Understanding the stock market fundamentals is crucial for the investors aiming to build wealth through equities. The stock market, also called the share market, is a platform where shares or ownership stakes of publicly listed companies are bought and sold.
In India, the two primary stock exchanges facilitating this activity are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
- What is the stock market
- How Indian stock market works
- How can you invest in stock market
- Fundamental and Technical analysis
- Understanding Risk before Investing
- Starting with Small and Safe
- Conclusion
What is the stock market
The stock market is a marketplace where investors trade shares issued by companies looking to raise capital. When you buy shares of a company, you become a part owner and can benefit from dividends and capital appreciation. Stocks can only be traded once listed on recognized stock exchanges like NSE and BSE, which ensure regulated, transparent trading.
Modern stock markets operate digitally, enabling millions of trades daily. Prices fluctuate based on supply and demand, influenced by company performance, economic indicators, political events, and market sentiment.
Stock markets also play a critical role in the economy by providing companies with funding to grow and offering investors opportunities for capital appreciation and income through dividends.
How Indian stock market works
The stock market comprises two main segments: the primary market, where companies issue shares to raise capital through Initial Public Offerings (See our article: An IPO Guide), and the secondary market, where existing shares are traded among investors.
The buying and selling of financial instruments such as stocks, bonds, or derivatives with the goal of making a profit is called trading. In India, trading happens during fixed hours, usually from 9:15 AM to 3:30 PM (Indian Standard Time) on weekdays, with a pre-opening session to establish opening prices.
How can you invest in stock market
A normal person in India can start investing in the stock market by following a few simple steps that make the process accessible and manageable even for beginners.
Step 1: Open a Demat and Trading Account
To buy and sell stocks on Indian exchanges like Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), you need two accounts:
- Demat account: Short for dematerialized account, is a digital account that allows investors to hold their shares and securities electronically instead of physical paper certificates. When you buy shares on exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE), they get credited to your Demat account, and when you sell, they are debited from it.
- Trading account: A trading account is a specialized account that allows investors to buy and sell securities such as stocks, bonds, commodities, and derivatives in the stock market. It acts as the gateway through which investors place their buy and sell orders on exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India.
These accounts can be opened online with any registered stockbroker. Evaluate brokers based on fees, ease of use, research tools, and customer support before choosing one.
Step 2: Complete KYC and Link Bank Account
You need to do KYC (Know Your Customer) during the opening of demat account by submitted your documents to the broker. KYC documents may include PAN card, Aadhaar, and bank details and must be submitted to comply with regulations. You will need to link your bank account for seamless fund transfers.
Step 3: Fund Your Trading Account
Transfer money to your trading account via net banking, UPI, or debit cards to have funds readily available for stock purchases.
Step 4: Select Stocks or Mutual Funds to Invest In
Select the stock of company or mutual fund to invest. Selecting stock or mutual fund for investment required planning and strategies. Without knowledge and effective strategies, investing can be disaster.
Step 5: Place Orders through Your Broker’s Platform
Use market orders for immediate buys or sell and limit orders to buy/sell at your desired price. Monitor your portfolio regularly.
Fundamental and Technical analysis
Before starting to invest in stock market, you should conduct thorough analysis using a structured checklist that combines fundamental evaluation, market understanding, and personal alignment to minimize risks and identify opportunities on NSE or BSE.
Fundamental analysis involves a comprehensive evaluation of a company’s intrinsic value by examining multiple quantitative and qualitative factors to make informed investment decisions. It aims to determine whether a stock is overvalued or undervalued compared to its true worth based on the business’s financial health, industry position, and broader economic environment.
The core of fundamental analysis focuses on examining the company’s financial statements which includes balance sheet, income statement, and cash flow statement to measure profitability, liquidity, solvency, and cash generation abilities.
Beyond numbers, evaluate management quality, corporate governance, competitive advantages, innovation capabilities, brand strength, and market share. These factors can significantly impact long-term sustainability and growth.
Fundamental Analysis starts with the economic outlook, narrows to industry prospects, and finally zooms in on individual companies within attractive sectors.
Technical analysis is a method used to analyze and forecast future price movements by studying past market data, primarily price and volume. It relies on charts, patterns, and technical indicators rather than a company’s fundamental financial data. The core idea is that historical price behavior can reveal trends and signals reflecting market psychology and supply-demand dynamics, allowing traders to predict future price directions.
Technical analysis rests on three foundational assumptions. Prices discount everything, meaning fundamentals, news, and sentiment are embedded in current levels. Prices move in trends – upward, downward, or sideways – that persist until clear reversal signals emerge. History repeats itself due to recurring investor psychology, producing predictable chart patterns.
Fundamental analysis is performed when you want to determine a stock’s intrinsic value and assess its long-term growth potential. Fundamental analysis is best suited for long term investing. Whereas, technical analysis is primarily used for timing trades and analyzing price trends. Technical analysis ideal for short term trading in determining precise buy/sell moments within stocks already chosen fundamentally.
Understanding Risk before Investing
Understanding risk before investing in the stock market is crucial as it influences potential gains and losses. Investment risks broadly fall into systematic (market-wide) and unsystematic (specific to companies or sectors) categories along-with volatility and liquidity risk.
Systematic Risk affects the entire market and cannot be diversified away. Examples include inflation risk, interest rate risk, political/regulatory risk, currency risk, and market volatility.
For instance, the 2020 COVID-19 pandemic and 2022 RBI rate hikes impacted all stocks including indices like Sensex and Nifty.
Unsystematic Risk is a company or sector specific risk, such as business risk, credit risk, and operational risks.
For example, a crisis in the IT sector or financial irregularities in a specific company affect only those stocks.
Volatility Risk is uncertainties causing due to price swings, especially in small-cap stocks or IPOs.
For example, there are so many company’s stock experienced sharp volatility after their IPO.
Liquidity Risk is the difficulty in buying/selling shares quickly without price impact; common in low-volume stocks or during market crises.
Starting with Small and Safe
Starting with small and safe investments is a prudent strategy, especially for beginners or those who prefer lower risk exposure in the stock market. It allows you to gradually understand market dynamics, develop investing skills, and build confidence while protecting your capital from large early losses.
By investing smaller amounts, individuals can learn how markets work, understand their own risk tolerance, and refine strategies without facing overwhelming losses if the market moves unfavorably.
Investing in safe stocks like well established and financially strong balance sheet companies can safeguard your investment during the crisis period. Although your investment will grow with steady pace, you will have peace of mind with these stocks.
Starting small does not mean compromising returns but it fosters a foundation for steady wealth growth. With the knowledge and confidence grow, making investing safer and more sustainable for the long term. Many successful investors began with modest sums and scaled up as they honed their skills and capital base.
Conclusion
Higher potential returns usually come with higher risk while balancing risk and return aligns with individual tolerance and financial goals. Employing diversification, setting stop-loss limits, and investing long-term in fundamentally strong, low-volatility stocks helps mitigate risks.
For beginners seeking professional help in investing, engaging a certified financial advisor or a SEBI-registered investment advisor is highly recommended.
Starting with professional advice builds confidence and a solid foundation for your investing journey while helping to avoid emotional and uninformed decisions in the complex stock market landscape.