Basics Of Share Market Explained

What Does 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.

Basic Objectives Are As Follows:

• 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 Is Sebi?

In India, there's a group called the Securities and Exchange Board of India (SEBI), and they're like the boss when it comes to overseeing the stock and investment markets. Their main job is to make sure that people who invest their money are safe, and they also want the stock market to work well. They do this by making rules and standards for different folks involved in the market, like companies, brokers, and people who invest. They also look after the stock exchanges and make sure there are fair rules for how things work in the share market. Their aim is to protect everyone's rights and interests while making sure the market is honest and works properly.

What is the Share Market?

A stock market, which is also sometimes called a share market, is like a big money place where people trade different things, like stocks, bonds, mutual funds, and more. The main difference between them is what you can trade. In a stock market, you can trade lots of different financial stuff, making it a big hub for investments. It's a place where regular people and big organizations can buy and sell parts of companies, government bonds, and other money-related things to help with investing and moving money around in the economy.

But when we talk about a share market, we're talking about a smaller part of the stock market. In a share market, it's all about buying and selling parts of companies, which we call shares or stocks. These shares represent a piece of a company, and people can buy or sell them to have a share in that company's money and profits. So, while we sometimes use the words "stock market" and "share market" the real difference is that a stock market has more things to trade, while a share market is all about trading pieces of companies.

Why Invest In Share Market?

We buy shares in companies to help our money grow over time. Some people worry that investing in shares is risky, but lots of research has proved that if you pick the right shares and hang on to them for a while, like five to ten years, they can make your money grow even faster than things like houses or gold, and they can beat the rising cost of living (inflation). So, investing in the right shares for the long run can be a smart way to make your money grow.

Stockbrokers used to congregate around Banyan trees to make stock dealings. They had no choice but to move from one location to another as the number of brokers grew and the streets filled. Finally, in 1854, they moved to Dalal Street, which is now home to Asia's oldest stock market, the Bombay Stock Exchange (BSE). It is also India's first stock exchange, and it has played a significant role in the Indian financial markets since then. Even today, the BSE Sensex is one of the benchmarks used to assess the strength of the Indian economy and financial system.

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.

The National Stock Exchange, or NSE, was founded in 1993. Trading on both exchanges - NSE and BSE - evolved from an open outcry system to an automated trading environment within a few years.

This demonstrates that Indian stock markets have a long and illustrious history. Yet, on the surface, especially when considering investing in the stock market, it might appear to be a maze. However, once you get started, you'll see that the investment principles aren't that difficult. One of the basics of investment fundamentals is financial planning. Read more about the importance of financial planning here.

Types Of Share Market

Primary Market:

This is the process through which a corporation registers to sell a specified number of shares and raise funds. This is also known as being a stock exchange listed company. To raise finance, a corporation goes to the major markets. If a firm is selling shares for the first time, it is referred to as an initial public offering (IPO). Read more on factors to consider before investing in an IPO.

Secondary Market:

The secondary market is where new securities are exchanged after they have been sold in the main market. This is to allow investors to sell their shares and exit an investment. Secondary market transactions are in which one investor buys shares from another investor at the current market price or at a price agreed upon by both parties.

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 The Share Market

Learn First

Before you start investing, it's important to learn about the share market. Understand the special words, how shares are bought and sold, and the things that can make share prices go up or down. To learn more, you can read books, take online courses, and keep an eye on the news about money.

Set Goals

Think about what you want to achieve with your investments. Do you want to grow your money over a long time, pay for your child's college, or save for when you stop working? Knowing your goal helps you decide how to invest your money.

Create an Emergency Fund

Before directing your funds to investments, it's crucial to establish an emergency fund. This fund serves as a financial safety net, covering unexpected expenses such as medical emergencies or car repairs so that your investments are not disrupted.

Choose a Stockbroker

The selection of a stockbroker is pivotal. Research and select a trustworthy stockbroker or an online brokerage platform. Evaluate factors like brokerage fees, the quality of trading tools, customer support, and the platform's user-friendliness to make an informed choice.

