How the stock market works in India
Last Updated: Jul -11-2019
The Indian stock market is growing in leaps and bounds, as there is an ever-increasing number of people who are curious and interested in investing in stocks. The market is experiencing a growth like never before. The stock market is like a lifeline for majority of the Indian companies and a top growth opportunity for the companies.
In this blog, we will understand how the Indian stock market actually works, what are the types of users, how does the stock movement happen, and what does it means when we hear in news that the stock market has fallen or risen.
Let us start with the definition of the stock market.
The stock market is an electronic marketplace where different buyers and sellers meet with an intention of buying or selling the stocks amidst each other. While this happens, there is usually a difference in opinions and perspectives.
For instance, let us assume there are two traders Mr. Kumar and Mr. Khanna. Both of them are holding 500 shares of Infosys, and monitoring the stock market since a long time.
Currently, assume the trading price to be Rs 1100. All of a sudden, there is big news stating the resignation of Mr. Vishal Sikka from his position, due to some internal conflicts. This obviously leads to falling of stock price. Now in this case both the people owning the shares might have different opinions with what has happened.
Mr. Kumar thinks that this is a big downfall of a blue-chip company like Infosys, and that the company will not be able to come out it. He decides to sell his shares at the current price before it is too late. He is not willing to take risk, and sets his stop-loss at Rs 950 selling off all his holdings at this cost.
On the other hand, Mr. Khanna is positive about whatever happened. He is confident that the company will come out of these rough times in a short span of 8-12 months. Instead of selling his shares, he decides to place an order of 500 more shares at a cost of Rs 950 per share. He is willing to take risks and hence takes this decision.
There is a possibility that since both users are eyeing the price of Rs 250, Mr. Kumar might be able to sell his shares and Mr. Khanna will be able to buy his shares successfully.
There are countless such instances taking place in the stock market at a daily basis. Stock market is a platform both for buyers and sellers to carry out their respective transactions smoothly and easily.
With this understood, the next question that arises is how does the value of a stock go up or down? What factors determine the value of the stock? Let us continue with the same example mentioned previously.
Due to the sudden resignation of Mr. Sikka, the cost of company shares has lowered to Rs.950. The market is continuing with the same cost. Soon, the company hires a new CEO who is a prominent face in the market. And, the company announces a buyback of its shares as well. With two strong steps, the buyers in the stock market are looking forward to buying the shares again. Hence, the stock stabilizes at Rs 950 by the end of next 5 trading sessions.
Let us also assume that on one Thursday the NASSCOM (National Association of Software and Services Companies) announces that the next year would be difficult for the IT companies as the major US giants have decided to cut down on the IT operational costs by 15%. This is definitely bound to have a large impact on the Indian IT companies.
This news generates a series of questions. We will study each of the questions and their solutions in detail to understand better.
Question 1: How will the stock price of Infosys react to this news?
There will be a mixed reaction among the public. Since people have received a couple of good news and just one bad news they will remain indecisive about the impact on the stocks of Infosys.
Question 2: If you own 500 shares of Infosys, and go through all this, what will be your reaction?
There is possibility that you would want to get rid of the stocks that you hold. Because, there are too many things happening within the company, and the 15% reduction in the operational cost is bound to impact the share value.
Question 3: How will the overall stocks of different Indian IT companies react to this news?
The IT companies understand the impact of NASSCOM news and realize that the IT stocks are bound to hit really bad.
Hence, this shows that the value of a stock may vary depending on various factors such as specific companies, sectors, geographies, and so on. As an investor, it is your responsibility to understand the relation between any news of a company and sector and its impact on the stock market.
The investor can easily trade stocks with the help of one or more of the following methods:·
- Do it yourself with the help of trading application ( Web , Desktop, Mobile)
- Call your broker and trade
- Visit the local sub-broker
The broker checks for any initial amount present in your trading account, and gets started with the trading process. Suppose that you purchase 500 shares of a company, those shares are stored in your Demat account. You can hold on to those stocks for minutes, days, weeks, months, or even years. Post the purchase; you become the shareholder in that company. On the other hand, the person who sold you those 500 shares, will have the relevant amount reflected in his/her trading account.
When you start to actively participate in the trading market, there comes a time when you have to calculate your profits. There are two ways in which you can calculate.
1. Absolute Return Methodology
Let us assume,
Stock buy price = Rs 100
Stock sell price = Rs 120
Return = Rs 120-100 = Rs 20
Return percentage = (20/100) X 100% = 20%
However, since the time factor is not considered, this type of calculation method is not correct. For instance, 20% over a few months looks good, but it is certainly not good over a few years.
2. Compounded Annual Growth Rate
In this method, the profits are calculated while keeping time into consideration. The formula to calculate the compounded annual growth rate is
CAGR = (Ending value/Beginning value) ^ (1/no. of years) – 1
With this formula, you will be able to calculate the actual profits and make better trading decisions.
Last but not the least; while understanding how the stock market works in India, it is important to know the types of traders present in the market.
Day Traders – They trade within few minutes or hours to quick profits
Sculptors – They only trade in high quality stocks
Swing Traders – They trade for long duration such as days or weeks
Growth Investors – They trade in longer terms like years or even decades
Value Investors – They monitor stocks for long-term investment, but they purchase the stocks only at low rate and foresee lot of opportunity in the future.
This can be called as an extensive introduction to the Indian stock market. For all the beginners who are willing to start trading, opening a trading account with your broker is all that you need. Therefore, study well, get started, make wise decisions, and earn profits