Why invest in the share market?
Investing in the share market offers a range of benefits that attract both seasoned investors and newcomers:
- Potential for high returns: Historically, the share market has offered the potential for higher returns compared to many other investment options over the long term.
- Ownership in companies: Buying shares grants you ownership in the company. As the company's value and profits grow, so does the value of your ownership.
- Diversification: Investing in different companies across various sectors can help spread risk and reduce the impact of a poor-performing investment.
- Liquidity: The share market is highly liquid, meaning you can easily convert your investments into cash by selling your shares.
- Long-term wealth creation: Shares have the potential to generate wealth over time through capital appreciation and dividends.
Types of share market
The primary market and secondary market are two distinct segments in the stock trading process.
1. Primary market
The primary market refers to the market where shares are issued for the first time by companies seeking to raise capital. The shares are bought by investors directly from the company or through an underwriter, in an initial public offering (IPO). The proceeds from the issuance of shares go to the company. Therefore, the primary market is crucial for businesses that need to raise funds through equity financing to start or expand their operations.
2. Secondary market
The secondary market, on the other hand, refers to the market where existing shares are traded among investors after the initial public offering. The shares are sold and bought among investors without participation from the issuing company. The prices of shares in the secondary market are primarily based on supply and demand, and they can fluctuate based on market conditions. The secondary market is important for investors who seek to buy or sell securities to realize capital gains or losses, depending on market conditions.
3. Equity market
The equity market is where companies sell ownership (shares) to investors. Buyers submit bids, which is the price they are willing to pay. Sellers set ask prices, which is the minimum price they will accept. Brokers help negotiate a final price, and if a buyer and seller agree, the trade happens. The buyer pays the total cost (stock price multiplied by number of shares, plus fees), and the shares are deposited into their account.
4. Derivative market
The derivative market is different. Here, trading revolves around contracts like futures and options. These contracts focus on buying or selling a stock at a specific price by a certain date. Unlike the equity market where you actually own the shares, derivatives allow speculation on stock prices without directly buying them. Both futures and options involve trading in large quantities, and using them requires understanding these specific instruments.
Both markets offer investors opportunities for capital appreciation and income depending on their asset allocation strategies and market outlook.
What are the functions of a share market?
A share market, or stock market, is a platform where buyers and sellers trade shares of publicly-listed companies. It serves several crucial functions:
1. Enhancing market liquidity and accessibility:
- Continuous market: The stock market provides a consistent marketplace for buying and selling securities.
- Ease of trading: It simplifies the process of buying and selling shares, making it accessible to a wide range of investors.
2. Price discovery:
- Demand and supply dynamics: By analyzing the interplay of demand and supply, the stock market helps determine the fair value of securities.
- Real-time Pricing: Investors can access up-to-date pricing information, enabling informed decision-making.
3. Ensuring transaction security:
- Regulatory oversight: Stock exchanges are regulated by authorities like SEBI (Securities and Exchange Board of India) to maintain fair and transparent practices.
- Legal framework: All market participants are required to adhere to specific regulations, ensuring the safety and security of transactions.
4. Promoting equity culture:
- Public Information: Listed companies are obligated to disclose financial and operational information to the public.
- Investor Education: This transparency fosters a better understanding of equity investments, encouraging broader participation.
5. Motivating corporate governance:
- Regulatory Compliance: Companies must adhere to strict listing requirements and disclosure norms.
- Performance Incentives: To maintain their market value and attract investors, listed companies are incentivized to improve their financial performance and governance practices.
How to invest in share market?
A person can choose to invest in either the primary or the secondary market. In the primary market, investors can directly purchase company stocks issued via an Initial Public Offering (IPOs). In the secondary stock market, investments are made through the sale and purchase of securities between the buyers and sellers on the stock exchanges.
1.Investing in the primary market (IPOs)
For investing in IPOs, one will need a Demat and trading account. A trader can also apply for an IPO directly through their bank account. IPO application through net banking has become easier with the introduction of a process known as Application Supported by Blocked Amount (ASBA).
2.Investing in the secondary market
Here is the procedure for investing in the share market:
Step 1: Open a Demat and trading account.
Step 2: Log in to the trading account and choose the stocks to purchase.
Step 3: Decide the price point to buy or sell shares. Wait for the buyer or seller to accept the request.
