Stock market investments always invoke mixed reactions in investors. Some consider it as a very profitable investment while others condemn it as most unpredictable and risky. Actually the truth lies in both these opinions. There are people who have carefully studied and invested in the stock market and have reaped huge profits and thereby secured their financial future. While on the other hand, careless investments or a herd mentality in investing has led to staggering losses in the share market leading to suicides. In this article we talk about The Indian Stock Market.
The Indian Stock Market
Let us understand the concept of Stocks.
A stock represents a fractional ownership in a company. When you own a stock in any company, you effectively become part owner of that company. So when the company makes a profit, you make a profit and vice versa.
If the company does well, you can benefit in multiple ways like:
- The company may pay Dividend on the shares you own. The dividend is paid on the face value and not on the market value.
- The company may issue Bonus shares on the shares you hold.
- The company may come up with a Rights issue wherein existing shareholders can buy a limited number of shares at a discounted price.
- The most important benefit is that you can sell the shares at a higher price than the price at which you have bought the shares.
Let us now understand how stock prices are determined and how do they rise or fall.
The price of a stock is determined by calculating the value of the company. It is first done when a company decides to offer shares to the public in the form of an Initial public offering (IPO). An investment bank calculates the value of the company and arrives at the price at which the shares should be sold. Afterwards the shares are listed on the stock exchange and traded. The shares can be bought or sold on the stock exchanges like the NSE and the BSE.
There are many factors that affect the stock price. Some of the major reasons for fluctuation in the stock prices are listed below:
Demand and Supply
This is simply a case wherein more people are willing to buy shares of a particular company, while a few are willing to sell them. In this case the share price rises.
If the company is expected to earn a healthy profit then this translates to an increase in the share price.
Forecast by experts and financial analysts
Most times experts and financial analysts who study the stock market, company profitability, industry trends and world economic matters, make predictions and forecasts in their reports. These reports influence the investors buying and selling decisions.
Technology and Social change
A company’s share price is influenced positively or negatively by an incoming new technology. Also the current demonetisation decision by the government has had a major impact on various industries like agriculture, manufacturing, real estate and infrastructure etc.
Interest rate and inflation
Rising interest rates lead to companies paying higher amounts for a loan taken and vice versa. Currently banks have cut rates due to demonetisation and this is good for many sectors.
Exchange rate of the rupee
Companies that export or import goods, are affected by the fluctuations in the exchange rate of international currencies, especially the dollar.
Market sentiment may positively or negatively impact the share price of a company. Some major factors that influence market sentiments are the monsoon, elections, budget, fiscal policy and the RBI monetary policy.
It is important to study and analyse companies carefully on the basis of its Earning Per Share (EPS) and its Price Earnings (PE) Ratio, which was already discussed in our earlier article. This will help you to invest at the right time, when stocks are available at cheap valuations, thereby leading to a profit in the future.
The process of buying and selling stocks is give below:
Open a Demat account.
The first step is to open a Demat account with your Depository participant (DP). Most of the banks are DP’s now. Just as your Savings Account deals with cash, your Demat account will deal with shares. If you have past physical share certificates, then you should get them dematerialised into your account.
Open your Trading account.
To start trading, you need to have three accounts.
- Demat account
- Savings bank account
- Trading account.
You can do online or offline trading. Most of the transactions today are done online as they much easier to do. If you choose the offline option, you need to call your broker and place the order through them, while in the case of the online option you can do it via the broker’s website, with an internet connection.
Once you place an order, your broker will try to execute the same. If the order is successfully executed then your demat account and your bank account will reflect the changes. Your demat account will reflect all the shares you bought or sold, bonus shares etc. Similarly dividends will get credited to your savings bank account.
The concept of Bulls and bears in the Indian Market
Bulls and bears are straight forward terms to understand. When the stock market is rising, it is referred to as a bull market. In a bull market the economy booms, investors have confidence to buy stocks for better profits and the employment level is high.
On the other hand a bear market signifies a decline, the economy slows down, recession and unemployment is high. As their name suggests, a bull charges at high speeds while a bear is slow with lumbering movements.
Some of the advantages of stocks are given below:
- Investing in stocks is a good way to earn high returns, if you carefully study companies and are able to buy stocks cheaply.
- There is no tax liability if you sell stocks after holding them for a period of atleast one year.
- They are a highly liquid investment.
- Today the media provides detailed information and guidance for buying the right stocks.
Some of the disadvantages are given below:
- They are one of the most risky investments, if you do not carefully study the companies.
- Too much of information like company reports, stock quotes etc., are available, so it is up to you to analyse and study things correctly before investing.
- Most of the time people fall to emotions like greed, fear, quick money making mode thus resulting in wrong decisions.
- If you sell your stocks within a year, then you incur a short term capital gains tax at the rate of 15%.If you sell after a year then you don’t have to pay any long term capital gains tax.
These are some of the factors to be kept in mind while investing in the stock market for better and profitable financial returns.
Hope you enjoyed this article The Indian Stock Market. Please read our earlier article on Investment in Stocks.Tags: bulls and bears, Demat, market sentiments, Profit earning ratio, Shares, The Indian Stock Market, trading account