Stock Market Basics: Everything New Investors Need to Know

The stock market can seem complex for beginners, but learning its basics is the first step toward understanding investing. It plays a crucial role in the economy by giving companies access to capital and offering individuals opportunities 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 ownership in a company. When you buy a stock, you purchase a small part of that company, making you a shareholder.

Shareholders generally have the following rights and benefits:

• Voting rights on important corporate matters.
  

• Dividends, which are a share of the company’s profits.
  

• Capital appreciation if the stock price rises over time.
  

• Ownership stake in the company’s assets and earnings.

For instance, owning 10 shares of a company with 1,000 total shares means you hold 1% ownership in that company.

Next, we’ll explore the different types of stocks and how they function in the stock market.

Understanding the various types of stocks helps investors categorise options based on characteristics like size, growth potential, and risk profile.

Common Stocks

Most publicly traded companies issue common stock. Shareholders have voting rights and may receive dividends. They benefit when the company grows but also carry the risk if the company underperforms.

Preferred Stocks

Preferred stockholders receive fixed dividends before common shareholders but usually lack voting rights. These stocks generally have lower price fluctuations compared to common stocks.

Stocks can be categorised based on market capitalisation or investment style, helping investors choose according to their risk tolerance and financial goals.

• Large-cap: Companies with high market value; generally more stable.
  

• Mid-cap: Medium-sized companies; offer balanced risk and growth potential.
  

• Small-cap: Smaller companies with higher growth potential but more volatility.

Growth Stocks

Stocks of companies expected to grow earnings rapidly. They often reinvest profits instead of paying dividends.

Dividend Stocks

Stocks known for paying consistent dividends, appealing to investors seeking income.

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 operate in different segments, each serving a unique purpose for companies and investors.

Primary Market

Also known as the new issue market, this is where companies issue new stocks to the public for the first time via Initial Public Offerings (IPOs).

Secondary Market

Here, investors trade existing shares after they have been issued. Prices fluctuate based on supply and demand.

Other Markets

• Derivatives Market: Trading of contracts like futures and options based on underlying securities.
  

• Commodity Market: Trading of physical goods such as gold, oil, and agricultural products.

The stock market functions as a platform where buyers and sellers trade shares, with prices determined primarily by supply and demand. If more investors want to buy a stock than sell it, the price rises; if more want to sell, the price falls.

Key Participants

• Investors: Individuals or institutions buying or selling shares.
  

• Brokers: Facilitate trades between investors and exchanges.
  

• Market Makers: Provide liquidity by quoting buy and sell prices.

Settlement Cycle in India

• T+1 system: Transactions are settled one business day after the trade date, as per SEBI’s latest settlement cycle guidelines.
  

• This ensures timely clearing and settlement, reducing counterparty risk.

Market indices such as the BSE Sensex and NSE Nifty 50 track the performance of select stocks listed on their respective exchanges, providing an overview of broader market trends.

With the basics of how trading works covered, let’s move on to explore what stock investment involves and how investors can generate returns.

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 first-time investors, understanding essential concepts is crucial before participating in the stock market. These terms and strategies provide the foundation for building confidence and making informed decisions.

Market Capitalisation

This is the total market value of a company’s outstanding shares, calculated as share price × number of shares.
It helps categorise companies into:

• Large-cap: Stable, established firms

• Mid-cap: Growing companies with moderate risk

• Small-cap: Smaller firms, often with higher risk and return potential

Dividends

Dividends are a portion of company profits distributed to shareholders.

They provide an additional income stream beyond stock price appreciation and are commonly offered by stable, profit-generating companies.

Volatility

Volatility indicates how much a stock’s price moves over time.

• High volatility = greater risk and return potential

• Low volatility = more price stability

Understanding volatility helps in choosing stocks aligned with your risk appetite.

Liquidity

Liquidity indicates how quickly and smoothly a stock can be traded in the market without causing major changes in its price.

Highly liquid stocks are easier to trade and generally more stable.

Bull and Bear Markets

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

• Bear Market: Marked by falling prices and widespread pessimism

Understanding these concepts equips investors to interpret market trends, evaluate risks, and design strategies suited to their financial goals.

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.