What is Share Market?

If you are planning to invest in the share market, you need to note what they are about. With knowledge of the basics and having a solid plan is essential before you begin. This is because, with many options available, returns on investments in securities differ substantially from each other. This makes it important for you to understand the share market well enough to make informed choices that will help you avoid potential financial losses.

The share market is a good way to invest your money because it allows you to earn extra income easily. However, to survive in this volatile market you need to make strategic decisions that will help you avoid losses. Many investors have made wise buying decisions and created wealth from the shares. To invest in it, you need to open certain accounts such as a Demat account, a trading account, and a bank account. Let’s take a look at how the Indian stock market functions to enable you to know what is necessary for investment initiation. 

Key Highlights

• Investing in the share market offers the potential for higher growth, diversification, liquidity, ownership, and long-term returns.
  
• You need to understand the workings of the share market to make informed decisions. This includes price determinants, regulations, participants, etc. 

• Within the stock market, several important functions can be performed including buying and selling of stocks, provision of liquidity, assistance in price discovery, and ensuring fair and transparent trading practices.
  
• When new stock is offered to the public for the first time through an Initial Public Offering (IPO) or Follow-on Public Offering (FPO) is called a primary market. On the other hand, in the secondary market, shares are exchanged among investors on stock exchanges or through Over-the-Counter (OTC) transactions.

Why Invest In The Share Market?

Investing in the share market can be a great way to grow your money. Here’s why:

Potential for High Returns

In the long run, equities may appreciate, permitting gains when they are sold at prices higher than those at which they were acquired. Additionally, several corporations distribute their earnings to stockholders via dividends which are periodic payments that contribute towards total returns.

Diversification

The stock market provides an array of stocks from various enterprises and sectors. It means you can distribute your investments, thus minimizing risks that arise when one choice does not yield positive returns. Moreover, depending on the risk tolerance or future goals, you may opt for investing in stable but recognized companies or small-sized firms.

Liquidity

Buying and selling shares in stock markets is fast unlike with other forms of investment such as real estate. Thus, if you ever need to get your hands back on what you have put in, it’s just one click away from you.

Ownership and Influence

When you buy shares, you own a part of the company. This can be exciting since you are part of the company’s journey and success. Moreover, shareholders often have the right to vote on important company decisions, giving you a voice in terms of how things are run.

Long-Term Growth

Your investments start growing faster when you reinvest all interest and cash dividends. This includes actual profit earned on stocks or mutual funds, than the initial value invested.

Types Of Share Markets

The share market can be further divided into primary and secondary markets.

Primary Share Market

The primary market is where a company first raises capital through shares by registering at a stock exchange. It is known as an Initial Public Offering (IPO), after which the company becomes publicly registered, and shares can be traded within the market.

Secondary Share Market

The secondary market is where a company’s new securities are traded once they have been sold on the primary market. Investors can buy and sell shares at the prevailing market price in this market. A broker or other intermediary typically facilitates the investment process.

How Does the Stock Market Work?

The stock market is a platform where investors buy and sell shares of companies. Here’s a simple breakdown of how it works:

Opening Accounts

You need to open three types of accounts to access the share market. A Demat account to hold your shares electronically and a trading account to buy and sell shares. Moreover, you will need a bank account that is linked to your Demat account for transactions. 

Placing Orders

You need to place either buy orders or sell orders. Buy orders for when you want to purchase shares. Whereas, sell orders help you sell your shares. They both are executed through your trading account. 

Market Participants

There are many participants in the market like investors who want to trade shares, platforms like NSE and BSE where the trading happens, and brokers who facilitate the buying and selling of shares.

Price Determination

The prices of the shares are set by how many people want to buy (demand) versus how many want to sell (supply). Moreover, market orders that execute immediately at the current market price, and limit orders that execute at a specific price are also the determinants. 

Transaction Settlement

After a trade, there occurs a shift of shares from the seller’s Demat account to the buyer’s account while cash is moved from the buyer’s bank into that of the seller.

Regulation

The role of the Securities and Exchange Board of India is to regulate the stock market, ensure fair practices, and protect investors.

What are the Functions of the Stock Market?

Suppose you are starting your investment in a small amount. It is possible to face some loss. You must be aware of the risk and money you can invest and get in returns. The stock market functions as the open market for the public to invest indirectly or directly in a small or big corporation.

The stock market offers a diverse investment in ETFs and other types of Securities. Taking this further, you must understand the market conditions before making any investment. There are two scenarios of the market: one is the bull, and the other is the bear market. In the bull market, the stock prices are high and grow at a rapid speed. 

You must carefully buy stock in the bull time as there is a chance of a steep loss of the stock you purchase. In bear markets, the share market price falls, and people are mainly selling their securities at this time. To decide between buying or selling shares, you must consider a financial advisor. If you know the share market definition and research well about the stock market, you can become a successful trader and make a considerable return on your investments. Consider an example of having a company that had invested one lakh in 1996 and that investment today is worth thirty-two crore rupees in today’s time.

How To Invest In The Share Market?

Follow the below steps to invest in the share market:

Step 1: To invest in shares, you need a Demat and trading account.

Step 2: Log into your Demat and trading accounts and choose the shares you wish to buy and sell. To purchase those shares, you must have the necessary funds in your account. For this, you must present the necessary documentation. An account will be opened once you have successfully verified your identity.

Step 3: Decide at what price point you want to buy and sell shares. After that, you have to wait for the buyer or seller to fulfil the request.

Step 4: After completing the transaction, you will receive either shares or money for the stocks you bought or sold.

Understanding the Stock Market Basics- Important Terms

There are a lot of terms associated with the share market. It is always advisable that the investors should properly learn about these terms. This helps in making the right investment decisions as an investor can better understand the market when he is aware of these terms. Some terms also help understand the companies in a better way. One can find it relatively easy to assess the companies on their performance as he gets a grip over these useful terms. The terms you must know about the stock market include the following:

Share/ Equity

Equity is a part of the ownership of a company. A stockbroker can help you buy or sell shares. You will need a Demat account to store the equity shares though. 

Mutual Funds

A mutual fund is a financial scheme where several investors with the same objective invest funds, handled by a professional. All these investors pool their money to create a unified sum of funds. Profit earned is higher, and the risk part is low in the mutual funds. This is due to the reason that highly efficient and experienced professional fund managers invest the funds of the investors in several different kinds of investment instruments. This results in a diversification of the funds which lessens the exposure.

Derivatives

A derivative is a financial contract whose value is dependent upon underlying assets. There is a risk of loss. These are cash-based investments where you need to settle your transactions ultimately. 

Commodity

The commodity in the stock market is the price to buy commodities or raw materials such as steel, gas, and other resources. The commodities include raw materials useful for different kinds of purposes in various sectors. The natural resources obtained from the earth form a major part of the commodities. These are among the best investments due to their need in the market. 

Conclusion 

The share market is a platform where investors buy and sell stocks or make a profit. Investing in the share market can be a very strategic way to build wealth, with different types of markets such as primary and secondary. Moreover, every investor must understand how the stock market operates, its functions, and key terms. If you would like to navigate around it confidently and make informed decisions about your investment to secure your financial future, then learning stock trading basics should be at the top of your priority list.

FAQs on Share Market