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Recently, many people are drawn to investing in the share market because they have heard the rags-to-riches stories of ace investors. But despite growing awareness of Indian stock markets, many investors do not have the knowledge to deal with its volatility.
Some of these investors view the share market as a way to become rich quickly, while others fear the horror stories of investors losing 50% of their portfolios. As a result, it makes sense that the sentiment around investment fluctuates between fear and greed.
In reality, share markets are more than rising and falling stock prices. Share market investing carries risks. But when approached with discipline, it is one of the most efficient ways to create wealth. To familiarise you with the nitty-gritty details of the stock market, let's understand about share market meaning, how it works, and its function.
Understanding Share Market
Before diving into the details of how the share market works, let’s discuss what the share market is.
The share market is the place where buyers and sellers trade publicly listed shares at specific times of the day. When you buy a share, you are purchasing fractional ownership of a company. For example, if you purchased 10 shares of ABC company for Rs. 200 each, then you are an ABC shareholder. This allows you to sell ABC shares at any time.
You invest money in the company when you buy shares. Your share price will increase as the company grows. You can make a profit by selling the shares in the market. Investing in shares can finance dreams such as higher education, a car, a house, etc. Share prices are affected by several factors. Prices can rise and fall at times. However, a long-term investment will negate the price drop.
A lot of people confuse 'share market' with 'stock market'. However, while the former allows you to trade only shares, the latter enables you to trade a variety of financial instruments, such as bonds, derivatives, and forex.
Share market definition is incomplete without mentioning the two types of stock markets:
● Primary Share Markets: A company enters the primary market when it registers at the stock exchange for the first time to raise funds through shares. A company's shares are then open for trading within market participants after an Initial Public Offering (IPO).
● Secondary Market: A company's securities qualify for trade on the secondary market upon selling its new securities on the primary market. Shares are traded among investors at the prevailing market price. Brokers and other intermediaries can facilitate these transactions for investors.
How does the Share Market work?
To raise funds or capital, companies list themselves on the secondary or primary market. A company needs to provide details about its business, financial status, and IPO (initial public offering).
Investors can trade stocks once they are listed on the secondary market. This is where most trading takes place. Traders and buyers conduct transactions in this market to make a profit or cut losses. People turn to stock brokers to extend the coverage of the fund, as there are thousands of investors. Upon receiving the order, they send it to the exchange. After finding a seller, the exchange sends a confirmation to the broker, who finally debits/credits your account.
The price of shares changes as trades is conducted. As with any other good, shares are priced according to their perceived value. Consequently, the stock's demand rises or falls. There are more buy orders as the stock's demand increases. As a result, the stock price increases.
- An order is placed.
- The broker transmits the details of the order to the exchange.
- Exchanges look for confirmation from sellers.
- To confirm the order, the exchange informs the broker.
- Money is exchanged when trading takes place.
Shareholders will own shares of a company in hopes of rising share values or receiving dividend payments. Stock exchanges facilitate this capital-raising process and receive fees from companies and financial partners for their services. Besides buying and selling securities on the stock exchanges, investors can also trade securities they already own.
What Are the Functions of a Share Market?
Now that you know what the share market is, let’s discuss the functions of a share market:
- Extending marketability and liquidity to existing securities: The stock market provides a ready and continuous marketplace for buying and selling securities. As a result, buyers and sellers can sell and buy shares on the platform.
- Pricing of securities: By analyzing demand and supply, stock markets help put a value on securities and provide instant information to both buyers and sellers.
- Safety of transaction: A stock exchange requires all participants to follow legal frameworks governed by the regulator and to comply with all regulations. Transactions are secure with such a system. SEBI regulates all trading in India.
- Spreading of equity culture: Listed companies have extensive information on the stock exchanges that the public can access. As a result of this data, the public can learn more about securities investments, leading spreading of greater ownership of the shares.
