Stock markets come up in conversations pretty often and you might cue in occasionally with your comments if you’ve been following the news. But the minute the talk gets technical things can get awkward! To avoid this we’ve answered 5 of your most embarrassing stock related questions.
What do you mean by ‘shares’?
Shares represent ownership in a company. Think of a company like a pizza divided into slices. Each slice represents a part of the company and is called a share. So, buying shares means buying a part of the company. Although you can’t buy all the shares of a company, only a few of them that are up for sale (known as floating shares) can be bought. The remaining are owned by the founder and management to control the company.
Also, you can’t buy shares of any company. Only those that are publicly listed on a stock exchange (marketplace to buy and sell shares) can be bought. It’s like going to an Italian restaurant and ordering Chinese, if it’s not listed on the menu you can’t order it.
But even private companies have shares. The only difference is that these shares aren’t freely available for everyone to buy and are usually owned by people who have some relationship to the company- like the founder (known as a ‘promoter‘ in stock market lingo), friends, family, private investors who’ve invested in the business, and its employees.
Remember, when private company Flipkart was bought by Walmart for a whopping $16 bn most of its employees turned to millionaires overnight because they also owned shares of the company known as ESOPs -Employee stock options.
<<<Stock Market Terms
That You Just Learnt-
- Floating Shares
- Publicly Listed
#2. If you buy and sell shares are you ‘investing’ or ‘trading’ in the stock markets?
Investing and trading depend on the duration between when you buy and sell shares. If you’re someone who buys shares and waits for years to sell them to make a profit you’re an investor and you ‘invest’ in the markets. But if you’re someone who buys and sells shares frequently within a short time span (few days to sometimes even a few minutes) to make quick profits you’re a trader and you ‘trade’ in the stock markets. Trading is riskier and is a full-time job while investing is less risky and can be done alongside your day job.
#3. How does one go about the process to actually start investing?
The procedure is fairly simple and can be done through different ways. Sticking to the pizza reference, if you want to order a pizza online there are multiple ways to go about it you can call for it, place an order online through their website or order it through Zomato or Swiggy.
Just like that to buy and sell shares you can place your order through a call or do it online. Whether you do it online or through a call it needs to to be placed through a registered broker who is the middleman between you and the stock exchange and he/she will buy/sell shares on your behalf. The broker could be an individual or even a brokerage firm (such as Motilal Oswal).
Before selecting a broker do a thorough background check and don’t be shy to ask them questions. Once this is done you need to open a trading a/c (to place buy/ sell orders) and a demat a/c (to hold shares in electronic form instead of physical form) with the broker. Think of the trading account like your shopping cart that holds your orders and a demat account like the shopping bag that stores it. Don’t worry if you hire a broker he/she will open these accounts for you.
Now that all the groundwork is done and dusted, research on a few companies that you wish to invest in and place your order with your broker by telling him the number of shares you want to buy and at what price you’re willing to buy it at. This was just a brief process. To know how to buy and sell shares in detail, click here.
In case you want to skip the middleman and buy shares of a company directly you can do this through DSP-Direct Stock Purchase Plans. But only a few large companies have this option just like how all restaurants don’t deliver. So it’s always better to buy and sell shares through a broker.
4. What are bull and bear markets?
Akin to a ‘bull‘ that charges at full speed a bull market means a market that is on the rise. It signifies a buying trend and everyone wants to buy shares to participate in it. Usually, when more people buy shares the prices go up even further because stock markets work on demand-supply and more demand pushes prices up. You should know that everytime shares rise a little it’s not necessarily a bull market. Bull markets happen only when shares rise by 20% over a period. And since there’s no way to predict this they say that bull markets can only be recognized once they’ve actually happened.
Following the bull market once people realize that share prices have risen way more than required i.e. shares are overvalued people start selling their shares to ‘book‘ their profits. As more and more people start selling their shares their prices fall (again because of demand-supply-more supply pushes prices down). Such a period is called as a stock market ‘correction‘ and is often confused with a bear market. But stock market corrections last for a short period, usually a few months and are actually good because they allow people to enter the markets at a low price..
