Share market basics

Ever wondered what are shares and share markets all about? Let’s learn share market basics in this section. Each and every one of us has defined goals in life and have time limits by which we have to attain these goals. For example, you may plan to study abroad, buy a car, build a home, etc. To achieve these, you need to have a proper financial planning. By this, I mean investing has to become your habit. Financial assets or share markets provide high returns and so start investing at a young age and do it regularly for a long period of time.

You can invest in the share market for short term or long term depending on your needs. Based on your risk appetite, age and dependency, you can be a trader or investor in the share market. As markets are always associated with risk, you have to read carefully. The various investment options in the Indian share market today are equity, mutual funds, SIP, IPO, bonds, debentures, derivatives, commodity, currency, etc.

How to invest in share market?

Demat and Trading Accounts:

So what you have to do to invest in the share market? Firstly, open a demat and trading account online with a broker and link your bank account with that. Opening demat account is a very simple and easy process. Once you have your demat and trading account, you can start investing in the Indian share market. It’s essential for you to be familiar with the stock exchanges and their functions. Stock exchange is where buying and selling of shares take place. The stock exchanges are regulated by SEBI (Securities and Exchange Board of India). The 2 important stock exchanges of India are NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).

As per your goals, choose the particular financial asset for investment. Indian share market is the one stop destination for all your needs. If you are more concerned about regular income and preservation of capital, you can opt for debt instruments likes bonds. If you want capital appreciation and willing to take risk, equity is the one for you. Before you invest in a share, do a complete study of the company, its financials, future prospects of growth, etc. Below is what you have to do to achieve your goals:

Define your life goals

Define your life goals Learn about financial assets

Learn about financial assets Choose the respective asset as per your need

Choose the respective asset as per your need Start investing regularly

Start investing regularly Fulfill your goals

Hope you have got a basic idea of share market and so now it’s time to understand the different financial instruments.

Types of Stocks to Invest in Share Market

When you buy a share, you can be a common shareholder or preferred shareholder on the basis of ownership.

As a common shareholder, you are permitted to vote in shareholder meetings and you are eligible to receive dividends. If the company where you have invested goes bankrupt, you will receive the share of proceeds of liquidation only after all creditors and preferred shareholders have been paid.

As a preferred shareholder, you may not have voting rights. But you will get dividends before common shareholder receives it.

On the basis of market capitalization, you can invest in large cap, mid cap and small cap stocks. Market capitalization = share price*number of shares outstanding

Outstanding shares are the shares that can be bought and sold in public markets. I will explain this with an example. Say a company A has 100 outstanding shares and the share price is Rs. 20, then market capitalization of the company will be 20*100=Rs. 2000

Large cap stocks:

These companies are well established and have a strong presence in the market. Companies like TCS, Infosys and Wipro fall under this category. Investing in these companies are less risky.

Mid cap stocks:

These companies have the potential to grow big and are relatively riskier compared to the large cap companies.

Small cap stocks:

Start ups fall under this category and are highly risky compared to the above two. On the upside, they can become a runaway success overnight.

The next essential aspect you should know is IPO (Initial Public Offer). A company raises money from public through IPO. It sells its shares so as to bring in capital for its future development. Your yield is high when you invest in a share due to the power of compounding. In simple terms, the price of share you hold today may be Rs. 100, it can double or triple if you hold the share for a long time.

Key Financial Instruments Traded in Stock Market

Shares/ Equity:

Equities or stocks or shares give you ownership of a company. You can buy or sell shares through a broker.

Mutual funds:

Here, the money is pooled from many investors and then invested in various financial instruments. Investors are referred to as unit holders. Profit generated is distributed to unit holders in proportion to the units held by them.

Bonds:

These are fixed income instruments also known as debt instruments by which government or a company borrows money from investors at an agreed interest rate for a specific tenure. These are less risky when compared to shares.

Derivatives:

A derivative is a financial contract whose value is derived from an underlying asset. It can be used to mitigate a number of risks. Derivatives include forward, futures, options and swaps.

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