- What is a share?
- Benefits of a shareholder
- Things to remember when investing in shares
- How does the stock market work?
- Stock exchange in India
- Investing in stocks for beginners
- The concepts of bull and bear market
- Risks of stock market investing
What is a share?
In simple terms, share is the per unit capital of a company. If you buy a share, you buy a part of ownership in the company and become a shareholder. The share is tradeable on recognized stock exchanges from where you can buy and sell them. Shares are also called equity shares and they form the equity share capital of a company.
Benefits of a shareholder
When you buy equity shares of a company and become its shareholder, you can enjoy the following benefits –
- The right to vote in company’s matters and form the Board of Directors
- Receive dividends from the company which is the profit of the company divided among its shareholders
- Capital appreciation as the value of the shares rise
- Bonus shares when the profits of the company are distributed in the form of shares rather than cash dividends
- The privilege of rights issue wherein you can buy additional shares at a preferential rate
- Liquidity as shares can be sold easily on a stock exchange
- Ownership in a listed company
- Investing in a regulated manner since the share market is regulated by the SEBI
Here’s a complete guide on how to value stocks.
Things to remember when investing in shares
Investment in shares can be beneficial and profitable. However, before you invest, remember these three important things –
Share market investments are prone to high risks because the market is volatile. The value of shares fluctuates wildly. So, you should keep this volatility in mind.
Secondly, you need to invest through authorized stock brokers who charge a brokerage on the amount invested.
Thirdly, stock market investments should be done after you take out some time to research the performance of the stocks that you invest into. This would give you an idea of the performance of the stock and what to expect from it.
How does the stock market work?
To understand how stock markets work, the first thing which you should know is that there are two types of stock markets –
Primary market is where the stock is purchased directly from the issuer or company through IPO (Initial Public Offering) when the share is issued for the first time. Secondary market, on the other hand, is where an already issued stock is bought and sold between shareholders.
The stock exchanges of India, NSE, BSE, etc. are secondary markets. The price of the shares traded on the financial market depends on the demand and supply. If the demand is high, the price would be high and vice-versa.
Stock Exchange in India
In India, there are two stocks exchanges where stocks are bought and sold – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE Sensex is a free-float weighted stock market index of 30 of the most well-established companies listed on the BSE.
The Sensex, comprising of 30 of the most actively traded stocks in India, give an economic view of India. The National Stock Exchange, NSE, on the other hand, contains 7 major indices and 15 other indices.
The most popular index of NSE is the S & P CNX Nifty. Nifty 50, short for National Index Fifty, represents the free-float weighted average of 50 of the most well-established companies of India in 17 different sectors.
Investing in Stocks for Beginners
If you are starting your stock investing journey, here are some important tips to keep in mind –
- Invest with a long term goal for good returns
- Assess and understand your risk appetite
- Control your emotions in market fluctuations
- Expect realistic returns
To buy a stock, you would need a saving account linked with a trading account and a demat account. Buying and selling of shares would be done through the trading account and money for the same should be transferred to the trading account from your saving account. The bought stock would then be held in a demat account.
The Concepts of Bull and Bear Market
The terms bull market and bear market are commonly used to define the status of the share market. But do you understand what it actually means?
Bull market is that period, in months or years, during which the stock prices are either rising or are expected to rise. It applies to all types of securities being traded on the market like equities, commodities, etc. A bull market reflects positive sentiments and involves considerable volumes of share trading.
A bull market is indicated by the following indicators –
- Increasing GDP of the country
- Increase in share prices of companies
- Employment rate rises
Bear market, on the other hand, refers to the period when the stock prices are declining or expected to decline. It might last a few months or even years. The indicators of bear market are –
- Decreasing GDP
- Fall in share prices
- Decreasing employment rate
Bear market is, therefore, a pessimistic market where share trading volumes reduce.
Risks of Stock Market Investing
Stock trading is fraught with different types of risks which affect the returns which you can earn. These risks include the following –
|Type of risk||Meaning|
|Liquidity risk||The risk of not being able to sell the investment when needed|
|Business risk||Risk of business failure due to poor management, bad business decisions, etc.|
|Taxability risk||The risk of changes in the tax regime which imposes tax on investments|
|Inflationary risk||The risk of inflation which would increase the production costs|
|Regulatory risks||The risk of change in regulations which affect a particular company|
You should understand and keep these risks in mind before investing the stocks.
Though risky, stock market investments can give you attractive returns and help in wealth creation. So, understand the dynamics of the market and then invest.
For a complete guide to stock investing you can also refer to this course and build your knowledge before you invest in stocks.