Step 4: After completing the transaction, either money or shares get credited to the Demat account.
Who determines the price of a stock?
The price of a share is determined by the fundamental economic principle of supply and demand. Generally, a company's stock price tends to rise when:
- Strong growth: The company is experiencing rapid growth.
- Profitability: The company is generating substantial profits.
- Positive market sentiment: The company receives positive news or market trends favor its industry.
Conversely, a decline in demand for a company's products can have a negative impact on both its revenue and stock price. As investor confidence wanes, they may choose to sell their shares, leading to a decrease in the stock price. This is often referred to as a "sell-off."
Advantages of share market
The stock market offers a range of benefits for both companies and investors. Here's a breakdown of some key advantages:
- Potential for long-term growth: Selling shares on the stock market allows companies to raise capital for expansion and development. This can lead to long-term financial growth for both the company and its shareholders.
- Easy entry and exit: Investors can readily enter and exit the stock market by buying and selling shares. Share prices are determined by supply and demand, allowing for a transparent and accessible market.
- Regulated and monitored environment: Stock exchanges and market authorities impose strict regulations on listed companies. This includes stringent disclosure requirements, ensuring transparency and protecting investors. Stockbrokers also operate under guidelines set by regulatory bodies like SEBI, further safeguarding investor interests.
- Secure clearing process: Stock exchanges facilitate a safe and secure clearing process for investors. When you buy shares, they are electronically transferred to your Demat account held with a reputable custodian. This reduces the risk of fraud and ensures smooth ownership transfer.
Why do companies need shares and why do they have to list it?
Companies often require additional capital to fuel expansion or fund new projects. To raise this capital, they can turn to the stock market. By offering shares to the public through an Initial Public Offering (IPO), companies can generate funds. Investors who purchase these shares become part-owners of the company. As the company's value increases, so does the value of the shares held by investors.
To launch an IPO and subsequently list on a stock exchange, companies must adhere to the regulations set forth by the Securities and Exchange Board of India (SEBI). SEBI, the regulatory body for India's securities market, plays a crucial role in protecting the interests of investors by ensuring fair practices and transparency.
Notable terms in share market and their explanation
The share market has a variety of terms that are essential for investors to understand before engaging in trading or investing. Here's a list of some notable terms along with their explanations:
- Shares: Also known as stocks or equities, shares represent ownership in a company. Owning shares makes you a partial owner of the company.
- Bulls and bears: Bulls and bears represent market trends. A bull market is characterised by rising prices and optimism, while a bear market is marked by falling prices and pessimism.
- Dividends: Dividends are a portion of a company's profits distributed to its shareholders as a reward for holding shares.
- Market capitalization: Market cap is the total value of a company's outstanding shares. It's calculated by multiplying the share price by the total number of shares.
- Blue-chip stocks: These are shares of well-established and financially stable companies with a history of strong performance.
- Volatility: Volatility refers to the degree of variation of a stock's price over time. Highly volatile stocks can experience significant price fluctuations.
- NIFTY: The term "NIFTY" refers to the Nifty 50, which is a stock market index. The Nifty 50 is one of the major stock market indices in India and is used as a benchmark to track the performance of the overall Indian stock market. It is managed and operated by the National Stock Exchange of India (NSE).
- Sensex: The S&P BSE Sensex is the benchmark stock market index of India. It is a free-float market-capitalisation-weighted index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE).
Conclusion
The share market is a dynamic ecosystem that provides opportunities for individuals to become a part of the growth story of companies and potentially realise financial gains. From its primary and secondary market divisions to the concepts of bulls, bears, dividends, and market capitalisation, the share market is filled with terms that may seem complex at first but hold immense potential for investors.
For those willing to venture into the world of investing, the share market offers a chance to be a participant in the global economy's growth and prosperity. Whether you are aiming for long-term wealth creation, diversification, or a deeper understanding of the economic landscape, the share market is undoubtedly a gateway that opens doors to a world of possibilities. As you navigate this realm, understanding the fundamentals and staying informed will be your best companions on the path to successful investing.
To invest in the share market, one would require a Demat and trading account, which facilitates holding shares and executing trades. Open a Demat and trading account today and take your first step towards the vast world of share market investing.
Read Our Related Articles
