Chapter 1 of 15
What is the Stock Market?
Shares, stock exchanges, and why companies sell ownership.
Priya worked at a pharma company in Pune for five years and had saved ₹2 lakh in a fixed deposit earning 6% per year. Her colleague told her that Cipla — the very company whose medicines she helped manufacture — had returned over 300% in the last decade to shareholders. Curious, Priya asked: "What does it even mean to own a share of a company?" That question led her on a journey into the stock market.
What Is a Share?
When a company wants to raise money to expand — build a new factory, hire more people, enter new markets — it can divide itself into millions of tiny ownership units called shares (also called stocks or equity). When you buy a share, you become a part-owner of that business, entitled to a proportional share of its profits and assets.
How Companies Raise Capital
When a company first offers its shares to the public, the event is called an Initial Public Offering (IPO). The company lists on a stock exchange — India's two primary exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) — and raises fresh capital directly from investors. After that, all subsequent buying and selling happens between investors in the secondary market; the company itself doesn't receive any money from these trades.
Suppose Infosys is trading at ₹1,500 per share and you buy 100 shares. Your investment is: 100 × ₹1,500 = ₹1,50,000
Infosys has roughly 415 crore shares outstanding. Your 100 shares give you a tiny but real ownership stake. If Infosys wins a large US contract and its annual profit rises from ₹25,000 crore to ₹28,000 crore, investor confidence grows and the share price might climb to ₹1,700. Your 100 shares are now worth ₹1,70,000 — a gain of ₹20,000 (13.3%) simply because the business performed better.
Price Discovery — How Stock Prices Are Determined
At any moment, thousands of buyers are willing to pay one price and thousands of sellers are willing to accept another. The stock exchange acts as an auction system that matches these orders in real time. When more people want to buy a stock than sell it, the price rises. When more want to sell, it falls. This continuous process of matching buyers and sellers to arrive at a fair price is called price discovery.
SEBI (Securities and Exchange Board of India) regulates the entire process to ensure fairness, transparency, and investor protection.
Stocks vs Bonds vs Fixed Deposits
Stocks are just one of many investment options available to Indians. Understanding how they compare to bonds and bank fixed deposits helps you decide the right allocation for your goals.
| Feature | Equity (Stocks) | Bonds | Fixed Deposit |
|---|---|---|---|
| What you are doing | Becoming a part-owner | Lending money to the issuer | Lending money to a bank |
| Returns (historical avg) | 12–15% (long-term) | 7–9% per annum | 6–7% per annum |
| Risk level | High (price can fall 50%+) | Low to moderate | Very low (insured up to ₹5 lakh) |
| Inflation protection | Yes — business earnings grow | Partial | Often below inflation |
| Liquidity | Very high (sell in seconds) | Moderate | Low (penalty on early exit) |
| Taxation | STCG 20% / LTCG 12.5% | Taxed at slab rate | Taxed at slab rate |
Stock prices fluctuate daily and can drop 30–50% during market crashes (like COVID-19 in March 2020, when the Nifty 50 fell 38% in six weeks). However, investors who stayed invested for 5+ years have historically been rewarded. Never invest in stocks money you may need within 2 years.
How Investors Make Money from Stocks
There are two ways equity investors earn returns:
Capital Appreciation: The share price rises above your purchase price. You realise this gain only when you sell.
Dividends: Companies may distribute a portion of their profits to shareholders as dividends. For example, Coal India regularly pays a high dividend yield. Dividends are taxed at your income slab rate.
Suppose you invested ₹1,00,000 in a Nifty 50 index fund in April 2014. By April 2024, the Nifty 50 had grown from ~6,700 to ~22,500 — roughly a 3.3× gain. Your ₹1,00,000 would have grown to approximately ₹3,30,000, a CAGR of about 12.8% per year, significantly beating FD returns.
Risks Every New Investor Must Understand
- Market Risk: The overall market can fall, dragging even good stocks down temporarily.
- Company Risk: A specific business can fail — its stock could go to zero (e.g., several infrastructure companies post-2010).
- Liquidity Risk: Small-cap stocks may not have enough buyers when you want to sell.
- Concentration Risk: Putting all your money in one stock or one sector amplifies losses.
If direct stock picking feels overwhelming, consider starting with Mutual Funds — they offer diversification and professional management, making them ideal for beginners.
When you buy a share of a company, what do you become?
Key Takeaways
- A share represents part-ownership in a company — as the company grows, so does your investment's value.
- Companies raise capital through IPOs; after that, trading happens between investors on exchanges like BSE and NSE.
- Stocks offer higher long-term returns than FDs or bonds, but come with higher short-term volatility — a 5+ year horizon is essential.
- Diversification across multiple stocks and sectors is the most important risk management tool for equity investors.