“Make your money work for you” is a common piece of financial advice, often heard in households and echoed in countless books on wealth creation. For students stepping into the world of finance, the stock market remains one of the most intriguing and potentially rewarding avenues. As a platform where ownership in firms is traded, it offers possibilities for long-term growth. However, it also comes with risks and volatility. Therefore, it is imperative for beginners to gain a foundational understanding of how the stock market operates, paving the way for smarter financial decisions.
Knowing About the Stock Market
Stocks, or shares, are securities that represent ownership in a firm. When an individual purchases a stock, they acquire a stake in the company and are called shareholders. This ownership gives them a portion of the company’s income – often distributed as dividends – as well as voting rights at shareholder meetings. However, it is worth noting that stock prices can fluctuate based on a firm’s performance, market changes, and investor sentiment. While the stock market is a larger system where shares are bought and sold, there is a specific platform where these trades occur, known as a stock exchange.
In India, the two main stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Of these, the NSE handles over 90 per cent of cash exchanges. According to the NSE Report 2024, around 2,500 firms are listed on the exchange. Additionally, all stock market activities – including daily trades, financial instruments exchanged, and the platforms facilitating these transactions – are overseen by the Securities and Exchange Board of India (SEBI).
How Does the Stock Market Work?
When a company seeks to expand, it may sell stocks to raise capital. As noted earlier, investors who purchase these shares become shareholders. If the firm grows and earns a profit, the stock price increases. Consequently, investors can sell their stocks at a higher rate and make a profit. Conversely, if the firm underperforms, the stock price falls, and investors may incur losses.
For example, consider buying 10 shares at ₹5 each. If the company performs well and the stock price rises to ₹10, the shares can be sold for ₹100, yielding a profit of ₹50. However, if the stock price drops to ₹3 due to unfavourable conditions, the value becomes ₹30, and selling at this point results in a loss.
Key Financial Tools for Trading in the Stock Market
To succeed in the stock market, traders can use various financial tools that help evaluate the market, identify opportunities, and enhance trading outcomes. Here are some important tools:
⮚ Trading Platform – This is the software or application that enables traders to access the market, place orders, and manage their accounts.
⮚ Charting Tool – This tool allows investors to visualise market trends and patterns. It supports technical analysis techniques such as indicators, oscillators, and Fibonacci lines, presenting price movements in graphical formats like bar, line, candlestick, or figure charts.
⮚ Backtesting Tool – This helps traders test their strategies on historical data to evaluate performance, risk, and profitability. It assists in optimising strategies and improving confidence and discipline.
⮚ News Source – Staying updated with reliable news sources keeps traders informed about market developments and supports the integration of fundamental analysis into decision-making.
Although these tools are essential, many others exist that traders may find useful depending on their trading style, goals, and preferences. The key lies in using these tools effectively and consistently.
Steps to Invest in the Stock Market
An individual cannot buy or sell stocks independently. A broker or stock brokerage platform is necessary. The following steps can be taken:
- Set up a trading account with a broker or brokerage platform. This account is used to buy and sell stocks. Students can ask their parents or guardians for assistance or request them to open an account on their behalf.
- Link both the trading and demat accounts to a bank account for seamless transactions.
- To open these accounts, KYC (Know Your Customer) verification is required. A PAN card or Aadhaar card may be used for this process.
- Once the accounts are set up, trading can be conducted via the broker’s online portal or over the phone.
To conclude, once trading and demat accounts are established, an individual is ready to begin investing. By acquiring the right knowledge and tools, students and beginners can make informed decisions, setting themselves on a path to long-term financial stability and success.
