Stock Market Basics: Everything New Investors Need to Know

The stock market may seem complex for beginners, but learning its basics is the first step toward understanding investing. It plays an important role in the economy by providing companies access to capital and offering individuals a way to build wealth.

This guide explains what stocks are, how markets function, the types of stocks available, and essential concepts every investor should know before starting their journey. By the end, you will have a clearer understanding of how the stock market functions and the key concepts relevant to investors.

Stocks represent partial ownership in a company. When you buy a stock, you essentially own a small fraction of that company and become a shareholder, giving you a stake in its growth and performance.

Shareholders typically enjoy the following benefits:

• Voting Rights: The ability to vote on major company decisions.
  

• Dividends: A portion of the company’s profits distributed to shareholders.
  

• Capital Gains: Profit earned when the stock’s price increases over time.
  

• Ownership Stake: A claim on the company’s assets and future earnings.

For example, if you own 10 shares of a company that has 1,000 total shares, your ownership equals 1% of that business.

Understanding what stocks represent and the main types available helps investors see how companies raise capital and how different shares create varied opportunities in the market.

Understanding the different types of stocks helps investors categorise them based on ownership rights, dividend structure, and potential for growth.

1. Common Stocks

• Represent ownership in a company and come with voting rights on corporate matters.
  

• Shareholders may receive dividends and benefit from price appreciation when the company performs well.
  

• However, they also face higher risk if the company underperforms.

2. Preferred Stocks

• Provide fixed dividends that are paid before common shareholders receive theirs.
  

• Usually do not offer voting rights, but tend to have more stable prices than common stocks.
  

• Preferred stocks are generally associated with investors who value consistency in returns over high-risk growth potential.

Understanding these stock types helps clarify how each functions within the market and the different benefits or risks they carry.

Stocks can be classified based on market capitalisation and investment style, allowing investors to evaluate options based on company size, growth prospects, and stability.

Based on Market Capitalisation:

• Large-cap Stocks: Represent well-established companies with high market value. These are typically more stable and less volatile.
  

• Mid-cap Stocks: Belong to medium-sized companies that balance growth potential with moderate risk.
  

• Small-cap Stocks: Include smaller, emerging firms that offer high growth potential but carry greater volatility and risk.
  

Growth Stocks

• Belong to companies with rapidly expanding revenues or earnings.
  

• Often reinvest profits for expansion rather than paying dividends.
  

• Typically attract investors focused on long-term capital appreciation.

Dividend Stocks

• Represent companies that distribute a steady portion of profits as dividends to shareholders.
  

• Offer consistent income and tend to be less volatile.
  

• Favoured by investors seeking stability and regular returns.

Understanding stock categories based on market capitalisation and style helps investors align their portfolios with individual risk preferences and financial objectives.

The share market, also known as the equity market, is a platform where investors buy and sell stocks. It connects companies seeking capital with individuals and institutions looking to invest.

In India, the two main stock exchanges are:

• National Stock Exchange (NSE)
  

• Bombay Stock Exchange (BSE)

These exchanges facilitate trading, enable price discovery, and provide transparency through regulatory oversight.

Stock markets function through different segments, each catering to specific needs of companies and investors. Understanding these segments helps in navigating the overall market structure effectively.

Primary Market

• Also known as the new issue market, where companies issue shares to the public for the first time through Initial Public Offerings (IPOs).
  

• The funds raised are used by companies for business expansion or debt repayment.

Secondary Market

• This is where existing shares are bought and sold among investors after being issued in the primary market.
  

• Prices in this market move according to supply and demand dynamics.

Other Markets

• Derivatives Market: Involves trading financial contracts such as futures and options, based on underlying assets like stocks or indices.
  

• Commodity Market: Focuses on the exchange of physical goods such as gold, crude oil, and agricultural products.

Each segment of the stock market plays a distinct role, offering participants different ways to invest, trade, and diversify their portfolios.

For beginners, understanding share market basics is the first step toward building a successful investment journey. The share market allows individuals to buy and sell ownership in companies and benefit from their growth over time.

Here’s a simple breakdown of how to get started:

• Learn the Share Market Basics: Familiarise yourself with key terms like stocks, indices, IPOs, and trading accounts to understand how the market functions.
  

• Open a Demat and Trading Account: These accounts are essential for holding and trading shares electronically.
  

• Link a Bank Account: It enables seamless transfer of funds for buying and selling shares.
  

• Select SEBI-Registered Broker: Select a SEBI-registered broker offering a user-friendly platform and research tools.
  

• Starting Small: Start with familiar companies to observe market patterns and learn gradually.
  

• Stay Informed: Monitoring market news, company results, and global developments can help understand stock movements.

