Stock / Share Market
by 5paisa Research Team Last Updated: 2022-10-07T15:34:53+05:30

Introduction

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.

In summary:

  1. An order is placed.
  2. The broker transmits the details of the order to the exchange.
  3. Exchanges look for confirmation from sellers.
  4. To confirm the order, the exchange informs the broker.
  5. 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:

  1. 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.
  1. 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. 
  1. 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. 
  1. 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.
  1. 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.

 

How Share Markets Are Regulated

Stock markets are common throughout most countries, and local monetary authorities or regulatory agencies regulate them.  Indian stock markets are regulated and supervised by the Securities and Exchange Board of India (SEBI). 

The SEBI Act of 1992 established SEBI as an independent body and gave it the power to inspect stock exchanges. Analyzing the market, the organization, as well as the administrative controls, is part of the inspection process.  

SEBI monitors the dealings of companies listed on stock exchanges. To ensure that all market participants are equally informed, the exchanges also set certain requirements, such as quarterly financial reports that must be filed on time and instant reporting of relevant corporate developments.

Trade suspensions and other disciplinary actions can result from failure to adhere to regulatory requirements.

 

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.

 

What are the financial instruments in the share market? 

The stock exchange trades four types of financial instruments. These include

  1. Shares

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.

  1. Bonds

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.

  1. 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. 

  1. Derivatives

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.

 

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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