When you invest in the stock market, you must have complete knowledge about the functioning of the share market. An investor should approach the stock market with a proper view of the investment strategy. A sound strategy for making a good investment is an essential need before starting to invest in the share market. There are a lot of securities of various kinds that the investors can choose to invest from. The kinds of returns these securities give differ hugely. Also, the rules governing these securities also vary from one to the other. It is really crucial for an investor to understand these rules properly so that he can make the right decision. Otherwise, the investor may lose out on a huge chunk of his hard-earned money.
Investors should also know why they should invest in the stock market. Some of you might question the decision. Some others might give the alternate investment options that the investors can look for. Having said all this, it is very important to note that the share market has a relevance of its own. Many people like Benjamin Graham, John Templeton, Thomas Rowe Price Jr., John Neff, and the all-famous Warren Buffett made their lives from the stock market. These people are real-life examples to show the immense potential the share market has.
Investing in the stock market first, however, needs you to open a few accounts to trade in the share market. These accounts include a Demat account, a trading account, and a bank account.
So, you may be wondering now what is the share market in India exactly? Let us now dive straight into the topic and understand how a share market works.
The Share Market Definition
First, let us take a look at the share market meaning. The share market is a kind of marketplace where the investors and the companies set prices of the assets and make capital. You, as an investor, buy and sell the shares of various business entities or other kinds of assets in the share market. There are different stock exchanges in India where you can invest in these business entities. The prominent stock exchanges in the country include the National Stock Exchange of India Limited (NSE) and the Bombay Stock Exchange (BSE). The investors would need a stock broker app and decide which stock you want to buy from the trading app. There are many organizations providing stockbroking services. Investors can avail of their services to invest in the share market.
The share market meaning is also to make a path for a company that needs serious funding to become one of the largest corporations in India. Companies always have to look for newer opportunities to expand their operations. Companies may try to start their operations in new regions across the market. A few of them may look to bring in new products to meet the demands of their customers. All these kinds of business expansion require a huge amount of capital investments. Listing their companies in the share market can fulfill their aim of meeting this huge capital demand. Investors invest in these companies by buying their shares. The companies thus get the required money to fulfill their capital needs.
In the stock market, the investors can choose whether to trade in the National Stock Exchange of India Limited or the Bombay Stock Exchange as per their needs. Both the Stock exchanges, that is, the NSE and the BSE have hundreds of companies listed on them. The investors thus have a lot of options to choose from, to invest in so many assets or for trading. Let's have a little more discussion regarding the Bombay Stock Exchange (BSE). The stock exchange often comes to light as it is around 125 years old. Yes, you heard it right there. With a long legacy of 125 years, it was the first stock exchange to exist in the Asian continent.
Currently, it is one of the leading stock exchanges both in India and the world. The BSE has around 6000 plus stocks listed on it. The Stock exchange deals in a multitude of different instruments such as equity, currencies, futures, options, and index options. Apart from equity, the Share market has a number of different kinds of other investment options that investors can invest in. The returns from these financial instruments are also quite handsome. This list first includes the debt instruments such as bonds and government securities. The Share market and the financial experts consider debt instruments as very safe investment options, especially for low-risk investors. The small investors cannot invest in large amounts, and they can’t even afford too much of risk.
Then there are a lot of people who also invest in shares for dividends. The dividends are profit sums paid to each shareholder as part of the company's profit. The dividend can also be a good investment strategy to gain a steady income from your financial holdings. When you buy the shares of a stock, you become an owner of a certain part of the company. However, the investors do not have the right to make decisions in the day-to-day matters of the company. But still, you get the share of profits generated and even gain more when the company's stock goes up. That is why dividends are a preferred investment destination for a good number of investors.
The companies in the stock market lie under different categories based on the different kinds of features. One of the most basic ways of looking at the companies is on the basis of their size. There is a category of companies listed in the share market. To know about the companies in the share market, you can read the following points:
The companies which are well established and have a considerable presence in the market are known as Large Cap stocks. These are companies that are operating in a market for a very long period of time. They have a reputation for serving the customers in the best possible manner. The investors and the customers thus have huge amounts of trust in these companies. The stocks of these large-cap companies are less volatile and less risky due to their strong foundation. As their market presence is very high one can say that such a company has a very dominant position in the market. Most large-cap companies do lead the market in the segment they operate in. So, they turn out to be very low-risk investments.
