Welcome to our comprehensive FAQ section on the stock market!
If you’re new to investing or just want to learn more, you’re in the right place.
The stock market might seem confusing, but it’s an important part of our economy and can be a great way to grow your money. Here, we answer common questions about how the stock market works, what different investments are, the risks involved, and tips for getting started.
Dive into the FAQs below to get a clear and simple understanding of the stock market and start your journey as an investor!
What is the stock market?
The stock market is a place where people buy and sell shares of publicly traded companies. When you buy a share, you own a small part of that company. For example, if you buy a share of a coffee shop chain, you own a tiny piece of that chain.
Think of it like a marketplace where instead of buying fruits or vegetables, you’re buying pieces of businesses. The prices of shares can go up or down based on how well the company is doing and how much people want to buy or sell those shares.
What are stocks?
Stocks are small pieces of ownership in a company. When you buy a stock, you’re purchasing a share of that company. For instance, if you buy stock in a tech company, you own a tiny fraction of that company and can benefit if it grows and makes money.
Think of stocks like slices of pizza: if you buy a slice, you get to enjoy a part of that pizza (the company). If the pizza gets bigger (the company grows), your slice becomes more valuable!
How does the stock market work?
In the stock market, companies raise money by selling shares to the public through an IPO (Initial Public Offering). After the shares are sold, they are traded on stock exchanges like the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). Buyers and sellers place orders through brokers, who help match them.
Here’s how it works:
- Buying and Selling: You can buy shares through a broker on the stock exchange. When you want to sell your shares, you can put them up for sale, and someone else can buy them.
- Price Changes: Stock prices move up or down based on supply and demand. If more people want to buy, the price rises; if more people want to sell, the price falls.
- Earnings and Dividends: If the company does well, the stock price may increase, allowing you to sell for a profit. Some companies also pay dividends, which are a portion of their profits shared with shareholders.
For example, if you buy shares in a popular restaurant chain, the value of your shares may increase as the business grows, and you can sell them for more than you paid.
What is a stock exchange?
A stock exchange is a marketplace where stocks (shares of companies) are bought and sold. Think of it like a giant online store for stocks, where buyers and sellers come together to trade.
For example, in the United States, the New York Stock Exchange (NYSE) is one of the largest and most well-known stock exchanges. In India, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) serve a similar purpose.
When you want to buy or sell stocks, like shares of Apple in the U.S. or Infosys in India, you do it through these exchanges. They help set prices based on supply and demand.
In simple terms, it’s like a busy marketplace where people trade different goods, but instead of fruits or clothes, they’re trading pieces of companies!
What causes stock prices to rise or fall?
Stock prices move based on demand and supply, influenced by external news, company performance, and market sentiment. For example, if a company announces positive news (like a new CEO), more investors might buy shares, driving the price up. Conversely, bad news can cause the price to drop.
What is a stock ticker symbol?
A stock ticker symbol is a unique series of letters assigned to a specific company’s stock, used to identify it on the stock market. It acts like a shorthand name for the stock.
For example:
- AAPL for Apple Inc. (U.S.)
- GOOGL for Alphabet Inc. (Google) (U.S.)
- TSLA for Tesla, Inc. (U.S.)
- RELIANCE for Reliance Industries (India)
- HDFC for HDFC Bank (India)
- TCS for Tata Consultancy Services (India)
When you want to buy or sell shares, you use these symbols to quickly find the stock you’re interested in. It’s similar to how a license plate identifies a car—each symbol points to a specific company in the stock market!
How do you buy stocks?
To buy stocks, you need a trading account and a Demat account. After logging into your trading platform, you can place an order to buy shares. The broker transmits your order to the stock exchange, where it is matched with a seller, and the trade is completed.
What is market capitalization?
Market capitalization, or market cap, is the total value of a company’s outstanding shares of stock. It’s calculated by multiplying the current stock price by the total number of shares.
For example:
- If a company has 1 million shares, and each share is worth $50, the market cap would be 1,000,000 x $50 = $50 million.