Complete KYC Process

Compliance with regulatory requirements is essential. This involves completing the Know Your Customer (KYC) process. You'll need to provide identity proof, address proof, and your bank account details to verify your identity and address.

Open Trading and Demat Accounts

To actively participate in the share market, you must open two crucial accounts. The trading account facilitates buying and selling shares, while the demat account securely holds your shares in electronic form. Your chosen stockbroker typically provides these accounts.

Diversify Your Portfolio

One essential component of risk management is diversification. To lessen the impact of a single investment performing poorly, you distribute your interests among a number of shares or asset classes. Increasing portfolio diversification can lower overall risk and produce more consistent results. . It's important to keep in mind that investing in the share market requires a long-term commitment. To succeed, you must have patience, continually educate yourself, and stay up-to-date with market trends. You should regularly reassess your financial goals and investment strategy and be ready to make adjustments when appropriate.

Key Financial Instruments To Trade In The Stock Market

1. 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 the maturity date.

2. Shares:

Investing in the 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, as the price of the shares may change. 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 and so will your investment.

3. Mutual Funds:

These are investment vehicles that allow you to indirectly invest in share market markets 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, the value of your investment also increases 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.

4. 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 understand how to buy or sell a futures contract

Things To Keep In Mind Before Investing In Share Market

Consider the following things before making the share market investment:

• Financial Goals

It's hard to figure out how much to invest when you're starting out. Share market investing does not involve a minimum investment. However, the size you invest depends on your financial goals, your income, your risk tolerance, and the state of the market.

• Investor Age

An investor's age is also important. If an investor is thirty years old, he can take higher risks with his investment (and therefore allocate a larger percentage of funds to share investments) than a fifty-year-old investor.

• Study the Market

A thorough study of the share market will help you educate yourself on how to invest money in the market. Learn about share market basics, stock selection methods, and popular trading strategies.

• Avoid Leverage

As a new investor, avoid leverage, which means borrowing funds from the broker to invest in the market. The practice is common on the stock market, but it also comes with a high level of risk. In the event you don't generate profit from your trade, leverage can be very costly. As a result, you will lose all your investment, as well as incur costs on the funds borrowed from the broker.

• Long Term Planning

A new investor faces challenges when it comes to stock investments. Thus, getting clarity about stock market investment will help you avoid herd mentality and set a realistic outlook. Also, do your investing with a long-term perspective. The smoothing effect of long-term investments will help you overcome market fluctuations.

• Monitor The Investment

The most common mistake investors make is not monitoring their investments. Nevertheless, the stock market is dynamic, meaning that your portfolio's inherent risk changes frequently. Therefore, always keep an eye on your investments and market news that may affect their performance.

• Portfolio Diversification

It's healthy to have a diverse portfolio. Your portfolio will not offer a steady flow of funds if a particular asset class dominates it. To counter low periods in one asset class, financial advisors suggest adding alternative asset classes. For example, an equity investment is often offset by a bond or other debt investment. In a market crisis, this balance in a portfolio can be very helpful.

• Identify your Profile

Your investor profile can help you determine the kind of instruments that are most suitable for your risk appetite. You can then make sure that you are taking on the right amount of risk for your lifestyle.

• Investment Strategy

Having an investment plan that details how much you wish to earn from your investments and the time horizon you may need to stay invested can help you avoid potential pitfalls later.

Conclusion

Understanding the basics of stock market investment may seem daunting at first, but it will empower you to make informed choices. Additionally, stock exchanges like the BSE and NSE have played critical roles in global finance throughout history. Over the long term, stocks can provide inflation-beating returns, making them a more attractive investment than real estate or gold.

However, determining the size and type of investments requires taking into account factors such as financial goals, age, and risk tolerance. Moreover, you can invest effectively in the stock market by conducting thorough research, staying current on market trends, and avoiding short-term thinking. Also, by leveraging the expertise and services of Kotak Securities, you can navigate the stock market with confidence and work towards securing your financial future.

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