The mid-cap companies are listed companies that have medium-capitalization and a moderate amount of risk. These companies are not as big as large-cap companies. Yet they are not very small-sized companies either. They lie between the very big companies and the small-sized ones. These stocks are often volatile but also tend to grow higher. The stocks of the mid-cap companies are not as stable as the large-cap companies but are not highly risky either. These companies generally are on the path of growth. Most of them go on to become very successful business houses in the coming times. They reach this stage by crossing the initial hurdles as they have a very good business model to work on. So, these stocks mostly see immense success in the future.
These are small-cap companies whose market capitalization is less than mid-cap companies. They are highly risky stocks, and their growth is not steady. These are the companies that have just entered the market in a particular segment. They mostly deal in one or two sectors only. The stocks are not steady because of the fact that most investors do not trust the companies much. Many risk-averse investors even try to avoid investing in such stocks. The main reason behind this lack of trust is the fact that the business model is yet to be successful. As every company generally comes up with a certain new business model, it will take some time to find much response from the market. Hence, the small-cap companies prove to be a high-risk investment offer with untested business models.
The company's market capitalization depends upon the outstanding total number of shares and the price of each share of the company. Let us look at an example to understand this in a better way. We shall assume that a company named XYZ has 100 shares. The price of each share is Rs 20. Then the market capitalization of the company will be calculated in the following manner.
Rs. 20 * 100 = Rs.2000/-
To know more about the stock market, you can relate to things like:
IPO, equity, mutual funds, and other factors. An initial public offering or in short an IPO is the process of raising money from the public. It is the opening of your company to public exposure and boosting the investment in your company. The chances of IPO investment and gaining in future stocks of the IPO lot you purchase will significantly gain you.
The Stock Market Terms
There are a lot of terms associated with the share market. It is always advisable that the investors should learn about these terms in a proper way. This helps in taking the right investment decisions as an investor can better understand the market when he is aware of these terms. There are a number of terms that 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:
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.
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 the highly efficient and experienced professional fund managers invest the funds of the investors in a number of different kinds of investment instruments. This results in a diversification of the funds which lessens the exposure. This in turn leads to very moderate risk.
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.
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 the 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.
Securities and mutual funds are among the most recommended investments in the stock market. Investors, traders, and financial advisors' best opinion are the money market makes their wealth grow.
There is a theory of demand and supply in the stock market. When the company progresses, the demand for the stocks or price will go up. If the company does not perform well, then there will be a loss.
How Does the Stock Market Work?
So, you very well know the share market definition. Let us then have a close look at how the stock market works. To invest in the stock market firstly, you need to open a Demat account with a broker and link your bank account with your Demat account. Opening a Demat account and a trading account is a quick and straightforward step due to the online KYC process. Once both the accounts are open and active, you can start trading and investing in the stock market.
The Stock market straightforward trades and investments get added safely to your Demat account. The safe deposit of Central Depository Services Limited (CDSL) and National Securities
Depository Limited (NSDL) in India holds all your transactions. The shares play three critical roles to help the investors as well as the companies. The stock market gives the buyer and the seller a commonplace to do both these tasks. The stock market platform will facilitate you with both storing and selling. Everything in the Stock market runs according to the rules and regulations set by the market regulator. It works under the purview of the Indian government. It is known by the name, Securities and Exchange Board of India SEBI.
To invest in the stock market, you must know what is the share market? How does the stock market work? Why do you need a share, and what is the value of the shares you have? Another essential function of the stock market is to clear credits, and debit, and handle the delivery of securities for both investors and companies. As per your financial goal, you have to plan your investments. Investors can set both long term and short term goals. The strategy for each kind of goal will however differ greatly. Investors can take the help of financial advisors to plan their investments. This can help them make profitable investments in the share market.
The government of India has given its best resources and closely monitors the Stock market situation to avoid any fraud and wrongdoings in the Stock market. Every stockbroker has to function according to the framework and guidelines prescribed by the SEBI. Any institution that wishes to participate in the functioning of the share market needs to obtain a valid license. Before choosing any stockbroker for making your investment check whether the financial institution has the license to operate.
The Function 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.