- In India, if Reliance Industries has 2 billion shares priced at ₹2,500 each, its market cap would be 2,000,000,000 x 2,500 = ₹5 trillion.
Market cap helps investors understand the size of a company. Companies are often classified as small-cap (under $2 billion), mid-cap ($2 billion to $10 billion), or large-cap (over $10 billion). It’s like a way to measure how big a company is in the business world!
What is the difference between a trader and an investor?
- Traders focus on short-term gains and often buy and sell within a day or week. They might be day traders, swing traders, or scalpers.
- Investors buy stocks for the long term, with a focus on growth. They typically hold stocks for years, hoping for long-term capital appreciation.
How do people make money in the stock market?
There are two main ways to make money in the stock market:
- Investing: Buying stocks for long-term growth, benefiting from the company’s success over time.
- Trading: Buying and selling stocks quickly to profit from short-term price fluctuations.
What are the main stock exchanges?
India has two major stock exchanges:
- Bombay Stock Exchange (BSE): One of the oldest exchanges in Asia, established in 1875. It uses the Sensex index to track the performance of 30 key Indian companies.
- National Stock Exchange (NSE): Founded in 1992, the NSE is the largest exchange in India by trading volume. It uses the Nifty 50 index to represent the top 50 companies in India.
Around the world, key stock exchanges include:
- USA: New York Stock Exchange (NYSE) and NASDAQ
- Japan: Tokyo Stock Exchange (TSE)
- Europe: Euronext (covers multiple countries)
- UK: London Stock Exchange (LSE)
- China: Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE)
- Russia: Moscow Exchange (MOEX)
These exchanges track the performance of their respective markets and play a vital role in global finance.
What are dividends?
Dividends are payments made by a company to its shareholders, usually from its profits. When you own shares in a company that pays dividends, you receive a portion of the earnings, typically on a regular basis (like quarterly).
For example:
- If you own 100 shares of a company and it pays a dividend of $1 per share, you would receive $100.
- In India, if you own shares of a company like HDFC Bank and it declares a dividend of ₹10 per share, you’d get ₹1,000 if you own 100 shares.
Dividends are a way for companies to share their profits with investors, and they can be a nice source of income, especially for long-term investors!
What are the costs involved in investing in the stock market?
The main costs include:
- Brokerage fees: Charges for executing your trades.
- Transaction fees: Taxes and charges levied by the stock exchanges and the government.
- Account maintenance fees: Fees charged by brokers for managing your accounts.
What are stock market sectors?
The stock market is divided into various sectors, such as:
- Software & IT (e.g., Infosys, TCS)
- Banking (e.g., SBI, ICICI)
- Oil & Gas (e.g., Reliance, ONGC)
- Healthcare (e.g., Dr. Reddy’s, Sun Pharma)
Each sector has its own performance trends and is affected by different economic conditions.
What is the difference between a bull and bear market?
- A bull market refers to a period when stock prices are rising or are expected to rise.
- A bear market refers to a period when stock prices are falling or are expected to fall.
What is Muhurat Trading?
Muhurat Trading is an auspicious trading session during Diwali, considered to bring prosperity. While it is symbolic, investment decisions should always be based on solid research rather than tradition.
How do I manage risk in the stock market?
To manage risk:
- Diversify your portfolio across different sectors and stocks.
- Set stop-loss orders to limit potential losses.
- Understand your risk tolerance and choose an investment strategy that matches your goals.
What is the difference between common and preferred stock?
Common and preferred stocks are two types of shares that investors can buy in a company, and they have different features:
| Feature | Common Stock | Preferred Stock |
| Ownership Rights | Typically includes voting rights | Usually does not have voting rights |
| Dividends | Variable and not guaranteed | Generally fixed and paid before common dividends |
| Risk and Returns | Higher potential for long-term growth, but higher risk | Less risky, with fixed dividends and higher claim on assets |
| Claim in Bankruptcy | Last in line to get paid | Higher claim on assets than common shareholders |
This table summarizes the key differences between common and preferred stock!
