Simply put, the share market is the business of stocks. ‘Stock’ is the terminology used to represent a share in the ownership of the company.
Let’s understand how this works with an example.
Rohit decides to open a pop-up restaurant. To fund his venture, he needs to invest Rs. 10 lakh. But at the moment, he has Rs. 2 lakh. He shares his business plan with four of his friends and requests them to invest the remaining amount. In return, he offers them 20% each of the company’s ownership. In four years from now, Rohit’s business is flourishing. This pop-up eatery is now valued at Rs. 50 lakhs. This means that his investment and those made by his friends have increased five times.
In the same way, when you purchase stocks in a public company listed on the share market, you become a part-owner of the business. When a company first list its shares, it does through a process known as an Initial Public Offering (IPO). Once an IPO is issued, shares are sold and purchased by investors on a platform known as the stock market or stock exchange.
Companies that are listed on the stock exchange sell shares of their company to obtain the necessary funds for the company to expand. In the share market, live shares are traded daily amongst investors who buy and sell within trading hours. As a stock investor, if the company’s value rises, the value of your investment also goes up.
Here are some leading financial instruments traded in the Indian share market. These include:
- Equities or company stocks also known as shares
- Mutual funds
- Corporate and government bonds
Understanding the basics of the share market
In its most fundamental sense, the stock market is akin to any other market around the world. People, known as investors, convene (not physically) to make money by buying and selling shares.
For example, Amit purchases 200 shares of company A at Rs. 10 per share through Kotak Securities, a well-known and established broker. In doing so, he has invested Rs. 2000 in company A. Six months down the line, the price of each share goes up to Rs. 20 per share. At this point, the value of Amit’s investment is Rs. 4000. If Amit decides to sell his shares now, he could earn a nifty profit of Rs. 2000.
One of the intrinsic principles of making money in the share market is to buy low and sell high.
Types of stocks in the stock market
- Large-cap stocks: These are large and well-established businesses that have a robust presence in the market. Investing in large-cap stocks are considered safe and can be an excellent platform for conservative investors.
- Mid-cap stocks: These are companies that have the potential to become large — however, they hold greater risk than large-cap companies.
- Small-cap stocks: Start-ups and new companies fall under this category. This is considered to be the riskiest among the three. However, it can help to know that every large-cap company began as a small-cap company and hence these stocks could hold the potential of becoming successful in the long run. At the same time, these companies could also go bankrupt and thus, one must tread caution before investing in small caps.
Investing in the share market
To invest in the stock market, it is imperative to open a demat and trading account and link them with a bank account. The leading stock exchanges in India are the Bombay Stock Exchange and the National Stock Exchange. These exchanges are regulated by the Securities And Exchange Board Of India (SEBI).
Here are some key points to keep in mind before you begin your journey in the stock market.
- Defining your financial goals
- Understanding various financial assets
- Selecting the right asset based on your needs
- Begin investing regularly
- Achieving your goals
Trading in the share market can be a profitable way of increasing one’s wealth. To enable stock investments, BSE and NSE provide a level playing field for all investors to trade in company stocks. Knowing about a company’s financials, prospects of growth and other critical parameters can help you make sound investment decisions. Better still, you can also take the expertise of stock market experts to identify the right stocks and begin your investment journey.