How does stock Market in India works - A Basic Tutorial Guide for Beginner

The stock market investment is a vital option to make money in India. In order to understand its
working, one needs to know its basics. Therefore, to help you understand the same, some of the
important components of the stock market are explained in the given text.

What Are A Stock And Share?

Stock refers to partnership in a corporation. Corporate companies sell stocks as a way to raise
money for their business. One stock contains a certain number of shares which can be purchased
and sold by the market investors. The shares go up or down on the basis of factors like Economic
and Industry conditions.

The reports of strong earnings can increase the share price, while as reports of a layoff can reduce
the share price.

For example, a Sweet Shop owner invested Rs.1000 in a Pharmaceutical company, if company’s
Stock price was listed at Rs.50 per share, he could purchase 20 shares of its stock. And if in the
future the prices of the shares jumped to Rs.60 per share, he will be able to earn Rs.200 profit (20
shares at Rs.10 per share)

How A Company In India Make Public Its Shares?

A company in India makes its sharespublic in multiple ways. A corporate company can issue
shares to the general public with SEBI approval. A Private Ltd can issue shares to relatives, friends
or business partners etc. It can’t invite people to purchase its shares and also can’t issue shares to
more than 200 investors as per 2013, Companies Act.

Here are some main methods via which a company in India makes public its shares both Limited
and Private Ltd. companies.

1) Initial Public Offering (IPO)

Initial Public Offering is when the company which is still unlisted issues fresh shares or keeps its
existing shares on sale. It is the first step of a new company in the direction of listing its shares in a
stock market. You should research an IPO thoroughly for shares.

2) Follow on Public Offering

Follow on public offering is another way for a company in India to make its shares public. When a
company which is already listed sells its shares to the public or keeps its existing shares on sale
then it is called Follow-on Public Offering.

3) Rights Issue

Rights Issue means when a listed company issues fresh securities to its already existing
shareholders on a record date. Rights Issue is meant to raise capital without diluting the stakes of
existing shareholders.

4) Private Placement

Private placement means when a company offers shares to a selected group of persons via private
placement offer letter. Next, you should have an overview of stock exchanges and its working.
The stock Exchanges

In order to understand the working mechanism of stock exchanges let us understand what Limit
Order and Market Order are:

Market Order: The order available at the best current price generally placed by an investor with
the help of a broker.

Limit Order: a take-profit order to sell or buy a stock at a specific price. The investors limit the
time duration for which the order remains open before it gets canceled.

There are two stock exchanges in India which generally take care of stock exchanges. The National
Stock Exchange abbreviated as NSE and Bombay Stock exchange abbreviated as BSE. The latter has
been going on since 1875, whereas NSE came into existence 1992. The trading mechanism,
settlement process and trading hours are same for both the exchanges. The firms in India need to
list themselves in order to sell their stocks. The process of selling and buying a stock at these
exchanges is order driven. The trading computer takes care of order matching which is placed using
limit order book. The market orders are matched with the best limit orders. In the entire process,
the buyer and sellers remain anonymous ensuring more transparency.
The brokers place all the orders in the trading system. The investors who are institutional can reap
the advantage preferential treatment using DMA (Direct Market Access) and place their orders
directly.

How does Stock Price Go Up and Down?

Just like the prices of any commodity, the prices of a stock are also driven by demand and supply. If
there is an increased demand for a stock, its prices go up. Contrarily, if there are more people
willing to sell a stock than people willing to buy it, the prices will go down. Understanding the law
of supply and demand is easy. What is more difficult to understand is that how a stock of a company
becomes more or less favorable. Whenever there is positive news about a company, the demand for
its stock rises, the demand can fall, if opposite is the case. Determining whether the price of a
particular stock will go up and down is very difficult. One of the ways of doing so is maintaining a
portfolio of shares of different companies.

The price of the stock of a company is an indication of its worth. In general, cases, whenever the
stock price is high, the company is seemingly doing well. However, the value of a company is not
measured in terms of its stock price but in terms of its outstanding shares. For instance, if a
company has 1000 outstanding shares valued at Rs.50 is worth more than a company with
outstanding shares 800 valued higher at Rs.60.

How much money do you need to start investing in the stock market?