Now sometimes following a correction if share prices fall below 20% it means the markets have entered the bear market zone. Akin to a bear that attacks with its paws downwards bear markets are a sign of falling share prices. They usually happen when the economy isn’t doing so well and people sell their shares and put their money in a safer place like a bank deposit. And once again few risky traders enter the market and bet on it. Soon others follow and again the demand pushes the prices up and the cycle continues.
5. What do you mean by blue-chip, income stocks, growth stocks and junk stocks?
You know how there are different kinds of restaurants like Michelin star restaurants, fine-dine restaurants, gourmet restaurants or even fast food joints that might all serve the same cuisine but the quality of food differs. Similarly, depending on the quality of a company, there are different kinds of shares.
Blue Chip Shares– These are shares of blue-chip companies and they’re like the ‘Michelin star restaurants’ of the stock market world. Since, these companies are well established, run by good management and have a good track record, they’re safe and stable. Even in times of an economic downturn, these companies have enough capital and resources to remain afloat or profitable. Of course, just like food at a Michelin Star restaurant, these quality shares are expensive but worth the price. Examples: Reliance Industries, ONGC, Infosys, Wipro etc.
Junk Stocks– You know how you have fast-food chains that give junk food at cheap prices. It fills you up and tastes great but eating too much of it can be unhealthy, junk stocks are similar. They belong to companies that are small and risky but can be bought at a cheap price. That’s why they’re also referred to as penny stocks. If the value of these shares grow, you can make huge profits. But you also run the risk of them failing and the company shutting down completely. That’s why just like junk food buying a few junk stocks occasionally is okay. but don’t buy too many of them at once without doing your homework.
Income Stocks- Then there are those restaurants that are decent and often give great deals, maybe a free dessert or drink on your birthday. These are like ‘income stocks’. Income stocks are called so because stocks of these companies regularly give out a share of the profit they generate to its shareholders. The amount of the profit is in proportion to the number of shares a person owns and is called as a dividend. Since dividends are a regular source of income these stocks are called as income stocks. But the only downside to these stocks is that its value doesn’t grow much over a period of time. This means on selling income stocks you won’t make high returns because the company distributes its profits instead of reinvesting them. So buy these shares if you need a regular source of income.
Growth Stocks– These are just the opposite of income stocks, they don’t give out regular dividends but instead offer high growth. So when you sell these shares you can make money from the increase in its share value.
6. What’s an Index?
The stock markets have over 1000 companies listed on it but to track each one of them and understand the mood of the market can be tough. That’s why there are stock market indices (singular-index) made up of a few selected stocks to give an investor a general taste of the markets. The index can be made up of some of the best stocks across different sectors on the market, it could be made up of stocks only from one sector, or it could be made up of companies of a particular size. Once the companies are selected to form the index, its value is calculated using a complex math formula that takes into account the current share price of all the companies in it. So, if the share price of one of these companies falls, the index value will also fall. Two commonly used indices by the Indian economy are Nifty and Sensex, so when people say markets are down by markets they mean Nifty or Sensex. Nifty is an index for stocks listed on NSE-National Stock Exchange & Sensex is made up of stocks listed on BSE-Bombay stock exchange. Both these indices are made up of stocks of some of the largest companies across many sectors in India for instance Reliance, HDFC, etc. So if Reliance’s share price falls the entire index will also fall.
Tracking these indices would help you decide when to enter the markets, when to get out or which industries are performing well and which ones aren’t. Still confused? Just think of how you’d pick one fruit from a fruit seller to test the quality of the other fruits.
Now that you’re fairly acquainted with some basic stock market lingo the next time someone brings it up in a conversation you won’t feel left out. This will also help you read up on stock markets and brisk through all the complicated jargon in newspapers. And once you’re confident about consuming such news the next step will be to actually start investing. Don’t worry, if you’re still intimidated by them, start by investing in shares through mutual funds. Then once you get the hang of it you can switch to stock markets.