A market where shares are publicly issued and traded is known as a share market. The answer to ‘what is the stock market is pretty similar to that of a share market. The key difference between share and stock markets is that the former only allows one to trade shares. The latter allows you to trade in financial instruments such as derivatives, bonds, mutual funds, and shares of listed companies.
The key factor is that the basic platform offers trading facilities that companies can use to trade stocks in the stock market. On a stock exchange, one can only buy and sell those stocks that are listed on it. Hence, buyers and sellers meet on a stock market. India’s prime stock exchanges are the National Stock Exchange and the Bombay Stock Exchange.
You would have always heard people talking about the bull market and bear markets. What are they? A bull market is one where the prices of stocks keep rising and a bear market is where the prices keep falling. Where do all this buying and selling happen? NSE and BSE 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. Zerodha, Upstox, and Fyers are the best brokers in the Indian share market. You can online easily through a simple process. After linking your bank account with these accounts, you can start your investment journey.
Table of Contents
History of the Indian Share market
Earlier, stockbrokers would converge around Banyan trees to conduct trades of stocks. As the number of brokers increased and the streets overflowed, they simply had no choice but to relocate from one place to another. Finally, in 1854, they relocated to Dalal Street, the place where the oldest stock exchange in Asia – the Bombay Stock Exchange (BSE) – is now located. It is also India’s first stock exchange and has since then played an important role in the Indian stock markets. Even today, the BSE Sensex remains one of the parameters against which the robustness of the Indian economy and finance is measured.
In 1993, the National Stock Exchange, or NSE was formed. Within a few years, trading on both the exchanges shifted from an open outcry system to an automated trading environment.
This shows that Indian stock markets have a strong history. Yet, on the face of it, especially when you consider investing in the share market, it often seems like a maze. But once you start, you will realize that the investment fundamentals are not too complicated. One of the basics of investment fundamentals is financial planning.
Types of Share Markets
Now that we understand the stock market meaning, one key aspect of stock market basics is that one can trade on one of two market segments. In other words, there are two types of share markets in India. These are primary markets and secondary markets.
1. Primary Share Markets
A primary share market is a place where a company first gets registered with the goal of raising money and issuing a certain amount of shares. The goal of being publicly listed on a primary stock exchange is to raise money. This is where a company gets registered to issue a certain amount of shares and raise money. If the company decides to sell its shares for the first time, this is known as an initial public offering.
2. Secondary Market
Once a company’s new securities have been sold in the primary market, they are then traded in the secondary stock market. On the secondary market, investors get the opportunity to exit their investment and sell off their shares. Transactions on the secondary market mostly comprise trades where one investor chooses to buy shares from a separate investor at the prevailing market price.
Based on whatever prices the two parties agree to set or the prevailing market price, one investor will buy shares from another on a secondary market. Typically investors conduct these transactions through a broker or other such intermediary who can facilitate this process. Brokers offer these trading opportunities at different plans.
What Is Traded On The Share Market?
We cannot discuss stock market basics without addressing the key financial instruments that are traded on it. There are four categories of financial instruments traded on the stock exchange.
Below are the main four key financial instruments that are traded in the Stock market:
- Mutual Funds
A share is a unit denoting equity ownership in a corporation that exists as a financial asset providing equitable distribution for any profits earned. Hence, when you buy shares, you buy a stake in the company whose shares you have bought. This means that if the company becomes profitable over time, shareholders are rewarded with dividends. Traders often choose to sell shares at a price higher than what they purchased them.
A company requires money so it can undertake projects. They pay their investors dividends from the revenue earned on their projects. One way of raising the capital for operations and other company procedures is via bonds. When a company chooses to borrow money from a bank, they take a loan that they repay through periodic interest payments. On a similar note, when a company opts to borrow funds from a variety of investors, this is known as a bond, which is also paid off through timely interest payments. Take the following example as an explanation of how bonds work.
Imagine that your goal is to start a project that will begin to earn money in two years’ time. To undertake this project, you will require some initial amount to get you started. Suppose you acquire the required funds in the form of a loan from a friend and write down the receipt of the loan stating that you owe them ₹1 lakh which you will repay in five years with an interest rate of 5% per annum. Suppose that your friend now holds this receipt. It means that they have just purchased a bond by lending out money to your company. Since you have promised to pay the principal amount at a 5% interest, you do so and finally extinguish your principal repayment by the time the fifth year comes to a close.
3. Mutual Funds
One key financial instrument part of share market basics in mutual funds investing. Mutual funds are investments that allow you to indirectly invest in the share market. You can find mutual funds for a variety of financial instruments like equity, debt, or hybrid funds, to name a few. Mutual funds work by pooling money from all the investors that fund them. This aggregate amount is then invested in financial instruments. Mutual funds are handled professionally by a fund manager.
Each mutual fund scheme issues units that are of a certain value similar to a share. When you invest in such funds, you become a unit-holder in that mutual fund scheme. When instruments that are part of that mutual fund scheme earn revenue over time, the unit-holder receives that revenue reflected as the net asset value of the fund or in the form of dividend payouts.
The market value of shares listed on a stock market continues to fluctuate. It is difficult to fix the value of a share at one particular price. This is where derivatives enter the picture. Derivatives are instruments that allow you to trade at a price that has been fixed by you today. To put it simply, you enter into an agreement where you choose to either sell or buy a share or any other instrument at a certain fixed price.
Why is Share Market important?
Share market plays a vital role in aiding 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 shares 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.
- 1. Dividends
- 2. Capital Growth
- 3. Buyback
- 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 needs. 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 the 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 consolidates its ownership.