Have you ever heard someone say, "I put money in the stock market," and wondered what is stock and how it even work? If so, you are not the only one. The stock market does seem confusing to beginners. Stock markets can seem dangerous and confusing. The truth is simple and the answer is right in front of you.
Stocks are one of the greatest tools invented to build wealth. You just need to understand the basics. In this article, we are going to tackle the basics of the stock market, the different types of stocks, and how stocks work. Because this is your starting point we are going to keep it as simple as possible.
What are Stocks?
Stocks are company ownership. A company needs money to grow. Whether it is a new factory, new products, or global expansion, companies need money. A company can keep its profit or sell ownership. When a company sells its ownership of a company, it is broken down into smaller pieces called shares or stocks.
When you buy a stock:
- You become a part-owner of the company.
- You are entitled to a share of the profits and the growth.
- Your wealth increases as the company increases.
Example:
If a company has 1 crore shares and you own 100 shares, you own a portion of the company. This is the main concept of what stocks are.
Why Do Companies Issue Stocks?
- To grow and expand.
- Rather than borrowing money from banks (and paying interest), they
- Raise money from the investors.
- Share the future gains with the shareholders.
- Enhance their reputation and brand equity. This is known as an Initial Public Offering (IPO).
Stock Market Basics: What Is the Stock Market?
The Stock Market is where stocks are transacted. Investors and traders are connected electronically. The price is determined by supply and demand. Some of the popular stock markets are:
- NYSE & NASDAQ (USA)
- NSE & BSE (India)
- London Stock Exchange (UK)
For the Stock market for beginners, the best analogy would be an e-commerce marketplace. In an e-commerce marketplace:
- Buyers are demanding stocks.
- Sellers are supplying stocks.
- The price is ever-changing.
How Stocks Work: Step-by-Step Explanation
How stocks work as a process is quite simple
Step 1: Company Gets Listed
A private company goes for an IPO and turns public company.
Step 2: Investors Buy Shares
Through a stock exchange, shares are bought by investors via a broker.
Step 3: Stock Market and Company Performance
Stock prices are driven by:
- Performance of the specific company.
- Reported profits or losses.
- Economic and political developments.
- Market speculation.
- Company news.
Step 4: Return
Investors make money through:
- Capital increase – the stock price increases.
- Getting paid dividends – the company pays part of the profits to stockholders.
This explains how stocks work.
Types of Stocks
Knowing types of stocks is key to controlling and optimising your investments.
1. Common Stocks
Most people understand this type of stock.
Characteristics:
- Voting rights on company decisions.
- Potential for significant growth.
- Company dividends are not guaranteed.
This type of stock is better for investors willing to invest for the long term and are looking for growth.
2. Preferred Stocks
This is a blend of stocks and bonds.
Characteristics:
Company dividends are guaranteed but are less than the returns of common stocks. This type of stock is for investors looking for less risk and guaranteed dividends.
3. Growth Stocks
These shares are of companies that are growing faster than the economy.
Examples: technology companies, digital platforms and disruptive innovators
Pros:
Potential for high returns on investment.
Cons:
Increased risk of larger stock price fluctuations.
4. Value Stocks
These are stocks that are potentially undervalued and are selling for less than their true value.
Pros:
- More stability.
- Making money as the company grows.
- Lower risk in the investment.
Cons:
These types of stocks do not grow rapidly.
5. Dividend Stocks
These are shares in companies that pay out their profits regularly to shareholders.
Best For:
- Passive income.
- Retired investors.
6. Blue Chip Stocks
Large, established, trusted companies.
Characteristics:
- Strong balance sheet.
- Market leaders.
- Consistent performance.
- Ideal for stock market beginners.
How Do Stock Prices Actually Change?
Stock prices move because of supply and demand.
More buyers than sellers → Price goes up.
More sellers than buyers → Price falls.
Factors influencing price:
- Company earnings.
- Future growth expectations.
- Interest rates.
- Inflation.
- Global news.
Remember: Markets move on expectations, not just results.
Stock Market for Beginners: Investing Vs Trading
Many beginners confuse investing with trading.
Investing
- Long-term (years).
- Focus on fundamentals.
- Less stress, lower risk.
Trading
- Short-term (minutes to days).
- Focus on price movements.
- Higher risk, higher stress.
- If you’re new, start with investing, not trading.
Risks Involved in Stocks
Stocks are powerful-but not risk-free.
Potential Drawbacks:
- Volatility.
- Company bankruptcy.
- Recession.
- Acting on emotion.
Risk Mitigation Strategies for Newcomers
- Balancing your portfolio.
- Buy and hold.
- Don’t follow the crowd.
- Be patient.
Market risk is a fundamental aspect of understanding how the stock market works for beginners.
Stocks Advantages
Regardless of the drawbacks, investing in stocks remains one of the most effective ways to generate wealth.
Advantages:
- Excellent way of beating inflation.
- Investing can improve your compounding returns.
- You earn your ownership stake in real companies.
- You can easily sell stock whenever you need cash.
- It is a great way to create wealth.
Over the long term, stocks have been shown to outperform virtually every other asset class.
Investing In Stocks: Getting Started
Here is a simple pathway for beginners in the stock market for beginners:
1. Set up your trading and demat account
2. Acquire the fundamental concepts of finance.
3. Start investing in index funds and blue-chip companies.
4. Make it a habit to invest every month.
5. Review your investments every year.
It’s more important to be consistent than to have perfect timing.
Myths About Stocks
- Investing in stocks is like gambling.
- You actually own a part of a company.
- You need a ton of cash to start.
- You can start investing with a little capital.
- You need to time the market perfectly.
It is more important to stay in the market for the long run (not to time it perfectly).
Final Thoughts
If you want to build wealth over time, stay ahead of inflation, and gain financial freedom, then yes, stocks are a good bet for you. Educating yourself on what stocks are, stock market basics, various types of stocks and how the stock market functions is the best way to ease your fear. The stock market is about being patient, smart and disciplined.
DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.