For those exploring share market basics for beginners, it is helpful to learn gradually, stay consistent, and base decisions on research and understanding.

Before stepping into the world of share market, it’s important to understand a few essential points that form the basics of stock market participation.

Key things to keep in mind include:

• Risk Awareness: Stock prices fluctuate based on market sentiment, economic data, and company performance.
  

• Investment Goals: Define your financial objectives such as short-term gains or long-term wealth creation, before investing.
  

• Diversification: Avoid putting all your funds into one stock or sector; spread investments across industries.
  

• Research and Analysis: Review company fundamentals, historical performance, and market trends before investing.
  

• Stay Disciplined: Avoid impulsive buying or selling based on short-term market movements.
  

• Understand Costs: Brokerage fees, taxes, and other charges can impact returns, so factor these in.

Understanding these share market basics helps new investors make informed choices and navigate market risks more effectively.

The stock market operates as a platform where buyers and sellers trade shares of publicly listed companies. Prices are determined primarily by the forces of supply and demand — when demand exceeds supply, prices rise, and when supply is higher, prices fall. Understanding these stock market basics helps investors grasp how market dynamics influence price movements and trading activity.

Key Participants

• Investors: Include individuals, mutual funds, and institutional players who buy or sell shares for profit or long-term growth.
  
  

• Brokers: Act as intermediaries, executing trades on behalf of investors through registered exchanges.
  

• Market Makers: Provide liquidity by consistently offering to buy and sell securities, ensuring smooth market functioning.
  

• Stock Exchanges: Platforms such as BSE and NSE where listed securities are traded under regulatory oversight.
  

• Regulatory Bodies: Institutions like SEBI (Securities and Exchange Board of India) monitor trading practices to ensure transparency and fairness.

Settlement Cycle in India

• India follows a T+1 settlement cycle, meaning transactions are completed one business day after the trade date.
  

• This process involves transferring shares to the buyer’s Demat account and crediting funds to the seller’s account.
  

• The T+1 system enhances efficiency, reduces counterparty risk, and ensures quick transaction closure.

Stock market indices such as the BSE Sensex and NSE Nifty 50 serve as indicators of market performance, reflecting overall economic and investor sentiment.

Understanding these key elements of how trading works lays the groundwork for exploring stock investment strategies and methods of generating returns in the market.

Stock investment involves buying shares to generate returns through price appreciation, dividends, or both. Investors can approach stock investment in different ways:

• Direct Investment: Buying individual stocks via brokers.
  Example: Purchasing 100 shares of Infosys directly on the NSE.

• Mutual Funds & ETFs: Indirect investment through pooled funds managed by professionals.
  Example: Investing in a Nifty 50 ETF provides exposure to 50 large companies without needing to pick each stock individually.

Long-term holding strategies can allow returns to compound, though outcomes vary with market conditions. Diversification, or spreading investments across sectors and stocks, further can spread exposure across sectors and companies.

For those new to investing, understanding fundamental stock market concepts is essential to build confidence and make informed financial decisions. These terms form the foundation of market knowledge and help investors assess opportunities and risks effectively.

Market Capitalisation

• Represents the total market value of a company’s outstanding shares, calculated as share price × total shares issued.
  

• Companies are categorised into:
  

  • Large-cap: Established and financially strong firms.
    

  • Mid-cap: Companies with moderate risk and growth potential.
    

  • Small-cap: Smaller firms offering higher growth but greater volatility.

Dividends

• A portion of a company’s profits distributed to shareholders, usually on a regular basis.
  

• They serve as an additional source of income beyond capital gains and are often paid by financially stable companies.

Volatility

• Refers to the degree of price fluctuation in a stock over a given period.
  

• High volatility means greater risk and potential reward, while low volatility suggests stability.
  

• It’s a key measure for determining a stock’s risk profile.

Liquidity

• Describes how easily a stock can be bought or sold without causing a significant impact on its price.
  

• Highly liquid stocks are preferred for active trading since they allow smooth entry and exit.

Bull and Bear Markets

• Bull Market: Characterised by rising stock prices and optimistic investor sentiment.
  

• Bear Market: Defined by falling prices and widespread caution among investors.

Understanding these basic terms helps new investors interpret market behaviour, manage risks, and align investment strategies with their financial objectives.

Understanding stock market basics is essential for new investors to navigate the complexities of investing. Stocks represent ownership in companies, and markets facilitate buying and selling these shares. Knowing the types of stocks and markets, how prices are set, and fundamental investment concepts empowers investors to make informed decisions. While investing carries risks, education and a disciplined approach provide a strong foundation for long-term success.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.