Stock Market Fundamentals
Why This Chapter Matters
Understanding the stock market is essential for personal finance, investing, and finance careers. India's market (BSE + NSE) is one of the world's largest. Whether you want to invest or work in finance, these concepts are foundational.
Core Concepts
1. What is a Stock Market?
A marketplace where shares (ownership stakes) of public companies are bought and sold.
Primary market: Companies issue new shares (IPO — Initial Public Offering).
Secondary market: Existing shares traded between investors (NSE, BSE).
BSE (Bombay Stock Exchange): Asia's oldest (1875). Index: SENSEX (30 companies).
NSE (National Stock Exchange): More trading volume. Index: NIFTY 50 (50 companies).
2. Key Terms
Share/Stock: Unit of ownership in a company.
Dividend: Share of company's profit paid to shareholders.
IPO (Initial Public Offering): First time a company's shares are offered to the public.
FPO (Follow-on Public Offer): Additional shares issued by already-listed company.
Market Capitalisation: Share price × Total shares outstanding.
Large-cap (>₹20,000 Cr), Mid-cap (₹5,000-20,000 Cr), Small-cap (<₹5,000 Cr).
Bull market: Prices rising (investor confidence high).
Bear market: Prices falling (investor pessimism).
Intraday trading: Buy and sell on the same day.
Delivery trading: Hold shares for more than one day.
3. Indices
SENSEX: 30 largest, most liquid stocks on BSE. Base year 1978-79, base value 100.
NIFTY 50: 50 stocks across 13 sectors on NSE. Base 1000 (Nov 3, 1995).
NIFTY Bank: Banking stocks.
India VIX: Volatility index — fear gauge. High VIX = high volatility/uncertainty.
4. Fundamental Analysis
Evaluating a company's intrinsic value by studying financial statements.
Key ratios:
P/E ratio (Price to Earnings): Share price / EPS. Lower = potentially cheaper.
EPS (Earnings Per Share): Net profit / Total shares. Higher = more profitable per share.
P/B ratio (Price to Book): Market price / Book value per share.
Debt-to-Equity: Total debt / Shareholders' equity. Lower = less leverage, safer.
ROE (Return on Equity): Net profit / Shareholders' equity × 100. Higher = more efficient.
Dividend Yield: Annual dividend / Share price × 100.
5. Technical Analysis
Predicting future price movement using historical price and volume data.
Support: Price level where stock tends to stop falling (demand zone).
Resistance: Price level where stock tends to stop rising (supply zone).
Moving Average: Average price over a period (20-day MA, 50-day MA, 200-day MA).
Golden Cross: 50-day MA crosses above 200-day MA → bullish signal.
Death Cross: 50-day MA crosses below 200-day MA → bearish signal.
6. SEBI and Regulations
SEBI (Securities and Exchange Board of India): Regulates stock markets.
Protects investors, regulates brokers, intermediaries, and companies.
Insider trading: Trading on non-public information — illegal.
Circuit breakers: Trading halted when index falls 10%, 15%, 20% in a day.
7. How to Invest
Demat Account: Holds shares in electronic form (NSDL/CDSL are depositories).
Trading Account: To buy/sell shares (with broker — Zerodha, Groww, Upstox, HDFC Securities).
Investment options:
Direct equity: Buy individual stocks (high risk, high potential return).
Mutual Funds: Pool money with other investors, managed by fund manager.
Index Funds/ETFs: Track an index like NIFTY 50 (low cost, passive).
SIP (Systematic Investment Plan): Invest fixed amount every month (rupee cost averaging).
SEBI's warning: "Past performance is not indicative of future results."