What are stocks and bonds?
| Feature | Stocks | Bonds |
| Definition | Stocks represent ownership in a company. | Bonds are loans made to a company or government. |
| Ownership | Owning stocks means you own a part of the company. | Owning bonds means you are a creditor; you lend money. |
| Returns | Potential for higher returns through price appreciation and dividends. | Fixed interest payments over time, plus return of principal at maturity. |
| Risk | Higher risk; stock prices can fluctuate significantly. | Generally lower risk; more stable returns, but still subject to default risk. |
| Voting Rights | Often includes voting rights in company decisions. | No voting rights. |
In summary, stocks give you a piece of ownership in a company, while bonds are a way to lend money and earn interest.
What is a stock index?
A stock index is a measurement that shows how a group of stocks is performing, acting like a scorecard for the stock market.
For example, the S&P 500 tracks 500 large U.S. companies. If it goes up, it means those companies’ stock prices are rising on average; if it goes down, the opposite is true.
In India, the Nifty 50 is a similar index that includes 50 of the largest companies listed on the National Stock Exchange. Just like with the S&P 500, if the Nifty 50 rises, it indicates that the overall market is doing well, and if it falls, it shows a downturn.
What is a broker?
A broker is a person or a company that helps you buy and sell stocks and other investments. Think of them as a middleman between you and the stock market.
For example, if you want to buy shares of a company, you can’t just walk into the stock market. Instead, you tell a broker what you want, and they handle the transaction for you.
They can also provide advice on which stocks to buy or sell based on your financial goals.
How do I buy stocks?
Buying stocks is pretty straightforward. Here’s a simple step-by-step guide:
- Choose a Broker: First, you need to select a broker. This could be an online platform of a traditional brokerage firm.
- Open an Account: Next, you’ll need to open a trading account with your chosen broker. This usually involves providing some personal information and documents.
- Deposit Funds: Once your account is set up, deposit money into it. This is the money you’ll use to buy stocks.
- Research Stocks: Look for stocks you’re interested in. You can use online resources or ask your broker for recommendations.
- Place an Order: When you find a stock you want to buy, log into your trading account, enter the stock’s ticker symbol, specify how many shares you want to buy, and place your order.
- Monitor Your Investment: After buying, keep an eye on your stocks and the market to make informed decisions about when to sell or hold.
For example, if you want to buy shares of Reliance Industries, you would log into your trading account, search for “Reliance,” and follow the steps to purchase the shares.
What are market orders?
Market orders are requests to buy or sell a stock immediately at the current market price. They are the simplest and quickest way to trade.
For example, if you want to buy shares of a company and place a market order, your broker will execute the order right away at the best available price. If the stock is currently priced at ₹500 per share, your order will go through at or very close to that price.
However, since market orders are executed quickly, the exact price you pay might vary slightly, especially if the stock is moving fast. This makes them great for when you want to buy or sell quickly without waiting.
What are limit orders?
Limit orders are requests to buy or sell a stock at a specific price or better. This gives you more control over the price at which your trade is executed.
For example, if you want to buy shares of a company but only at ₹450 or lower, you can place a limit order at ₹450. If the stock reaches that price, your order will be executed. If it doesn’t, the order will remain open until it’s filled or canceled.
On the selling side, if you own shares and want to sell them only if the price reaches ₹600, you can set a limit order at that price. This way, you ensure that you get your desired price, but there’s no guarantee the order will be filled if the stock doesn’t reach your target price.
What is a stop-loss order?
A stop-loss order is a type of order used to limit potential losses on a stock. It automatically sells your shares if the price drops to a certain level, helping you avoid bigger losses.
For example, if you bought shares of a company at ₹500 and want to limit your loss to ₹450, you can set a stop-loss order at ₹450. If the stock price falls to ₹450, the stop-loss order will trigger and sell your shares, protecting you from further decline.
This is useful for managing risk, especially in volatile markets, as it helps you stick to your investment strategy without constantly monitoring prices.
