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The Basics of Stocks

The world of the financial market and stocks can be daunting to many due to its perceived complexity. While it would be a lie to say that this is not a complicated world, once you know some basics it becomes easier to make sense of it all. So lets look at some basics.

To begin, I’m going to make it as basic as possible. What is a stock? Well, a stock is simply a paper document or a certificate that shows you own a small part or percentage of a particular company. These stocks are bought and sold through stock exchanges such as the Bombay Stock Exchange or the National Stock Exchange. There are also some smaller regional stock exchanges, but that’s not all that important so I’m not going to focus on it. The BSE and the NSE are the two main stock exchanges in India and most of the trading activity in the country happens through these two exchanges. For a company to be able to issue stocks, they must be a publicly listed company on one of these stock exchanges.

Stocks are divided into various categories on these exchanges based on their market capitalization. Market capitalization is simply a measurement of the size of a company which is calculated by multiplying the number of shares outstanding (shares that have been issued and purchased by the investors) by the price of each share. Based on the market capitalization of a company, the stock is categorized into either a “small cap” a “medium cap” or a “large cap” stock. Various countries will have different cut offs for their definition of these categories and these will of course evolve over time with factors such as inflation etc.

Now that we’ve established what a stock is and how it works as far as trading it goes, lets dig a little deeper into some terms that you should understand to better understand this world. Whenever there is a stock pick being recommended there are certain terms you will be faced with so its important to know what is meant by the person recommending the stock. So when looking at a particular stock, there are a few things that describe it. Firstly, there is the “current market price” or CMP as it is often referred to as. This is fairly self explanatory; it simply means the price that this stock is currently being traded at on the exchange. IF you wanted to buy or sell this stock, this is the price it will be bought or sold at. Next you will see an “open” price which means the price at which the stock opened at today when trading began on this day. Any times the last traded price is not the same as the opening price on the next day due to external factors. The “volume” of a particular stock is the number of those stocks that are being traded on the exchange at that particular time. This is sometimes an indication of the strength of the company, very often really small companies do not have much trading volume and this is indicative of the investment being extremely risky.

Another set of terms which categorize stocks are “penny stocks”, “growth stocks” and “blue chip stocks”. Penny stocks are usually very small companies and don’t have much of a chance of ever making it big. Growth stocks as the name suggests are companies that are on the growth trajectory and have a chance of striking it big. Usually these kinds of stocks are good investments and can make you returns quicker. Blue chip stocks are the mammoths of the corporate world, the old companies such as a Tata or Reliance. These are relatively more reliable investments and will probably give you returns consistently.

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