All companies need money to run their business. Sometimes the profit acquired from selling goods or services is not sufficient to meet the working capital requirements. And so, companies invite normal people like you and me to put some money in their company so that they can run it efficiently and in return investors get a share of whatever profit they make. Understanding this is the first step towards understanding stock market basics. Let’s learn about this in detail.
Stock investors are those who keep their money in the stock for a longer period of time, sometimes even years. Returns are compounded over a period of time. Investors use fundamental analysis. They look at the growth trajectory of the company because your investment literally grows with the company in the long term.
Stock traders generally buy and sell within the same trading session. Traders use technical analysis to understand which stocks to invest in. Traders look for short and quick gains. Stock trading basics will require you to learn technical indicators like momentum oscillators, Bollinger bands, charts and more.
How do you start trading or investing:
You need to open a Demat and trading account. Most investment platforms and brokers these days provide you with a Demat cum trading account. Trading account is used for just the transactions.; buying and selling. Generally, if you are a trader, you don’t really need to open a Demat account because if you are buying and selling within the same day, a trading account will suffice.
Types of stocks Based on Market Capitalisation
Small Cap Stocks:
Companies with a market capitalisation of less than Rs. 500 Crore are categorised as small-cap companies. Over 95% of Indian companies are considered as small-caps.'
This type of companies holds a rank above 251 and tends to perform during the initial phase of economic recovery and the stocks issued by such companies are termed small-cap stocks.
Investors, who want to generate higher returns from their investments, tend to find small-cap stocks a suitable option for them. Additionally, individuals who have a high-risk tolerance level and can bear exposure to market risks may consider this investment option.
Mid Cap Stocks:
Mid-cap is an approximate term that encapsulates companies and stocks which fall in between large-cap and small-cap category. The classification of the respective company’s stocks depends on its market capitalisation. Such classification is variable and can change with the change in a company’s market valuation.
Large Cap Stocks:
All large-cap companies are listed at the top of recognised stock exchange indices around the world. India’s Nifty 50 hosts the top fifty large-cap stocks in India which are the most traded in the stock market.
IPO (Initial public offering)
Initial Public Offering or IPO is a process in which a privately held organisation makes the shares of the firm available to the general public for purchase. This application is made available in assigned banks and online for applicants to bid.
Types of IPO
1.Fixed Price Offering
2.Book Building Offering
Fixed Price IPO can be referred to as the issue price that some companies set for the initial sale of their shares. The investors come to know about the price of the stocks that the company decides to make public.
Book building, the company initiating an IPO offers a 20% price band on the stocks to the investors. The interested investors bid on the shares before the final price is decided. Here, the investors need to specify the number of shares they intend to buy and the amount they are willing to pay per share.
The lowest share price is referred to as floor price and the highest stock price is known as cap price. The ultimate decision regarding the price of the shares is determined by investors’ bids.