decide to divide the company equally between them. So each own about 50% of the company. We can also use shares/stocks to know the ownership of the company. A share/stock represents the smallest part of a company with each share/stock having an equal value. (A stock/share(equity) is a security that represents part ownership of a company).

An example illustrating "shares of company"
An example illustrating “shares of company

Consider this example, Suppose the two friends have Rs. 10000 in total and both want to divide it between them. So they decide to take Re.1 coins to divide the Rs. 10000 between them. Each of them will receive 5000 coins of Re.1 each. Here the Re.1 coin is like a share which has a value of Re.1. So with each friend having 5000 coins is same as having 5000 shares of the total 10000 shares, giving each friend a 50% ownership in the company.

How many shares the company is divided into and what is the value of each share depend on the owners of the company. Different companies have different number of shares and value of the shares is also different. Generally a big company can have like more than 100 million shares.

So the next time you buy a stock you are actually part owner of the Company!!.

What are Stock Markets?

Stock markets is a market where you can buy or sell stocks of any company. Its like any other market, where there is a buyer and seller.

I am sure many of you have gone to a vegetable market. When to go to a vegetable market, you want to buy vegetables. So you are a “Buyer” in the market. The vegetable vendor on the other hand wants to sell his vegetables.So he is a “Seller” in the market.

If you and the vegetable vendor agree on the vegetable and price, you buy and vendor sells it to you. So a transaction takes place. You get vegetables and vendor gets money.

In the stock makert, this is exactly what happens. If you want to buy a stock, means you are a “buyer“, you go to the market and seek out a “seller” who is selling a stock. If you are happy with the price at which he/she is selling, you transact with the seller. Similarly you can be a “seller” if you have some stocks that you want to sell. In that case you look for a “buyer“.

Illustration of transaction in stock market
Illustration of transaction in stock market

Now you don’t really have to physically go to a market to trade stocks. You can do that by opening a Demat account with any of the available brokers. Zerodha, Upstox, Sharekhan, etc are some of the brokers available in India. They will help you with the process of opening a account and buying/selling of stock.

Types of Markets:

There are generally 2 types of markets, Primary market and Secondary market. Primary market is related to IPOs, FPO’s, Buybacks, Rights issue etc. This market is used for direct communication between the company and the general public. Of this right now, you only need to know about IPO which we have discussed later.

Difference between Primary and Secondary market
Difference between Primary and Secondary market

Secondary market is the market where we need to focus. Secondary market is where you will be doing transactions. The Secondary market is made up of people like you and me who want to sell stocks or want to buy stocks. Any time you buy a stock, you will be buying it from another person who already has the stock. Anytime you sell a stock there will be another person who will be buying the stock. So everytime you transact there will be another person that you will be transacting with. Who you deal with is not known, but the NSE, SEBI and Depository take care that the transactions are honoured and no one DEFAULTS. In case of Defaults, NSE, charges a penalty to the defaulter.

Check Out: Best Financial Books you need to read about Investing

What is an IPO?

Initial Public Offering (IPO) is the first time offereing for general public like me and you to invest (buy) shares of the company.

Consider the above example of ShareExp Pvt Ltd. The two friends own 5000 shares each. Since they are the only two owners of the shares of the company, this is called a Private Equity company.

Suppose they want to have public participation. Meaning people like you and me can buy their shares. Inorder for that to happen, they will have to “sell” their existing shares to the public in the Primary market. Remember, Primary market is where the company is in direct contact with the people.

When a Private Company “sells” their shares to the General Public for the first time in the Primary market, it is called as an IPO. Initial Public offering, as the name suggestes, is the inital offering of shares of a company to the public.

In the IPO process, the company name will also change from ShareExp Pvt Ltd to ShareExp Ltd.

The people who are allotted shares/stocks in the IPO will be eligible to “sell” their shares in the market. Others who have not received it, will have the chance to buy these shares from the sellers in the market.

Illustration of IPO
Illustration of IPO

FAQs related to IPO

  1. Who can apply for IPO?

    Any person who has a DEMAT account can apply for IPO.

  2. Who gets allotment in IPO?

    Those who have applied for IPO stand a chance to get allotment.

  3. Do everyone get allotment?

    It depends. If issue is oversubscribed, then allotment is done in lottery style. If undersubscribed or fully subscribed, then everyone gets allotment.

  4. Can you sell IPO shares if you get allotment?

    Yes. You can sell shares if you received allotment in IPO.

  5. Can I buy shares of company after IPO?

    Yes you can buy shares from the secondary market.

  6. How much is the minimu investment for IPO?

    For IPO you apply in lots. For all IPOs, you will have to pay atleast Rs. 15000/- for one lot.

Here we have covered Some basics which people have confusion about or have no idea about. We have tried exlaining about these questions in this blog. If you found it difficult to understand do ask questions below.

Do you have any other questions? You can ask in the comments below.

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