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When we think about the stock market, we usually have images of people looking at big screens, talking on the telephone, yelling numbers. You might have seen such images in the movies as well. I used to think the same way.
When I first got into the stock market, I had a lot of questions.
- How does the market work?
- How do investors buy/sell stocks?
- Where do I go to buy stocks?
- How much money do I need to invest in the stock market? What defines the price of stocks?
These were some of the questions I wish I had answers to. Through this article, I would like to answer some of the basic questions related to the stock market. This article is only for beginners, for those who want to start investing in the stock market but lack basic knowledge about it.
What is the Stock Market?
Before saying anything about the stock market, let me first tell you what a stock means? A stock is part ownership of a publicly listed company. It is a small portion of the company that the stockholder owns.
The term stock is used interchangeably with share. However, there is a slight difference between the two. But for now, let’s not get into the difference in detail. A stock market is a place where the stocks get exchanged. A seller and a buyer come together to make the exchange.
How Does the Stock Market Work?
To understand this, you will have to recall the first chapter of Economics – Demand and Supply. Now for those who have never studied demand and supply, here’s what it means: The basic theory of demand and supply explains how the price of a product is determined by the availability of a product (supply) and the desire to purchase the product (demand).
The relationship between demand (D) and supply (S) is shown in the following diagram.
This diagram shows that the price is determined by the intersection of demand and supply curves. Studying the diagram further (see below), the price increases in two scenarios – when the demand increases (demand curve shifts towards the right) or when the supply decreases (supply curve shifts towards the left).
So basically, there are four takeaways from the theory of demand and supply.
- When demand increases, price increases.
- When supply increases, price decreases.
- When demand decreases, price decreases.
- When supply decreases, price increases.
The stock market works in the same way. When the demand for a stock increases, the price of the stock increases. In other words, if there is a high number of buyers of a particular stock, the price of the stock increases. Similarly, when the supply increases, price decreases. In other words, if there is a high number of sellers of a particular stock, the stock price decreases. So your number one rule in the stock market should be to buy when the price of a stock is low and sell when its price is high.
Nepal Stock Exchange (NEPSE)
The Nepal Stock Exchange (NEPSE) is the only stock exchange in Nepal. NEPSE lists stocks of public companies, which are the companies whose stocks can be purchased or sold publicly. It provides information about the stock market in Nepal. You can know about the prices of stocks and the current trading situation on NEPSE’s website. The stock market of Nepal opens from 11:00 am to 3:00 pm. Investors can only buy and sell stocks during this time of the day. The market opens five days a week, from Sunday to Thursday.
How to Start Investing in Stocks?
It is the most common question in the mind of a beginner investor. There are two ways to invest in stocks—through the primary or secondary markets. What is the primary market? When a company first lists its shares publicly, investors buy the shares in the primary market. This process is called Initial Public Offering (IPO). When you purchase the stock through an IPO, you have purchased it in the primary market. A secondary market is where investors buy/sell shares of already-listed companies.
To start investing in the stock market in Nepal, you will need a few things. At first, you will need a Demat account. This account is for holding all your shares together in an electronic form. It has been made compulsory by the Security Exchange Board of Nepal (SEBON). To open a Demat account, you have to go to a company that is a depository participant. Companies such as investment banks, stockbrokers, and merchant banks provide services to depository participants. If you do not know where to find them, go to your bank and tell them that you want to open a Demat account. They will guide you further.
Secondly, you will need a broker account. Stockbrokers bring buyers and sellers together. If you want to buy the stocks of a company, you do not have to find a seller yourself. Your stockbroker does that for you. In return, the broker takes a commission fee, which is usually a tiny portion of the transaction amount. There are about 50 stockbrokers in Nepal. You can choose any one of them and open an account. Once you open a broker account, now you can begin investing. If you want to buy a stock, place a buy order with your broker, and they will buy the stock for you. In addition, you can ask your broker regarding other processes of buying and selling stocks.
Lastly, you need a bank account for all your transactions. It will be linked with your Demat and broker accounts. The bank account is also necessary to receive the dividends distributed by the companies whose stocks you own.
Before You Begin
Before you begin investing, you must know the company whose stock you are purchasing. Study the company properly before you invest in its stocks. You must also know about the current market condition.
The market condition, in a simple way, can be known by the NEPSE Index. The index measures the stock market performance. The index value keeps on changing every day according to the performance of the stocks in the market. If the index value increases, the market is performing well. If it decreases, the market is performing not-so-well. However, a single day’s index value does not determine the performance of the market. You must monitor the market’s performance by comparing it to its past index values.
As I said, this article was only meant for beginners in the stock market. Now, you must have gotten a brief idea about the stock market and how you can invest in the market. I will write about the analysis of companies in my future posts.
Investing in stocks is a great way to increase your net worth. However, do not expect to make quick money in the stock market. You must always look for ways to increase your knowledge about investing in the stock market. To do so, I suggest you read books, articles, papers and watch videos related to them. The more you know, the better you will be at investing. So, keep learning. That is all that you need to do, especially when you are first starting.