What You Should Know About Stock Markets

  •  4 min
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  • 06 Feb 2023

You might choose to invest in retirement plans like pension funds and Provident Fund. If you’re a little better informed, you might invest in government bonds. If you have a lump sum of money to spare, you could look to invest in gold and real estate, which are popular among Indian investors. But there is another avenue worth considering—and that’s market-based investments like shares and mutual funds .

While investing, assess if your money is growing as well as it could. Is inflation eroding your capital? Recognise that inflation can hamper your attempts to build wealth for the future. How do you combat it? Begin by looking anew at the words ‘saving’ and ‘investing’. Although often used interchangeably, they actually have very different meanings.

Say, you put your money in a locker or a savings account where it either does not grow or grows at a nominal rate. This means you have not completely utilised your money. Now, suppose you put your money in insurance. The policy will secure your loved ones in the event of a mishap, but the money will not fetch good returns.

Certainly, both savings and insurance are necessary. However, you must also think about investing in an instrument which fetches returns that have the potential to tackle inflation. Only then would you be truly investing to secure your financial future. Financial plan is not easy, but you can prepare one by doing your homework. Gold, real estate, and pension funds are all effective investment options. But you could also choose to invest in the share market.

The share market is a place where buyers and sellers interact for the purpose of trading and investing in the shares of listed companies. To list on the stock exchange, a company must first sell its shares to the public through an initial public offering (IPO). Following this, the company lists on the stock exchange, and its shares can be bought and sold on the exchange.

Stock market investments can be quite profitable and they bring inflation-adjusted returns. Besides, there is no one-size-fits-all solution. Different investors set up different strategies while investing here. There are many approaches that you could use: long-term and short-term investment, futures and options trading, intraday trading, and so on. Read more about how the share market works before you take the plunge.

Why Do Companies Offer Their Shares?

When companies offer their shares to the public during an IPO, they aim to raise money for various affairs of the business. The money is utilised by the companies for expansion, purchase of machinery, debt reduction, and so on.

Read more: Find out more about the IPO process and why companies go public.

How Are Share Prices Determined?

Share prices are affected by the laws of supply and demand. When a buyer purchases a stock from a seller, the purchase price becomes its new market price. This price keeps fluctuating throughout the trading day. When there are many buyers pushing up the demand for a stock, the price is likely to go up, especially if supply is low. On the other hand, if many sellers are looking to sell their stock but buyers are limited, the stock price may be expected to decline.

You can purchase shares and securities from a registered broker of a stock trading exchange like Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). All you need is to open demat and trading accounts with the registered broker. A demat account is compulsory for investing in shares, and you will need a trading account to place buy and sell orders.

Most registered broker will help you to open both accounts simultaneously. Here’s a closer look at the account opening formalities:

  • Fill in the account opening form.
  • Submit copies of necessary documents like PAN card, Aadhaar card, proof of address, proof of identity, and proof of income. Also, submit your passport-sized photographs.

Read more: Documents required to open a demat account

  • The registered broker will give you a copy of the rules and regulations. It contains the details of the agreement and the charges that you will incur.
  • The registered broker will then send a representative to carry out in-person verification. This is done to ensure that the documents submitted by you during the account opening were genuine.
  • On successful processing of the application, you will be provided with your account number and a client ID. You can then log in to access your account.

As the shareholder of a company, you become its part-owner. This brings you certain corporate benefits:

  • Dividends: Companies issue dividends to shareholders from their profits. Stocks that pay consistent dividends are generally in demand among share market investors.
  • Bonus shares: Sometimes companies may give out bonus shares to shareholders at no extra cost. The shares represent a share of the company’s earnings.
  • Share buyback: At times, companies that have extra funds or are looking to consolidate company ownership may buy back shares from shareholders. The shares are bought at a slightly higher rate than the prevailing market price.

Apart from these benefits, share market investors generally seek to earn from capital appreciation of their shareholdings. Over the long term, the prices of well-chosen shares can appreciate considerably, leading to significant gains for investors.

Which shares should you buy or sell? One approach is to focus on market capitalisation (market cap). The term refers to the total market value of the company’s outstanding shares. To calculate, you simply multiply the current market rate of a single share by the total number of outstanding shares.

Stocks are divided into three major categories based on market cap:

Large-cap Stocks

These belong to companies that are large and well established. Typically, they have been in existence for a long period and have a strong presence in the market. Such stocks usually pay steady dividends. Their stock price also does not fluctuate too much in times of volatility.

Mid-cap Stocks

These companies are riskier than large-cap companies but they also have a greater potential to grow in the long term. If the companies do well, such stocks will bring significant capital appreciation for investors. But they might not be too steady in turbulent markets.

Small-cap Stocks

Most start-ups fall under this category. They are risky, for a little market turbulence could push them out of business. But when small-caps do well, they can lead to massive returns on your stock investment.

Read more: Explore the features of large-cap mutual funds and small-cap mutual funds.

Watch and Learn
Long-term Investment basics
Are you a long term investor but are confused on how to select a stock? Where to invest and where to not? Don't worry! Tune in with Kinjal Parekh and watch this videos till the end where we take you through four important parameters which you must consider checking before investing in a company.
  • Start by shortlisting a few stocks and study their price movements. If you are a beginner, it may help to seek advice from the experts before investing. Read more: Find out how stock quotes can help
  • Never take any decision in the share market based on rumours. Rumours create panic and lead to bad decisions in the stock market.
  • Continuously monitor the performance of your portfolio. By doing so you can eliminate stocks which are loss-making or risky.
  • Patience and discipline are the keys to success in the stock market. For best results, have an investment strategy in place and follow it with care.
  • Keep yourself updated with share market news. By following the news you will know about economic developments that affect the companies you have invested in. This will help you to make wise decisions.

Who Regulates Share Markets?

The share markets in India are regulated by the Securities and Exchange Board of India (SEBI). SEBI is responsible for creating a regulatory framework that looks after the interest of shareholders and investors. The regulations imposed by SEBI help make the share market more transparent and facilitate its working smoothly. SEBI also ensures that the stock exchanges remain free from malpractices that hurt shareholders.

Summing Up

Investing in the stocks of companies has become easier thanks to modern technology. Investors can use trading platforms on their smartphones and computers to invest in stocks from anywhere across the globe. To get in on the action, simply open an account with a reliable registered broker like Kotak Securities. Transactions and transfers are smooth and quick since everything happens electronically. Plus, you can get stock recommendations and timely research reports to help with your trading decisions.

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