Share Market Basics - A beginner’s guide to share markets
A stock market is a place where publicly listed shares and other financial securities are traded by buyers and sellers. Equity shares distribute ownership rights of a publicly listed company to the general public. Other financial securities traded in the stock market include derivatives products, bonds, etc. This article will look at some share market basics for beginners.
One of the first questions beginners ask is why a company would want to give up its ownership rights. The short answer is – to run its operations. The long answer is – companies require extra capital when they expand or scale up the business.
In order to raise capital from the general public, a company may decide to list itself on a stock exchange. It issues shares in the public through an Initial Public Offering (IPO), which is simply termed as going public. The general public is then allowed to buy and sell the shares issued in the market. Buying a share makes the investor a shareholder of the company. The shareholders of the company enjoy various rights, benefits, and advantages under its memorandum. They are part owners of the company and are entitled to share the company's profit.
What impacts share prices?
Share prices are determined by the market. The basic underlying principle of the change in price is that of demand and supply. The more the demand, the higher the price and vice versa. Normally, the share price goes up in the following cases:
a) A company earns good profits
b) It is growing fast
c) A piece of news breaks that affects the company positively
There are several other key factors that impact or determine a company's share price.
Difference between trading and investing
The primary difference between trading and investing is the time period of buying and selling the shares. Trading is a short-term activity – traders buy and sell the shares within minutes, days, or weeks. Investment, on the other hand, involves buying the shares and holding them for long time periods, sometimes tens of years.
Moreover, trading churns money rapidly, whereas investment is about buying good-value shares and retaining them to benefit from higher returns.
Stock Exchanges in India
A stock exchange is a marketplace where stocks are bought and sold. In India, the primary exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). All the exchanges adhere to Securities and Exchange Board of India (SEBI) regulations. SEBI is India’s stock market regulator. Trading shares is a risky activity, and SEBI is responsible for maintaining the integrity of the market and protecting the interests of the investors. It has the power and the responsibility to develop and regulate markets.
The stock exchanges offer investors a platform to buy and sell shares and securities. These exchanges are standardised and regulated. Along with providing investment opportunities to investors, these exchanges also offer a platform to companies for raising capital.
A share market is a good place for investment and to earn periodic returns. However, while you can earn big profits, you may also make dire losses. Hence, before entering the market, it is essential for investors to have a basic understanding of the markets, knowledge of shares and companies, knowing the risks involved and financial goals to make informed investment decisions.
What are IPOs?
When a company sells shares to the general public for the very first time to raise funds, it is called an Initial Public Offering (IPO). Before the IPO, shares of the company are traded in the primary market.
After the IPO, shares of the company are traded in a secondary market. This is called an exchange. Here shares of the company that are already owned by the general public are bought and sold.
What are bull markets and bear markets?
A bull market is a term used when the shares or the overall market is in a constant upward trajectory. It is a condition in the financial market when the prices are constantly rising or are expected to rise. It is generally when stock prices rise by 20% after two declines of 20% each. Bull markets may last for months or even years. Bull market signifies a period of optimism and growth in the economy or the markets.
The opposite of a bull market is a bear market. It is a condition when the prices are constantly falling. A bear market is termed when the prices fall by 20% or more. In these cases, generally, investors are pessimistic about the growth of the company or the economy at large.
What is online trading?
Online trading facilitates buying and selling of financial securities, like shares, over the internet by investors. Stockbrokers now have gone online to offer their trading platforms to investors. They provide online trading of financial instruments such as shares, commodities, derivatives, bonds, ETFs, etc.
The traditional method of buying and selling shares by investors by calling their brokerage firm and requesting them to make a trade on their behalf is time-consuming and hectic. Now with online trading, traders themselves can execute orders and buy and sell shares on their own with the use of a smartphone. Investors get real-time trading options and information about the companies, along with their offers. Even expert recommendations can be accessed online to help make an informed decision.
The requirement of trading online is similar to that of the traditional way of trading shares. If one has a basic knowledge of the share market, trading online will not be that different.
To begin trading, one should have a trading account with a stockbroker and a Demat account with a depository. The trading account should be linked to the bank account so that funds can be transferred. Every order executed in the share market is settled within t+2 days, where ‘t’ is the day when transactions are made. This means the buyer has agreed to buy the shares from the seller at a mutually agreed-upon price. The settlement of these trades must complete and reflect in the accounts of both buyer and seller within two working days from day one or day ‘t’.
How to reduce risk in share markets?
In order to reduce risk, investors should diversify their investments among various financial instruments, companies, and sectors. The aim is to maximize profit by investing in different spheres such that changes in market conditions affect the different spheres differently. Maximum investment professionals concur that though diversification doesn’t shield an investor from loss, it minimizes the risk to a great extent.
For example, your portfolio consists of shares of a ride-sharing company. Any bad news, such as a strike by drivers, can lead to a drop in the share prices, which will subsequently affect your portfolio value. But if you have a few shares in a ridesharing company and a few in, say, an airline company, then the strike by drivers will in no way affect the share value of the airline company. This means even though you may experience a loss due to one company, it can be offset by profit in some other company. Contrary to this example which affected the share prices of an entire sector, some risks can be company specific as well. Let’s say instead of a strike by drivers, the CEO of the ridesharing company you had invested in leaves the company, then this impacts the company negatively and thus leads to a fall in its share price. Other ridesharing companies in the same market won’t suffer a loss. In fact, they may even see a rise in share price since people may shift from the former to the competitors.