- Regulation and motivation of companies: A company that wishes to list its shares on a stock exchange must follow certain rules and regulations. For instance, every year they should submit all relevant financial data to a stock exchange. As a result, listing companies will carefully monitor their financial performance to protect their interests. This way, stock exchanges incentivize companies to improve their financial performance.
Types of Share Markets
What are the share market types? The share market constitutes the following type:
1. Primary Share Market: If a company registers for the first time, it enters this market. Also referred to as IFO, the company gains public registrations, and its shares get traded among the market participants.
2. Secondary Share Market: After the company’s securities are sold in the primary share market, they get traded on the share market. Investors can sell and buy shares at a prevailing market price.
Other types of share markets are:
• The equity market where stocks get traded with buyers, usually by a broker
• The derivative market, where trading is executed through 2 instruments primarily (the Future contract & Option contract)
What are the financial instruments in the share market?
The stock exchange trades four types of financial instruments. These include
An equity share represents ownership of a company. Dividends are distributed to shareholders whenever a company earns profits. Additionally, shareholders bear the company's losses.
It takes substantial capital for a company to undertake long-term and profitable projects. Bonds are one way to raise capital. This bond represents the company's "loan". In the form of coupons, the bondholders receive interest payments from the company on a timely basis.
- Mutual Funds
The purpose of mutual funds is to pool the money of a large number of investors so that the collective capital can be invested in a wide variety of financial instruments. Various financial instruments are available as mutual funds, including equity, debt, and hybrid funds.
Mutual fund schemes issue units with a certain value, similar to shares. You become a unit-holder in such funds when you invest in them.
A derivative security is an investment avenue that derives its value from the underlying security. Derivatives include shares, bonds, currencies, commodities, and more. A derivatives contract is an agreement in which the buyer and seller have differing expectations of the price of an asset and, therefore, enter into a "betting contract" regarding its price.
Why invest in the share market?
By the share market definition, the primary motive of investing in share market is to ensure every individual meets their future financial goals. A rise in inflation makes it insufficient for people to earn & save. To deal with price increases because of inflation, investments are imperative. The share market is a popular investment avenue due to the following reasons:
• Offers high liquidity to investors as average volumes are high
• Various financial instruments like mutual funds, bonds, shares, derivatives, and more
• Ownership offers investors the right to vote besides their contribution in the business’s strategic movement
• Investors can enjoy high returns In shorter time frames
• The trades are executed on the digital platform that offers the most convincing opportunities for investors
So, the share market investments offer several advantages. However, investors should always be cautious. In simple words, gaining an insightful understanding gives you a foundation to start investing in this market.
How to Invest In The Share Market?
Let’s learn about the share market investing process:
Investing in the Primary Share Market
Initial Public Offerings (IPOs) are used to invest in the primary share market. A company counts and allots shares based on demand and availability after receiving investor applications for an IPO.
Investing in the Secondary Share Market
Step 1: Open a Demat and trading account
To invest in the secondary market, you need to start with a Demat and a trading account. To facilitate seamless transactions, both accounts should be linked to a preexisting bank account.
Step 2: Select the shares
Select shares you wish to sell or buy from your online trading account. To purchase those shares, you must have the necessary funds in your account.
Step 3: Select the price point
Decide what price you want to pay for the share you wish to purchase or sell. Let the buyer or seller respond to your request.
Step 4: Complete the transaction
After the transaction, you either receive shares or money for your stocks.
You should pay attention to the time you remain invested, as they depend on the financial goals you wish to accomplish.
How are Shares Priced in the Market and Who Determines the Price?
According to share market meaning, the firm’s shares start to trade in Public on the stock exchange. Soon after that, the price gets determined by the supply & demand of shares. In case of favourable parameters, the demand for shares is raised. As a result, it leads to a higher share price. This is how shares are priced in this market.
Why do companies need shares and why do they have to list it?
