Share Market in India: Meaning, Types, Participants & Functions of Share Markets
In the share market, buyers and sellers trade publicly listed shares during set hours. People often confuse the terms ‘share market’ and ‘stock market.’ The share market focuses on shares, while the stock market includes various financial securities like bonds, derivatives, and forex. In India, the main stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). This article will further detail the share market, functions, and objectives.
What is the Stock Market?
The share market, also known as the stock market, is where publicly traded companies can raise capital by selling their shares to the public. These shares represent a portion of ownership in the company and give the shareholder certain rights, such as the right to vote on significant decisions and receive a portion of the company’s profits in the form of dividends.
Types of Share Market
There are mainly two types of share market –
- Primary Market
- Secondary Market
The primary market is where new securities, such as stocks or bonds, are first issued and sold to the public for the first time. In contrast, the secondary market is where securities that have already been issued in the primary market are traded among investors without the involvement of the issuing company.
Both the primary and secondary markets play important roles in the financial system. The primary market helps companies raise capital to finance their operations, while the secondary market provides liquidity for investors and helps determine the securities’ value. Together, they create a dynamic marketplace that drives economic growth and shapes our financial world.
Participants in the Share Market
The main participants in the share market include:
- Investors: Individuals or institutions that invest in stocks with the expectation of generating wealth through capital gains or dividends.
- Traders: Individuals or institutions that buy and sell shares and stocks frequently, often in the short term, to make a profit through market fluctuations.
- Stockbrokers: Professionals who act as intermediaries between buyers and sellers, executing trades on behalf of clients.
- Stock Exchange: A stock exchange is a platform where securities are traded between buyers and sellers. The primary stock exchanges in India are NSE and BSE.
- Regulators: Government bodies that oversee the share market, ensuring that it operates fairly and transparently and protecting investors from fraudulent market activity.
- Issuers: Companies that issue stocks and shares to raise capital and finance operations.
Now that we have basic share market knowledge, let’s learn how share markets work.
How Does the Stock Market Work?
A share market operates on the principle of supply and demand. The value of a company’s shares is determined by their demand. When there is more demand than supply, the price of the shares goes up, and when there is more supply than demand, the price goes down.
It provides a platform for buyers and sellers to come together and trade shares. Share trading in India involves buyers placing bids for shares at a specific price and sellers offering shares at a certain price. The transaction is completed once a buyer and seller agree on a price. Moreover, brokers and traders also play an essential role in the share market by connecting buyers and sellers and facilitating transactions.
Why Invest in Share Markets?
For investors, investing in the share market is an alternative source for financial growth through ownership of shares in publicly listed companies. The share market, or stock market, serves as a marketplace for buying and selling these shares. Here are key reasons why individuals and institutions engage in share market investments:
- Ownership in Profitable Companies: Shareholders own a portion of the company’s assets and earnings, enabling them to benefit from its profitability and growth.
- Capital Appreciation: Share prices can appreciate over time, allowing capital appreciation or an opportunity to book profit by selling shares at a higher value.
- Dividend Income: Some companies distribute a portion of their profits as dividends to shareholders, offering a steady income stream.
- Diversification: Investing in various stocks allows for portfolio diversification, spreading risk across different asset classes.
- Liquidity: The share market provides liquidity, allowing investors to buy and sell shares relatively easily compared to other investment avenues.
Advantages of Investing In the Stock Market
These advantages amplify a stock exchange’s significance and contribute to its continued relevance and appeal.
- Unlocking Financial Growth: Company stocks, when traded, offer a reliable pathway to sustained and stable long-term financial growth, facilitating business expansion.
- Seamless Market Participation: You can easily enter or exit the market by buying or selling shares at prices determined by supply and demand dynamics, making stock market engagement straightforward.
- Regulatory Safeguards: Investors benefit from a secure environment as listed companies must comply with stringent regulations and disclosure standards, ensuring a safeguarded investment landscape. Stockbrokers, too, follow guidelines set by SEBI.
