How does the Indian stock market work?
What is Share Market
New to the stock market? I will take you through the world of share market in this article. Firstly, let us learn what is share market?
Share market is where buying and selling of share happens. Share represents a unit of ownership of the company from where you bought it. For example, you bought 10 shares of Rs. 200 each of ABC company, then you become a shareholder of ABC.
This allows you to sell ABC share anytime you want. Investing in shares allows you to fulfil your dreams like higher education, buying a car, building a home, etc. If you start investing at a young age and stay invested for a long time, the rate of return will be high. You can plan your investment strategy based on the time you need money.
By buying a share, you are investing money in the company. As the company grows, the price of your share too will increase. You can get profit by selling the shares in the market. There are various factors that affect the price of a share. Sometimes the price can rise and sometimes it can fall. Long term investment will nullify the fall in price.
Why at all a company sells it shares to the public? A company requires capital or money for its expansion, development, etc. and for this reason it raises money from public. The process by which company issues shares is called Initial Public Offer (IPO). We will read more about IPO under Primary Market.
You would have always heard people talking about bull market and bear market. Whar are they? Bull market is one where the prices of stocks keep rising and the bear market is where the prices keep falling. Where all these buying and selling happens?
NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). These are the two major stock exchanges in India and are regulated by SEBI (Securities and Exchange Board of India).
Brokers act as an intermediary between the stock exchange and the investors. So to start investing or trading, you have to open a demat account and trading account with a broker. You can open demat account online easily through a simple process. After linking your bank account with these accounts, you can start your investment journey.
Two kinds of Share Market:
Share market is categorized into two namely:
1. Primary Market
2. Secondary Market
A company or government raises money by issuing shares in the primary market by the process of IPO.
The issue can be either through public or private placement.
Issue is public when the allotment of shares is made to more than 200 persons; Issue is private when the allotment is made to less than 200 persons.
Price of a share can be based on Fixed price or Book building issue; Fixed price is decided by the issuer and mentioned in offer document; Book building is where the price of an issue is found out based on the demand from the investors.
The shares bought in the primary market can be sold in the secondary market. Secondary market operates through over the counter (OTC) and exchange traded market. OTC markets are informal markets wherein two parties agree on a particular transaction to be settled in future.
Exchange traded markets are highly regulated. Also called as auction market wherein all transactions happen via the exchange.
Why is Share Market important?
Share market plays a vital role in aiding the companies to raise capital for expansion and growth. Through IPOs, companies issue shares to the public and in turn receive funds that are used for various purposes. The company gets listed on the stock exchange after IPO and this provides an opportunity to even a common man to invest in the company. The visibility of the company increases as well.
You can be a trader or investor in the share market. Traders hold stocks for a short period of time whereas investors hold stocks for a longer duration. As per your financial needs, you can choose the investment product.
The investors in the company can use this investment to fulfill their life goals. It’s one of the major platforms for investment as it provides liquidity. For instance, you can buy or sell share anytime based on the need. That is, financial assets can be converted to cash anytime. It offers ample opportunities for wealth creation.
You know well that you can earn money by investing in shares. The following are the ways through which your money grows.
2. Capital Growth
1. These are the profits the company earns and it is distributed as cash among the shareholders.
2. It is distributed according to the number of shares you own.
Investment in equities/ shares leads to capital appreciation. The longer is the duration of investment, the higher the returns. Investment in stocks is associated with risks as well. Your risk appetite is based on your age, dependents and need. If you are young and don’t have any dependents, you can invest more in equities to get more yield. But if you have dependents and commitments, you can allocate more portion of money to bonds and less to equity.
The company buys back its share from the investors by paying a higher value than the market value. It buys back shares when it has a huge cash pile or to consolidate its ownership.