Basics Of Share Market Explained

Why Invest In Share Market?

We invest in stocks to grow our wealth over time. While some people consider stocks to be a dangerous investment, several studies have shown that investing in the appropriate stocks for a long time (five to ten years) may give inflation-beating returns, making them a better alternative than real estate or gold.

When it comes to investing in the stock market, people have short-term strategies as well. While stocks may be quite volatile in a short period of time, buying the proper stocks can help traders win quickly.

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.

Let’s Start With Share Market Basics

What Is A 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 for stock buyers and sellers. India's premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange. Here’s how share market works.

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 Share Market

First, you need to open a trading account and a demat account to invest in the 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.

Key Financial Instruments To Trade In The Stock Market

• Bonds
• Shares
• Derivatives
• 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 the maturity date.

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.

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.

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

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.

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.