Basics of Share Market
Before starting to invest in stocks, learning about what the share market is and how it works will help. It is where shares of different companies are traded. In India, there are two primary exchanges; the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Investment is a key to your safe and secured future. However, to overcome the impact of inflation, investments in plain old financial instruments does not seem to be adequate. To get something extra out of your investments, Share market offers the lucrative opportunity of purchase and trade of securities such as stocks and options. PROFITMART empowers every eager investor to understand the working of the share market by providing information on stock market basics, how to trade, types of financial instruments, and successful trading strategies that offer better returns for you to become someone more than a regular investor.
Here are eight things to know about share trading
- Stock market: Let’s start with the basics. A stock market is just like the normal market you go to for buying vegetables. Except, this is for buying and selling shares and other securities. You have many players in the stock market – exchange, brokers, retail investors, day traders, institutional investors, foreign investors and so on.
- Primary Market: This is where companies offer some part of their shares for the first time to individual and institutional investors. Such offerings are known as the initial public offerings (IPO). This is the route adopted by private companies to convert to public companies on the share market.
- Secondary Market: After the IPO, the shares are traded on the secondary market. This allows investors to sell their holdings at the prevailing market prices. It also provides the opportunity to other investors who may not have received shares during the IPO
- Stock exchange: A stock market cannot work with an exchange. It acts as platform to bring together buyers and sellers. This is where companies come to get listed – when they issue shares in exchange for money. That sticker board you see with names of stocks and prices? Yes, that comes from the stock exchange. It is the common point between all the parties involved in stock trading.
- Shares: Stocks or shares are securities that are available for trade. When you buy a share, you essentially own a part of the company. This portion of your ownership is reflected in the shares you hold. When a company lists on the exchange, it issues a certain amount of shares. This could be 50% of the company’s ownership, or 75% or even 100. As a shareholder, you are an investor in the company. You profit when the company makes money. The share’s price is a reflection of the company’s financial value. It rises when the company flourishes or if there is positive news, and falls in case of bad news that may affect the company’s health. As a share trader, you hope to make profits by buying shares at a lower value and selling at a higher price. This is the most basic rule of equity investing.
- Brokers: There are lakhs and crores of investors in the country. Not all of them can crowd at the exchange to buy and sell shares. Imagine the mess! This is where brokers play a role. They are registered with the exchange and act as a medium between the investor and the exchange. You need to be registered with a broker or a brokerage firm to trade in the stock markets.
- Share trading: This is why you need to have a trading account before playing in the stock markets. All your trade orders for buying and selling shares will be routed through this trading account. The broker or brokerage firm will then transfer your trade orders to the exchange for processing. You can place orders for buying or selling online or on the phone. It is important that you do your homework and form a strategy before trading.
- Demat: A demat account is another prerequisite for share trading like the trading account. It is like a bank account for your share certificates. Just like how you can’t mail posts without an address, you can’t trade without a demat account.
How to Invest in the Stock Market?
Stock market is a money-earning platform for those who have the right knowledge to tap the movement of stocks and gain lucrative returns. If you wish to learn the working of stock market, and how to invest in it, then here are a few tips to follow:
- Identify your Investment Requirements:
Before placing the order on the stock market, investors must determine their needs and limitations. While determining the requirements, users must consider present as well as the future needs. The same rule is applicable while determining their limitations. Investors must list their incomes and deduct all their expenses along with debt obligations (if any) to find the investible surplus. An important factor that will determine the share market investment strategy is the risk aversion of the investors. Individuals who do not wish to take higher risks would prefer investing in fixed deposits and bonds. Many investors fail to consider their tax liabilities while investing.
- Determine the Investment Strategy:
After understanding the personal investment capacity, investors must analyse the stock market scenario to frame an appropriate investment strategy. Individuals must identify stocks that suit their needs. For example, if an investor wants an additional source of income, investing in dividend paying stocks is appropriate. For investors who want to grow their capital, choosing growth stocks is an accurate strategy.
- Enter at the Right Time:
Entering the market at the right time is one of the most important share market basics often overlooked by investors. Purchasing the identified stocks at the lowest price level will maximize the potential profits investors can earn. On the other hand, exiting the stock when it is trading at the highest price is profitable.
- Execute the Trade:
Traders can execute their orders either through offline or online share trading. They can place their orders on the telephone. If an investor chooses the offline method, he must ensure the broker has understood the order correctly to prevent any errors.
1. Online Trading on the Share Market: Orders are placed through an online trading account using a computer and internet connection. Investors who want to trade themselves find this service beneficial.
2. Offline trading on the Share Market: Using a stock broker or placing orders on the telephone is known as offline trading. The brokers place orders on behalf of their clients and provide confirmation on the execution of these transactions.
- Monitor the Portfolio:
Many investors make the mistake of investing and not periodically checking their investment portfolio. The stock exchange is dynamic and conditions are constantly changing. Tracking your investments regularly is important to exit and entry at the right time. Researching about the companies where traders have an interest is crucial to prevent, or at least minimize, losses in case of any extreme situation. However, this does not mean making decisions with every price rise or fall because patience is a vital characteristic for traders to profit through stock investing.
There are different kinds of stocks traded on the markets. Understanding these various shares before developing the investment strategy to suit personal requirements is recommended.