Basics Of Share Market Explained
WHY INVEST IN SHARE MARKET?
We invest in shares to build our wealth in the long run. While some people view shares to be a risky investment, many studies have proved that putting your money in the right shares for a long period of time (five to 10 years) can provide inflation-beating returns — and be a better investment option than real estate and gold.
People also have short-term strategies while investing in share markets. While shares can be volatile over a short period of time, investing in the right shares can help traders make quick profits.
Earlier, stockbrokers would converge around Banyan trees to conduct trades of stocks. As the number of brokers increased and the streets overflowed, they simply had no choice but to relocate from one place to another. Finally in 1854, they relocated to Dalal Street, the place where the oldest stock exchange in Asia – the Bombay Stock Exchange (BSE) – is now located. It is also India’s first stock exchange and has since then played an important role in the Indian stock markets. Even today, the BSE Sensex remains one of the parameters against which the robustness of the Indian economy and finance is measured.
If you’ve heard recently that Indian share markets are at record high, you can read about Stocks that took Sensex to a new high.
In 1993, the National Stock Exchange or NSE was formed. Within a few years, trading on both the exchanges shifted from an open outcry system to an automated trading environment.
This shows that Indian stock markets have a strong history. Yet, at the face of it, especially when you consider to invest in share market, it often seems like a maze. But once you start, you will realize that the investment fundamentals are not too complicated. One of the basics of investment fundamentals is financial planning. Read more about the importance of financial planning.
So Let’s Start With Share Market Basics.
WHAT IS SHARE MARKET?
A share market is where shares are either issued or traded in.
A stock market is similar to a share market. The key difference is that a stock market helps you trade financial instruments like bonds, mutual funds, derivatives as well as shares of companies. A share market only allows trading of shares. Click here to start your journey on derivatives market.
The key factor is the stock exchange – the basic platform that provides the facilities used to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India's premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange. Click here to understand how stock market works.
TYPES OF SHARE MARKET
THERE ARE TWO KINDS OF SHARE MARKETS – PRIMARY AND SECOND MARKETS.
Primary Market:
This where a company gets registered to issue a certain amount of shares and raise money. This is also called getting listed in a stock exchange.
A company enters primary markets to raise capital. If the company is selling shares for the first time, it is called an Read more factors to consider before investing in an IPO.
Secondary Market:
Once new securities have been sold in the primary market, these shares are traded in the secondary market. This is to offer a chance for investors to exit an investment and sell the shares. Secondary market transactions are referred to trades where one investor buys shares from another investor at the prevailing market price or at whatever price the two parties agree upon.
Normally, investors conduct such transactions using an intermediary such as a broker, who facilitates the process. Different brokers offer different plans. You can visit this page to understand the different plans that Kotak Securities has to offer. Or, you can read about the features that Kotak Securities has to offer.
HOW TO INVEST IN SHARE MARKET
First, you need to open a trading account and a demat account to invest in share market. This trading and demat account will be linked to your savings account to facilitate smooth transfer of money and shares. Note that demat and trading account are different, read more about difference between demat and trading account.
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What are the financial instruments traded in a stock market?
Below are the main four key financial instruments that are traded in Stock market:
1. Bonds
2. Shares
3. Derivatives
4. Mutual Fund
Bonds:
Companies need money to undertake projects. They then pay back using the money earned through the project. One way of raising funds is through bonds. When a company borrows from the bank in exchange for regular interest payments, it is called a loan. Similarly, when a company borrows from multiple investors in exchange for timely payments of interest, it is called a bond. Click here to read about the importance of tracking bond yield movements.
For example, imagine you want to start a project that will start earning money in two years. To undertake the project, you will need an initial amount to get started. So, you acquire the requisite funds from a friend and write down a receipt of this loan saying 'I owe you Rs 1 lakh and will repay you the principal loan amount by five years, and will pay a 5% interest every year until then'. When your friend holds this receipt, it means he has just bought a bond by lending money to your company. You promise to make the 5% interest payment at the end of every year, and pay the principal amount of Rs 1 lakh at the end of the fifth year.
