Basics of Share Market for Beginners
The share market is the mechanism through which the collective savings of people are channelised into various investments. These can be in the form of bonds, stocks or debentures.
Share market facilitates the pooling of capital for providing funds for building new projects. It also helps people put their money in different ventures for higher returns.
What is the share market?
The share market is where companies raise funds for their business activities. When you buy shares, you are purchasing a small part of the company.
The share market is also referred to as the equity market. It is where investors buy and sell shares in public companies.
A stock exchange is a physical or electronic place where buyers and sellers gather to trade their stocks.
The stock exchange lists all the different companies available to trade, along with their current share prices. This allows us to share our opinions on how much we think it's worth investing in them by buying or selling their stocks.
One significant difference between the share market and other markets is that it is possible to buy just one stock instead of purchasing an entire commodity or service.
The share market is a way for companies to raise money. It's also an opportunity for people to invest in businesses and make some money.
The share market is made up of investors buying and selling shares of stock. What are shares? They are slices of ownership in a company, like the pieces of a pie. The more shares you have, the more significant portion of the pie you get.
What are stocks? Stocks are just another word for shares. When someone refers to "the stock market", they talk about the place where stocks are bought and sold.
How to invest in shares?
There are two ways to buy shares:
Buying through a broker: A broker facilitates buying and selling of shares for you. They can be anyone from someone willing to buy and sell stocks to someone who has their own branch offices all over India or even someone who works from their home or office.
Buying directly from the exchange: In this case, you don't need a broker because you can buy directly from the exchange itself. They will charge a small transaction fee, but the entire process is smooth and straightforward.
Learn more about: How to invest in share market for beginners?
Decide how much you want to invest
Research companies before buying their shares. See what their share price has done recently, compare it with its peers, look at their balance sheet and cash flow statement, read their latest annual report. Check websites like CNBC TV18, Bloomberg TV, Money Control, ET Now for market updates and business news.
Weigh the risks against the potential returns
Think about your goals for this investment – are you planning to use it for retirement? Or do you plan to use it as a short-term investment? How much risk are you willing to take? What is your time frame? If you need the money in less than five years, avoid highly volatile stocks with high price swings.
If you are investing for the long term, it could be worthwhile to take some risks by choosing growing stocks that are not yet stable or mature. You can also select quality companies that have proven themselves over time rather than jumping first into the large-cap funds.
Diversify your portfolio and analyse various asset classes
Fundamental analysis is done by studying a company's financial statements, industry reports, government policies and regulations, industry trends, and so on. This analysis helps in determining whether an investment opportunity will fetch good returns or not.
Things to consider when buying shares
There are several things to consider when buying shares in India. Before you invest in the shares, you need to know what the company is, how it is doing, and whether you can invest in that particular share.
Things to consider:
- Company's financial health: Look at the company's financial statements, read the annual report, and note the sales, profits, and growth in sales for the last few years. If sales are growing consistently (3-5% annually) and profits are also increasing (by the same amount), then it's a good sign.
- How liquid is the share: If you plan to sell the shares in the future, check that stock's liquidity. You can check this by seeing how many shares are traded daily and how much premium/discount is there in stock price from its actual value.
- Current Price: Find out if the current price is cheap or expensive compared to its actual value or other stocks of the same quality or same size companies with similar business lines or growth trends. Also, check if the company is currently trading below book value per share (i.e., Rs 70/- per share when Book Value per Share is Rs 80/-).
- Dividend Payout Ratio: investors are looking for profitable companies. It's best to purchase shares of companies that have a stable dividend payout ratio. The Dividend Payout Ratio gives information about how much money a company has used to pay dividends to its stockholders. If the ratio is high, the company is more willing to reinvest its capital for growth.
Know What are Shares?
Tips for investing in the share market
The key to investing in the stock market is to be patient and disciplined. Here are some pointers on how to achieve that:
- Be clear about your objectives- Many people buy shares hoping they will become instant millionaires. Remember that compared with other investments, stocks are high-risk, high-return instruments. If you are looking at the stock market as a means of regular income, you may have to wait for years before you start getting dividends.
- Be realistic about your finances- Stocks are not an investment option for all sections of society. Before buying shares, investors should have a substantial amount of disposable income available after meeting their monthly living expenses. This ensures that the investor can afford to take losses if any occur.
- Don't rely too much on tips or advice from others- Many people earn huge profits by investing in stocks based on information from others - often their friends or relatives. Unless you have expertise in analysing stocks, it is better to support only after proper studies and research on the company concerned and its business prospects.
- Please don't fall for overnight gains or quick wealth creation stories because they rarely happen in real life. The mention of "windfall profits" in adverts should always raise doubts regarding the trustworthiness of the product being invested in.
Buying shares in India is a process that can be done online or offline. While the former is the easiest, it should be noted that investing online does not ensure returns, and you should always do your research and speak to investors before you part with your hard-earned cash.