Guide to Stock Market Basics
Understanding how the stock market works, from shares to indices.
What is a Stock?
A stock (also known as a share or equity) is a type of security that represents ownership in a company. When you buy a company's stock, you are buying a small piece of that company. You become a shareholder.
As a shareholder, you are entitled to a portion of the company's profits (paid out as dividends) and have voting rights in certain company matters. The primary goal for most investors is capital appreciation—the stock price increasing over time as the company grows and becomes more profitable.
Primary vs. Secondary Market
Primary Market
This is where new securities are created. When a private company first offers its shares to the public, it does so through an Initial Public Offering (IPO). This is the primary market. Investors buy shares directly from the company.
Secondary Market
This is the stock market as we commonly know it (e.g., the National Stock Exchange - NSE, or the Bombay Stock Exchange - BSE). Here, investors trade previously-issued shares among themselves, without the issuing company's direct involvement.
How are Stock Prices Determined?
Stock prices are determined by the law of supply and demand. If more investors want to buy a stock (demand) than sell it (supply), the price goes up. If more investors are selling a stock than buying it, the price goes down.
Several factors influence this supply and demand:
- Company Performance: Strong earnings, revenue growth, and new product launches can increase demand.
- Industry Trends: Growth in a company's sector (e.g., technology, healthcare) can lift its stock price.
- Economic Factors: Interest rates, inflation, and overall economic growth affect investor sentiment and company profits.
- Market Sentiment: News, analyst reports, and general investor optimism or pessimism can cause short-term price fluctuations.
What are Market Indices (Nifty 50 & Sensex)?
A stock market index is a statistical measure that represents a specific section of the stock market. It is calculated from the prices of selected stocks. Indices are used as a benchmark to gauge the overall performance and sentiment of the market.
- Nifty 50: Represents the weighted average of 50 of the largest and most liquid Indian companies listed on the National Stock Exchange (NSE).
- Sensex: Represents 30 of the largest and most actively-traded stocks on the Bombay Stock Exchange (BSE).
When you hear that "the market is up," it usually means that a major index like the Nifty 50 or Sensex has increased in value.