A lot of people enter into the stock market to expand their income sources. However, they may lack knowledge of the market’s terminologies. For a complete beginner, understanding terms like ‘Market Cap’, ‘Dividend’, and ‘equity’ just to name a few can be challenging or even overwhelming.
An aspirant investor should get familiar with these terms before his foray into the market. In this article, we will discuss the share market and provide all the details you need to know before you start investing.
What is the Share Market?
In simple terms, a Stock or securities exchange, often referred to as the Share Market is a platform where people can buy and sell publicly listed company shares.
It is a platform for companies to raise capital by selling their shares to investors who in turn will give them money to grow and expand. These shares represent ownership stakes in the companies. In return, as the companies grow and gain more profits, the investors get a slice of it.
Types of Share Markets
- Primary Market
In the Primary Market, the investors can buy securities directly from the companies or the government for the first time. This process is called an Initial Public Offering(IPO), you might have heard the term being thrown around by the media often.
This is where securities such as stocks, debentures, and primary bonds are created and issued for the first time by the government or companies to raise funds. In the financial market, this is where the securities are sold and bought for the first time.
- Secondary market
The Secondary Market is often commonly associated with the Stock Market.
After securities are put up for sale in the Primary Market, they are traded in the Secondary market. Here, investors have the opportunity to purchase and sell shares directly among themselves at the current market price.
How Does The Share Market Work?
The Share Market works similarly to a medium where you can buy or sell shares and invest. The Share Market’s operational procedures entail the following steps.
- As mentioned before, first the companies put up their shares in the Primary Market for interested investors to apply for the IPO and then buy the shares. Companies generate capital by selling their shares to buyers. Once the IPO is done, these shares get officially listed on stock exchanges.
- The officially listed shares are now available in the Secondary market, where the actual trading happens. The investors who purchased the shares in the IPO can now sell their shares if it’s profitable.
- Here comes the Stockbrokers. Stockbrokers could be individuals or a company. They facilitate the trading by creating a Demat Account and Trading Account for you. And for this, they charge you a small brokerage fee.
Essential Share Market Terms and Their Explanation
Shares: Also known as stocks or equities. Shares represent partial ownership in a company. If you have shares in a company, you are a partial owner.
Dividends: A portion of the company’s profits is distributed to you because of the shares you hold in that company.
Blue-chip Stocks are the shares of big, financially stable companies such as Apple or Coca-Cola. They are considered safe bets for long-term investing.
Bonds: To put it simply, Bonds are nothing but a way for a company to get a loan. Instead of going to the bank for the loan, the company acquires money from the investors who buy their bonds. In return, the company gives them interest based on their investment.
Pros and Cons of Investing in the Share Market
- Potential of High Returns: Records show that investing in the share market offers superior returns compared to other investment avenues over a long period of time.
- Liquidity: Stocks are highly liquid assets. So they can be easily bought and sold on the stock exchange, enhancing portfolio management.
- Tax benefits: In the Indian Stock Exchange, investments up to 12 months are tax-free, and long-term capital, which are investments that are held for more than 12 months, incur a tax rate of 15% plus a 3% cess which is really not bad compared to other investment platform. Additionally, any capital losses can be carried forward for up to eight financial years for offsetting against future gains.
Cons-
- Volatility and Risk: Gains made via stocks or mutual funds come with the possibility of getting steady returns but on the flip side, they can also be highly volatile. Remember to do your research and invest accordingly.
- Market Uncertainty: Economic, political, and global events can have a huge impact on stock prices and the market, leading to increased volatility and making it challenging for investors to predict future returns accurately. Be especially wary of embargoes, wars, or economic blockades!
- Lack of Diversity: Many investors often go all in on a brand-new stock or fail to diversify their portfolio across various sectors of the economy. Remember to always diversify your holdings not just between companies but also between sectors, i.e. don’t put all your eggs in one basket!
Charting Your Course: A Final Reflection
With all that out of the way, you are now ready to set course for the next big stock! Before you become the next Warren Buffet, keep in mind that you need a lot of practice to get consistent returns through the Stock Exchange.
If you follow through the tips mentioned here and keep realistic expectations, you should have a diverse portfolio of stocks that will hopefully pay dividends for a long time. Just remember that investing is a long road and there are no shortcuts to the finish line. Good luck!
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