The stock market today forms an important part of the world economy. This is the place where a novice or seasoned investor can acquire knowledge for making prudent decisions. This guide outlines the very basics of investing in stocks, crucial terms you will come across, and why it is important for wealth creation.

What Are Stocks?

Shares, also known as stocks or equity, represent ownership in a company. When you buy stocks, you acquire a piece of the company, including a share of its profits and assets. 

There are two main types of stocks:

• Common Stock: This is the most common type of stock, offering ownership rights and sometimes dividends. Common shareholders usually have voting rights in company decisions but are paid after preferred shareholders in case of liquidation.
• Preferred Stock: Preferred shareholders receive fixed dividends and have a higher claim on assets than common shareholders in the event of liquidation, but they usually do not have voting rights.

Stocks can also be classified by Market Capitalization:

• Large-Cap Stocks: These are companies with a market capitalization of over ₹20,000 crore (approximately $2.5 billion), known for stability.
• Mid-Cap Stocks: Companies valued between ₹5,000 crore and ₹20,000 crore (approximately $600 million to $2.5 billion) fall into this category, offering growth potential and moderate risk.
• Small-Cap Stocks: These are companies with a market capitalization of below ₹5,000 crore (approximately $600 million, usually associated with higher risk and volatility.

What is the Stock Market?

The stock market is a marketplace where stocks are traded. It is a place for companies to raise capital by issuing shares and for investors to buy and sell these shares. The history of the stock exchange outlines its journey from initial trading in Antwerp to today’s electronic platforms, driven by the need for capital and investment. The market can be accessed through both physical exchanges like the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), and online stock trading platforms or stock market apps, making it easier for individuals to stock market trade.

How Does the Stock Market Work?

The stock market serves as a platform for buying and selling shares of publicly traded companies, allowing investors to build wealth through stock market trading. Understanding its structure and trading process is crucial for making informed investment decisions. 

Structure of the Stock Market

The stock market is composed of several key elements:

• Exchanges: Stocks are listed and traded on exchanges, which are platforms facilitating transactions. Major exchanges include the New York Stock Exchange (NYSE) and Nasdaq in the U.S., as well as the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in India. Exchanges are central hubs for efficient trading.
• Brokers: Investors enter the stock market through brokers who act as intermediaries. Brokers, whether individuals or firms, are registered with exchanges and execute buy and sell orders on behalf of their clients, charging a fee or commission for their services.
• Demat Accounts: To trade stocks, investors need a Demat account that holds securities electronically, replacing physical share certificates. This account streamlines the trading process by facilitating the electronic transfer of shares.

Trading Process

Before investing in a stock market, you must open demat account. Trading in the stock market involves:

• Placing Orders: Investors place buy or sell orders through brokers, specifying the stock, number of shares, and price. An order can be a market order (executed at the current price) or a limit order (executed at a specific price). 
• Order Execution: Brokers execute orders by finding matching buyers or sellers. Once matched, a contract note is issued detailing the transaction specifics.
• Settlement: Trades are settled on a T+2 basis, meaning that clearing takes two business days from the transaction. Shares are transferred to the buyer’s Demat account, and payment is made to the seller.

Market Dynamics

The stock market is influenced by:

• Supply and Demand: Prices rise when demand exceeds supply and fall when supply exceeds demand.
• Market Analysis: Investors use fundamental analysis (evaluating financial health) and technical analysis (examining stock charts and price trends) to make decisions.
• Types of Trading: They include day trading (buying and selling within the same day), swing trading (holding stocks for short periods), and position trading (holding stocks long-term).

Stock Market Segments

• Primary Market: Where companies issue new shares through Initial Public Offerings (IPOs) to raise capital.
• Secondary Market: Where existing shares are traded between investors, with no involvement from the issuing company.

Understanding the Stock Market Basics – Important Terms

Before you invest in stock market, here are some important terms to understand:

Why Invest in Stocks with HDFC Sky?

HDFC SKY is a comprehensive investment stocks app with several key advantages:

• Diverse Investment Options: Access over 3,500 Indian stocks, top ETFs like NIFTY 50, 2,000+ mutual funds, futures and options, US equities, and commodities and currencies.
• Cost-Effective Trading: Flat ₹20 per order and the Buy Stocks Pay Later feature with up to 4x margin.
• User-Friendly Interface: Easy navigation with real-time updates, educational resources, and a personalized dashboard.
• Research and Advisory: Insights and tips from HDFC Securities’ expert research team.
• Risk Management Tools: Real-time margin monitoring and stop-loss orders to protect your investments.
• Educational Resources: Articles and multimedia content to boost market knowledge.

Conclusion

The stock market presents significant opportunities for wealth creation. By grasping the fundamentals of how the stock market operates and familiarizing yourself with essential concepts, you can make informed investment decisions. For those seeking a streamlined and user-friendly platform to manage their investments, HDFC SKY offers a comprehensive solution. With its advanced tools and educational resources, HDFC SKY can help you grow your portfolio and enhance your understanding of stock trading.