Investment refers to obtaining assets in order to generate income or profits. Shares are investments too. These not only give ownership rights to the investor but also generate returns over time. This article answers common questions that you may have about a stock market, a place where shares are traded. It also talks about the difference between a share and a stock and the ways to invest in stocks.
This article covers the following topics:
- What is the stock market?
- Why do companies list shares on the stock exchange?
- What are shares and stocks?
- How does the stock market perform?
- Types of stock markets
- How to invest in shares?
- Factors to consider while investing in the share market
What is the stock market?
The stock market is a platform where shares of companies trade. The buyers and sellers of different companies’ shares come together and trade in the share market. The stock market provides the liquidity that you, as an investor, require after purchasing a share of a particular company.
There are two national-level stock exchanges in India: the National Stock Exchange and the Bombay Stock Exchange. When private companies list their shares in the stock exchanges, they no longer remain private. They become public companies.
Why do companies list shares on the stock exchange?
Money is needed to run any company. There are several ways for them to raise money, but every source has its advantages and disadvantages. We have discussed two ways below:
- Raising money through the bank loan will impose a fixed liability on the companies, as they will have to pay a fixed interest even if they are not making sufficient profits. So raising money through loans is a burden.
- On the other hand, if a company raises money by issuing shares, there is no fixed burden on paying regular dividends. Because paying dividends depends on the decision of management. There is no hard rule that the company will have to pay regular dividends.
What are shares and stocks?
Share is part ownership in the company. When a company issues shares, they sell part of their ownership to investors who buy it. So, when you buy a share, you become a part-owner of the company. After a company issues shares, the company becomes public, and together, all the new shareholders, become the company’s actual owner.
The shareholders appoint a Board of Directors, who sees whether the company’s management is working in its best interest. When the shares of a shareholder are fully paid, the shareholder can convert its shares into stocks. A group of shares held by a shareholder is called stock.
How does the stock market perform?
The stock market acts as a trading platform for buyers and sellers of stocks. When a stockholder wants to sell their ownership to another buyer, that transaction is performed in the stock exchange. Stock exchange charges a commission for the trade, and the trade gets executed. The share market provides a transparent platform for trade in any publicly listed company, and it also helps to add liquidity to the company’s shares.
Types of stock markets
There are 2 types of stock markets, namely the Primary Market and Secondary Market.
It is a market where shares are issued to the public for the very first time. The first issue of shares is called the “Initial Public Offering”. Whenever a company plans to issue shares, they reach an underwriter. The underwriter performs all the legal formalities and helps the company determine the accurate share price based on demand in the market and the right timing for the issue.
Once the issuing price is fixed, the underwriter opens a window for the investors to subscribe to the shares. If the issue is oversubscribed, then the subscribers will receive shares on a pro-rata basis. One essential thing is that the primary market’s money directly goes to the company for its future operations or expansion.
Once the shares are distributed, the shareholders will have the shares in their accounts. However, if a shareholder wants to sell their shares, they will need a buyer willing to buy them. In the absence of a buyer, the shareholders’ investment becomes illiquid, meaning they can’t sell their shares when needed. To solve this issue and offer liquidity to investors, shares are traded in the secondary market.
In the secondary market, both the buyer and seller place their bids and shares exchange hands. There is no new security created here. Only the previously issued shares are traded to provide liquidity.
How to invest in shares?
There are a few steps that you need to follow to invest in the share market.
Step 1: PAN or Aadhar card
Having a PAN or Aadhar card is mandatory to invest in shares in India. These documents are required for the KYC (Know Your Customer) purpose. You can open an account with India’s market regulator, the “Securities and Exchange Board of India”. As per the new regulations, you need to provide a cancelled cheque and 6months’ bank statement for opening a Demat account.
Step 2: Hire an intermediary (broker)
Directly buying and selling of shares in the stock exchange by individuals is prohibited. Only a registered person or a company authorised by the “Security and Exchange Board of India”, who acts as an intermediary can trade shares in a stock exchange on your behalf. Such intermediaries’ service (broker) is chargeable, and they charge brokerage fees from you.
Step 3: Opening a Demat account
Demat account is used to hold shares and securities in electronic format. Earlier shares were issued in paper format, but now everything is digitalised, and shares are issued in electronic form. All the electronic securities and shares that individual purchases are kept in the electronic form under the Demat account.
Step 4: Buying a share
- Shares can be bought by giving instructions to the brokers. If you want to buy a share, you will have to provide the broker with price and quantity instructions. Once the price in the market matches as per the provided price, then the trade is executed. If you are buying a share and want to take delivery, it will take a few days to reflect the shares in your Demat account. It is called the settlement period.
- You can directly buy a share in the online trading platform. Current BID/ASK prices reflect for each share in the trading platform. So you can give buying instruction directly in the online trading platform provided by the broker.
Factors to consider while investing in the share market
There are risks involved in the share market. So you must keep a few factors in mind while investing in the share market.
Make a diversified investment
Never invest all of your wealth in a single share. This kind of investment is hazardous. If something happens to the company, then you will lose your entire wealth. Always diversify your investment. Diversification means investing in a group of shares that are not correlated. So if the price of one company’s share falls, the other may rise or remain the same, and your losses will be minimised. Always build a portfolio of shares.
Make an informed decision
Don’t respond to noises in the market. You will always hear predictions that a particular share will double in two months or three months. These kinds of predictions are mostly wrong. Always do your research and make an informed decision while investing.
Investing in the share market is tricky and risky. But, with the right procedure and safety, you can make real profits. The interest rates in the Fixed Deposits offered by banks are going down daily. So it has become essential for investors to invest in the share market as the returns are higher. Always make an informed decision. Head to Tickertape to make your investment decision and to find out more about stocks and their growth predictions, analysis of the market mood index, and so on.