- Assured Clearing Process: Investors are guaranteed a dependable and secure clearing mechanism when purchasing stocks, with the assurance that the acquired stocks will be safely deposited into their Demat Accounts.
Tips for Investment in the Share Market for Beginners
Consider the following steps to invest in all stock markets:
- Educate Yourself: Understand key terms in the share market such as stocks, dividends, and market indices. Diversify your knowledge across different industries.
- Define Financial Goals: Establish clear objectives and assess risk tolerance based on age, financial obligations, and investment timeline.
- Choose a Brokerage Account: Research and select a reputable brokerage platform that aligns with your investment goals, comparing fees and features.
- Thorough Research: Before investing, analyse company financials, industry trends, and overall market conditions. Stay informed through reliable financial news sources.
- Create a Strategy: Develop a disciplined approach by setting a budget and adhering to it. Avoid emotional decision-making and periodically review and adjust your portfolio.
- Implement Your Plan: Open the brokerage account and execute your investment strategy based on thorough research and a well-defined plan.
- Stay Informed: Stay updated with market changes and news that may impact your investments. Continuous learning is crucial for success in the stock market.
- Consider Professional Advice: Consult a financial advisor to refine your strategy and ensure alignment with your financial plan.
How to Start Investing in Share Market via smallcases?
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Investing in smallcases is quite easy and convenient. You can effortlessly buy and sell the entire basket of stocks or ETFs with a single transaction, saving much time and effort compared to selecting and buying individual stocks.
Moreover, smallcases are created and managed by professional investors and financial advisors. Therefore, you can begin investing in smallcases even if you know little about the financial market.
You can begin investing in smallcases by following the steps below:
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Why Do Companies Get Listed in the Stock Market?
Regardless of size or industry, companies opt for stock exchange listings to raise capital, boosting their overall company value. This capital infusion serves diverse objectives, ranging from straightforward expansion to acquiring machinery, especially pertinent for manufacturing entities.
Each company’s reasons for accumulating capital are unique. Consequently, when a company goes public, and shares are bought by the public, the funds generated are employed to enhance and develop the company’s business.
Functions of a Stock Market
The stock market fosters transparency, liquidity, price discovery, and equitable trading. It ensures that all participants access data for buy and sell orders, facilitating fair pricing. Efficient order matching is guaranteed, enabling qualified traders to execute orders at a fair price promptly.
Stock markets play a vital role in collectively determining share and stock prices through the interaction of buyers and sellers. Eligible traders are granted immediate order placement, and the market ensures fair execution.
Market participants, including investors, traders, speculators, and hedgers, engage in various strategies. Investors may opt for long-term holdings, traders swiftly enter and exit positions, market makers provide liquidity, and hedgers use derivatives for trading.
What are the Stock Market Indices?
The two main stock market indices in India are:
- Sensex
- NIFTY
Let’s look at what these two indices are in more detail below:
What is Sensex?
The Sensex was first introduced in 1986 with a base value of 100, and it has since become one of India’s most widely followed stock market indices. It refers to a stock market index measuring the performance of the top 30 companies listed on the Bombay Stock Exchange (BSE), the first stock exchange in India based on market capitalisation. It is often used as a benchmark index for the Indian stock market and reflects the overall performance of the Indian equity market.
What is NIFTY?
NIFTY, a blend of “National Stock Exchange” and “Fifty,” is a premier stock market index at the National Stock Exchange (NSE). NIFTY 50 tracks India’s top blue-chip companies, the largest and most traded in the country. NIFTY encompasses various indices, including NIFTY 50, NIFTY IT, NIFTY Bank, and NIFTY Next 50, and is part of the NSE’s Futures and Options (F&O) segment.
Understanding the stock market begins with a key understanding of these stock indices.
Things to Consider Before Investing in the Share Market
When purchasing shares in India, consider vital factors:
- Company’s Financial Health: Examine financial statements and annual reports, and assess sales, profits, and their consistent growth (3-5% annually) as positive indicators.
- Share Liquidity: Assess future selling potential by checking daily trade volume and the stock’s premium/discount compared to its actual value.