Thus, a bond is a means of investing money by lending to others. This is why it is called a debt instrument. When you invest in bonds, it will show the face value – the amount of money being borrowed, the coupon rate or yield – the interest rate that the borrower has to pay, the coupon or interest payments, and the deadline for paying the money back called as the maturity date. If you’re looking for a bond option that helps you save tax, you can read about tax free bonds.
Secondary Market:
Investing in share market is another place for raising money. In exchange for the money, companies issue shares. Owning a share is akin to holding a portion of the company. These shares are then traded in the Indian share market. Consider the previous example; your project is successful and so, you want to expand it.
Now, you sell half of your company to your brother for Rs 50,000. You put this transaction in writing – ‘my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has just bought 50% of the shares of stock of your company. He is now a shareholder. Suppose your brother immediately needs Rs 50,000. He can sell the share in the secondary market and get the money. This may be more or less than Rs 50,000. For this reason, it is considered a riskier instrument.
Shares are thus, a certificate of ownership of a corporation. Thus, as a stockholder, you share a portion of the profit the company may make as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value. Read more about different types of stocks.
Mutual Funds:
These are investment vehicles that allow you to indirectly investing in share market market or bonds. It pools money from a collection of investors, and then invests that sum in financial instruments. This is handled by a professional fund manager.
Every mutual fund scheme issues units, which have a certain value just like a share. When you invest, you thus become a unit-holder. When the instruments that the MF scheme invests in make money, as a unit-holder, you get money.
This is either through a rise in the value of the units or through the distribution of dividends – money to all unit-holders. Click here to start your journey into mutual funds
Derivatives:
The value of financial instruments like shares keeps fluctuating. So, it is difficult to fix a particular price. Derivatives instruments come handy here.
These are instruments that help you trade in the future at a price that you fix today. Simply put, you enter into an agreement to either buy or sell a share or other instrument at a certain fixed price. Read more to underdtand how to buy or sell a futures contract
What does the SEBI do?
Investing in the share market is risky. Hence, they need to be regulated to protect investors. The Security and Exchange Board of India (SEBI) is mandated to oversee the secondary and primary markets in India since 1988 when the Government of India established it as the regulatory body of stock markets. Within a short period of time, SEBI became an autonomous body through the SEBI Act of 1992.
SEBI has the responsibility of both development and regulation of the market. It regularly comes out with comprehensive regulatory measures aimed at ensuring that end investors benefit from safe and transparent dealings in securities.
Its basic objectives are:
- Protecting the interests of investors in stocks
- Promoting the development of the stock market
- Regulating the stock market
You can read about the 5 changes that SEBI recently made.
What next?
Now that you have understood what a share market basics are, what it means to invest in share market and other stock market fundamentals, you need to understand how it works and how you can invest in the share market.Click here to find out.
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QHow many shares of stocks should I buy?A
You need to consider certain factors while deciding how many shares of stocks you should buy. These include the availability of capital, diversification and analyzing whether you need more shares or not.
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QWhich share is the best for beginners?A
Beginners must buy shares of blue-chip companies that are dominant players in their segment.
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QWhat is the difference between stocks and shares?A
Essentially they are the same. Both represent your ownership of a company. In India, it is called shares, while in the US it is called stocks.
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QWhat are the factors that determine the price of a stock?A
A company’s growth prospect, its profitability, demand, investors’ sentiments, etc., determine the price of a stock.
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QHow would you choose stock for your portfolio?A
Choose stock basis profitability, risk, valuation, etc. You can find these analytics on a trading website.
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QWhat instruments are traded in stock markets?A
Equity shares of listed companies are traded in stock markets and other instruments like index futures, stock futures, VIX futures, etc.
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