What is share market and how it works? Well, companies require maximum capital while expanding their business operation. In such circumstances, the best way to approach money is via the stock market. As investors pay money to that firm, they get the ownership of a small portion of the company. So, if the share value rises, the value owned by investors will also become higher.
An organisation can list shares by selling them to the Public via IPO. But in such cases, the company needs to follow the rules & regulations of SEBI.
What is a stock exchange?
In simple words, a stock exchange is a forum where stocks, bonds, and derivatives (or other securities) are traded and purchased. A stock exchange platform trades different financial instruments. It simplifies the process of selling or buying shares and securities. The Securities & Exchange Board of India, or SEBI, regulates these activities.
According to share market meaning, the primary stock exchanges are BSE and NSE. But according to SEBI, there are a total of seven recognised exchanges in India.
What are Sensex and Nifty?
The primary stock markets, both BSE and NSE, use an index to measure market performance. For BSE or Bombay Stock Exchange, Sensitive Index or Sensex measures the performance. On the other hand, NSE or National Stock exchange uses Nifty to assess the market.
In short, Sensex and Nifty are benchmark index values that measure the stock market’s overall performance. Nifty is the Index used by the National Stock exchange, and Sensex is the Index used by the Bombay Stock Exchange.
How to Make Money in a Stock Market?
According to share market meaning, the stock or share market is a fundamental aspect of today’s economy. So, as a beginner, you need to learn the ins and outs of making money in the share market. Besides patience and discipline, you need to conduct extensive research and analyse markets accordingly. Unless and until you understand the volatility factor, taking a decision becomes challenging.
If you want to improve your skills, you must pay attention to financial instruments and their advantages, like ETFs, shares, Futures & Options and more. Also, seek different opportunities available in this market via order types, including delivery, intraday, margin trading, etc.
THINGS YOU NEED BEFORE YOU INVEST IN STOCK MARKET
Here’s a list of things you need to understand before you plan to invest in the share market:
• Take a look at the whole financial situation to figure out your goals & risk tolerance
• Assess and understand your investment goals
• If you want to buy securities like bonds, mutual funds or stocks, understand the fact that you may lose some money
• Determine your risk appetite before making any investment decision
• You could mitigate the risks of investing by diversifying your investments (choose the right investments within the asset category)
• Smart investors have an emergency fund. So, in case of sudden unemployment, ensure that you have six months of income in savings
• If you have a loan on a high-interest credit card, immediately pay the balance in full
• Dollar-cost averaging helps you protect yourself from risks (it is an effective investment strategy you may consider)
• Refrain from borrowing to invest in the stock market
In today’s era, investing in the share market is one of the rewarding ways to generate wealth. But you need to follow a strategic investment tactic to accomplish long-term financial goals.
Open Free Demat Account
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More About Stock / Share Market
Frequently Asked Questions
Open a brokerage account with one of the many brokerage firms and you can buy and sell stocks on your own. For more guidance, follow the steps mentioned above.
Bajaj Finserv Ltd., Infosys Ltd., and Jubilant Food Ltd. are some shares you can invest in as a beginner.
To invest in the share market:
● Determine your investment requirements
● Identify the investment strategy
● Make sure you enter at the right time
● Complete the trade
● Keep an eye on the portfolio
The stock market is a collection of markets where a company’s ownership or stocks are sold and bought. It allows organisations to raise money by selling stocks to the Public. If you want to learn share market, you may take free classes online.
First, you need to divide the amount in the stock by current share prices. If the broker allows you to purchase fractional shares, the result is the number of stocks you may purchase. If you buy just full shares, do so by rounding it up to the nearest whole number.
The best shares that a beginner can buy are Infosys Ltd., Bajaj Finserv Ltd., and Jubilant Food Ltd. These shares are the most appropriate ones for newbies in this field.
While stocks and share both seem similar, they are different from one another. A share is a financial instrument representing an organisation’s part ownership. On the other hand, a stock is a financial instrument which represents one or more companies’ part ownership. The value of two shares of one organisation might be equal to one another.