- Current Price Evaluation: Determine if the current share price aligns with actual value, considering similar quality stocks or companies of similar size and growth trends. Verify if the stock trades below book value per share.
- Dividend Payout Ratio: Opt for shares in companies with a stable dividend payout ratio, indicating profitability. This ratio reveals the company’s commitment to reinvesting capital for growth when high.
Tips for Beginners for Share Market Investing
Investing successfully in the stock market requires patience and discipline. Here’s a guide to help you:
- Define Your Objectives: Avoid the misconception of instant wealth through stocks. Recognise the high-risk, high-return nature of stocks. If you expect regular income, be prepared to wait for dividends, possibly for years.
- Assess Your Finances Realistically: Stock investment is not suitable for everyone. Ensure you have a significant disposable income after meeting living expenses. This safeguards against potential losses.
- Limit Reliance on Tips: Avoid relying solely on tips or advice from others, even friends or relatives. Unless you possess stock analysis expertise, base your decisions on thorough research into the company and its business prospects.
- Beware of Overnight Success Stories: Be sceptical of promises of overnight gains or quick wealth creation. Such scenarios are rare in reality. Any mention of “windfall profits” in advertisements should trigger doubts about the investment’s credibility.
Factors Affecting the Stock Market
Several factors can affect the share market, including:
- Economic indicators: Economic indicators such as gross domestic product (GDP), inflation, interest rates, and employment data can affect the share market details to a certain extent.
- Company-specific factors: Earnings reports, mergers and acquisitions, and product launches can affect individual companies’ share prices.
- Political events: Political events such as elections, policy decisions, and international conflicts can affect the share market. Political instability and uncertainty can lead to volatility in the market.
- Natural disasters and pandemics: Natural disasters, such as earthquakes and hurricanes, and pandemics, such as the COVID-19 outbreak, can have a significant impact on the stock market. These events can disrupt supply chains, reduce consumer demand, and affect business operations.
- Investor sentiment: Investor sentiment can also affect the share market businesses. Positive sentiment can increase demand for stocks, while negative sentiment can decrease demand.
- Geopolitical factors: Geopolitical events such as wars, political unrest, and trade disputes can create uncertainty and volatility in the share market. Favourable events may positively impact share market trading and vice versa.
Exploring the advantages of the stock market is essential when one wants to learn the basics.
To Wrap It Up…
The share market is a dynamic and exciting world that allows you to buy and sell publicly traded company shares. It allows you to invest in companies you believe in and potentially earn profits by buying and selling shares at the right time.
The stock market allows you to grow your money, but at the same time, it also comes with risk. Hence, always do your own research on the share markets before investing in them.
And if you’re looking for expert advice, you can invest via smallcase!
Frequently Asked Questions About the Stock Market
Yes. The stock or share market comprises various platforms facilitating the buying and selling of company stocks.
Each listed company offers shares at different prices. It can either be Rs. 1 or Rs. 1,00,000. By carefully evaluating your financial goals, you can identify companies that offer stocks at Rs. 500 or less and fulfil your investment goal.
A share represents the smallest unit of a company’s stock, signifying ownership in the company. Each stock unit is a share, which equals a portion of the company’s ownership.
A stock, or equity, symbolises partial ownership in a company. Termed as “shares,” these units grant the holder a share of the corporation’s assets and profits corresponding to their stock holdings.
Engage a stockbroker, be it a human or an online platform. Stock exchanges don’t facilitate direct stock buying; you need a broker. Whether buying or selling, you decide the investment and specify trade preferences through your chosen broker.
Stock trading involves buying and selling stocks, often associated with short-term investments by highly active investors. It poses challenges and risks, but education about the basics of the stock market can mitigate those risks and enhance one’s chances of success.
The demand and supply of a share in the market determines the stock price of that particular stock. Favourable factors drive demand for shares and, in turn, share prices.
All You Need to Know About Starting Your Share Market Journey
Share market investments can seem a bit tedious at first but smallcase is here to simplify all your queries and worries. Right from “Share market for beginner”, “Portfolio Diversification” to “short term investments” we’ve got all the tips, just a single click away –
