People use to invest in the share market to build their wealth in the long run. If you are scared of investing in the share market, then you are not alone. Individuals with a very limited experience in the stock market are very scared of losing. If we have shares of a company we own a part in a company. That means if a company has 100 shared and you own 1 share then you own 1% share of that company.
“Poor People Save. Rich People Invest.”
When you start investing at a very young age and for a long time, the return will also be high. When you are buying shares of a company you are investing in a company. As the company will grow, then your share will also increase. When you sell these shares in the market you can earn profit. Share market does not always mean profit, sometimes losses are also seen.
Types Of Share Markets
Basically, there are two types of share markets in India. These are primary markets and secondary markets.
1. Primary Share Markets
In primary share markets first the company gets registered with the goal of raising money and issues a certain amount of shares. The company’s list the stocks publicly in order to raise money. If the company decides to sell its shares for the first time, this is known as an initial public offering.
2. Secondary Market
When a company sells new securities in the primary market after that they are traded in the secondary stock market. On the secondary market, investors get the opportunity to exit their investment and sell off their shares. Transactions on the secondary market mostly comprise trades as here one investor chooses to buy shares from a separate investor at the prevailing market price. Based on whatever prices the two parties agree to set or the prevailing market price, one investor will buy shares from another on a secondary market.
Typically investors conduct these transactions through a broker or other such intermediary who can facilitate this process. Brokers offer these trading opportunities at different plans.
Why at all a company sells its shares to the public?
Since a company requires capital or money to expand and develop itself, the company sells its shares in public and raises money from the public. The process by which company issues shares is called Initial Public Offer (IPO). Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional and retail investors. Initial public offerings can be used to raise new equity capital for companies, monitor the investments of private shareholders such as company founders or private equity investors, and to enable easy trading of existing holdings or future capital raising by becoming publicly traded. After the IPO, shares are traded freely in the open market at what is known as the free float.
What Is Traded On The Share Market?
Now let’s discuss financial instruments that are traded on the share market. There are four categories of financial instruments traded on the stock exchange. They are shares, bonds, derivatives, and mutual funds. They are as follows:
A share is a unit/part of a company which denotes the ownership of a particular percentage/part of the company. For example if the company sells out 100% shares and you buy 2% of the share then you are the owner of 2% part of the company. Also, once you buy shares in a company you are in equal distribution of any profits or losses earned. Hence, when you buy shares, you buy a stake in the company whose shares you have bought. This means that if the company becomes profitable over time, shareholders are rewarded with dividends. Traders often choose to sell shares at a price higher than which they purchased them.
Every company needs money in order to take new projects. They pay their investors from the profit earned from their projects. There are various ways of raising capital and one way is via bonds. When a company chooses to raise capital by borrowing money from a bank, they take a loan and repay the money through periodic interest payments. Similarly when a company chooses to borrow money from investors then this is called bond. The money borrowed through bond is also paid through timely interest payments. Take the following example as an explanation of how bonds work.
Suppose you are starting a new project and the project will earn money in 2 years of time. So you need some money to start a project. Suppose you acquire the required funds in the form of a loan from a friend and write down the receipt of the loan stating that you owe them ₹1 lakh which you will repay in five years with an interest rate of 5% per annum. Now your friend holds that receipt that means they have purchased a bond fom you by lending out some money to you. Since you have promised to pay the principal amount at a 5% interest, you do so and finally extinguish your principal repayment by the time the fifth year comes to a close.
3. Mutual Funds
Mutual fund investing is One key financial instrument part of share market basics Through Mutual funds you can indirectly invest within the share market. Mutual funds are of various types like equity, debt, hybrid funds etc. Mutual funds work by pooling money from all the investors that fund them. This aggregate amount is then invested in financial instruments. Mutual funds are handled professionally by a fund manager.
HOW TO INVEST IN SHARE MARKET
First, you need to open a trading account and a demat account to invest in the share market. You can open a Demat account on ICICI Direct and SAMCO. This trading and demat account will be linked to your savings account to facilitate smooth transfer of money and shares. There is an important difference between the two. Trading account is where you execute your buy and sell trades. The demat account is where your shares are held in custody. When you buy shares in your trading account, your bank account gets debited and your demat account gets credited. The reverse is true when you sell shares.
Bonus tip: How to Invest in the Share market?
Thus, stock markets are places where stocks and securities are traded. The first step for your investment in stock markets should be to open a Demat Account and a Trading Account with a reliable financial partner. A trusted brokerage platform can provide you with cutting-edge market reports, alongside facilities, like brokerage cashback on your Demat Account.
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