Contrary to popular opinion, one does not need a bucket load of money to invest in the stock
market. If you are a beginning investor or a regular working person then all you need is an idea
about the shares of the company worth investing for. There are several firms in India which sell
their share at Rs.100 or even less. You can buy in accordance to your financial capacity. Just make
sure that you are picking the best stock with the available options.

How can you enter stock market in India?

Entering stock market in India is very easy. Here are some basic requirements you need to fulfill.

Stock Broker

The stockbrokers are the members of the stock exchange that help you buy stock. These brokers
are registered with SEBI, the Security and Exchange Board of India. You have the option of choosing
from a number of brokers and sub-brokers.

Saving Account

A person needs to have a saving account in order to invest in the stock market in India.

Demat A/C

You will also need a Demat A/c in a bank for entering the stock market. There are several banks
such as ICICI, Kotak, and SBI that offer the 3-in-1 account entailing Trading account, Demat and
Savings. You just need to fill a few forms and get a Demat A/c opened in a bank.

In addition to it, you will also need an internet connection and laptop to carry out the transactions.

Documents required
You will need identity documents such as Aadhar Card, Pan Card, and ID proof to buy stock. Once
you get a Demat A/c opened you can start to trade. For a better understanding of the stock market,
here are a few terms you should be familiar with:

Intraday Trading: In an intraday trading the stocks are purchased not with the intent of an
investment but for earning a profit. The buying and selling of stock take place the same day. The
Intraday trading orders need to be specified that these are intraday trading orders.

Margin & leverage: the leverage and Margin are other two important terms that the investors need
to understand. The margin is a kind of loan that a broker provides to the investors using which they
can leverage their existing stock and buy more. Leverage is the added buying power that allows the
investors to buy more stock. It is expressed in a ratio such 2:1. When you have 2:1 leverage, it
means you can but stock worth Rs.5000 for Rs.2500 of securities.

Square off: it is a trading style where securities are bought and sold on the same day with the
intent of earning profit.

Stop-Loss: it is an advanced trade order placed during trading. This order specifies that when a
stock reaches a certain price, it can be sold

Bracket Order: Bracketing order helps to limit the loss during trading. Using a Bracket order
ensures that your main order gets executed on top of a profit taking or stop-loss order, and the
remaining order gets canceled automatically without any intervention.

Derivative Future and Option: Future and option put different obligations on the sellers and
buyers. An option gives a right to the buyer to sell a security at a specified price whereas the Future
puts an obligation on the buyer to purchase sell a security at a specified date.

Lastly, you need to know about the different charges on trading

Different Charges on Trading

There are several charges that are levied on share trading. Some of the important charges are:

Brokerage charge: the fee charged by the brokers is called the brokerage charges. The brokers
have their own models for charging the investors.

STT: it stands for security transaction tax. It is levied on both the purchase and sale of a security at
the rate of 0.1% of a total transaction normally and 0.025% for an Intraday transaction. For
instance, if you are buying shares for Rs.1000 the STT will Re 1.

Service charge: it remains same for both the delivery and Intraday trading i.e. 15% of the
brokerage charge.

Stamp Duty: Different states have different stamp duties. In Maharashtra, it is 0.002% for intraday
trading and 0.01% for trading. In Delhi, it is 0.0025% for an Intraday as well as for the delivery.

Transaction charges: NSE charges 0.00325% as the transaction fee. BSE charges 0.00275% of the
total amount as the transaction fee.

SEBI Turnover Charge: It is .0002% of the amount and is charged on both sides.

DP charges
There are two types of depositories, NSDL and CDSL in India. A share is kept in an electronic form
whenever it is bought. For this service, an amount is charged. The investors are not directly charged
for this but the participants are charged at a flat rate of 10 to 35 depending on your DP which can
be a bank or a broker.

Capital Gain Tax:

The capital gain tax is charged in accordance with the Short and Long-term capital gain tax. When
the stock is sold within one year of buying, the Capital gain tax is considered short-term and is
charged at 15% of profit you make at the sale. When it is sold after one year of buying it is called
Long-term capital gain and there is no tax on it.

Hopefully, the given information is substantial for you to gain a basic understanding of stock
market in India.