Indian stock market Nifty has remained flat on a year-to-date basis. However, the Indian markets have stood out compared to other global markets. How do the markets work? What goes behind gaining profits out of stock market investments? Presenting to you an in-depth analysis of the science behind stock market investments.
How does the stock market function?
The stock markets provide a platform for investors seeking to buy and sell securities to negotiate prices and execute trades. The markets take into account several entities such as stockbrokers, investors, a network of exchanges, broking houses etc. All the stock market entities must be registered with the Securities and Exchange Board of India (SEBI), the country’s capital regulator. Investments in the stock markets require you to open a Demat account with a SEBI-registered stockbroker, also known as a Depository participant.
Primary vs Secondary Markets
Companies that list their shares on the stock markets for the first time do so through an Initial Public Offering (IPO). Such securities constitute the primary market. After shares are listed on the exchanges, investors buy and sell them, which forms the secondary market. The phases of secondary markets are as follows:
- Trading – Buyers and sellers trade on the listed securities in the stock markets.
- Clearing and Settlement – The clearing process identifies securities owed to the buyer and the cash owed to the seller. The settlement of securities typically takes T+2 days. Upon settlement, the purchased shares get credited into the buyer’s account, and the sellers receive their payment.
Do stock markets help beat Inflation?
One of the best ways to beat inflation is by investing in the stock markets. The mechanics behind this is simple: as economies grow over time, so do companies and their shares. Let us look at the top three reasons individuals looking to beat inflation in the long term can benefit from stock market investments.
- Consistent results – Fluctuating stock prices may seem risky for your savings. Although the stock markets may seem volatile in the near term, they have a history of providing consistent results for the longer horizon.
- Companies have pricing power – As costs rise, companies hike their prices to account for the additional expenses.
- Stock markets enhance growth – Stock market investments help beat inflation, and suitable investments made at the right time can also help your portfolio grow exponentially.
Stock selection Processes
Selecting the right stocks is the most critical aspect of stock market investments. The top methods used for stock screening in India are outlined below. The stock selection process teach you, how to invest in share market and there are two approaches in stock market.
- The Top-Down Approach – Many fund managers use the top-down approach for stock screening. The process comprises the following steps:
Step 1: Analyse India’s growth outlook and macroeconomic scenario compared to other developing economies.
Step 2: Understand which industries will likely benefit from current government policies and economic conditions.
Step 3: Select specific companies with a higher potential for generating profits from these industries.
- The Bottom-Up Approach – Individual investors may find the bottom-up approach easier. Let us understand how this works.
Step 1: Select companies based on specific criteria such as financial ratios, past performance, management structure, and business model.
Step 2: Categorise these companies based on their respective sectors and assess the growth potential for each sector.
Step 3: Plug the macroeconomic factors and find the most profitable stocks.
Value Stocks vs Growth Stocks
Growth stocks comprise investments that tend to grow faster than average market returns. On the other hand, value stocks provide steady returns through diverse market conditions. Moreover, growth stocks exhibit much higher volatility and more significant risk as compared to value stocks.
Fundamental vs Technical Stock Analysis
Investors rely on various tools to analyse stocks before making an investment decision. Fundamental analysis studies stocks based on their intrinsic value. It aims to analyse a business’s financial aspects, such as the business model, financial ratios, and other economic factors that could influence the company’s market value. However, technical analysis focuses primarily on charts and trends to predict future prices. The technical analysis considers past price movements to predict future prices.
The stock markets are an excellent platform for individuals to beat inflation and grow their savings. Individuals seeking to explore the stock markets can open Demat account online instantly and commence their journey into the stock markets.