Basics of Share Market
Why
do we Invest in Share Market?
To make sure
we have enough funds to be prepared for the future. Simply earning and saving
is not enough. Inflation – the price-rise beast – eats into the value of your
money. Investing is the answer to inflation. Read more about the difference
between savings and investing and how investing can help you beat the inflation
monster. To make up for the loss through inflation, we invest and earn extra.
This is the investment fundament. The stock market is one such investment
avenue.
Earlier, stockbrokers would converge around Banyan trees to conduct
trades of stocks. As the number of brokers increased and the streets
overflowed, they simply had no choice but to relocate from one place to
another. Finally in 1854, they relocated to Dalal Street, the place where the
oldest stock exchange in Asia – the Bombay Stock Exchange (BSE) – is now
located. It is also India’s first stock exchange and has since then played an
important role in the Indian stock markets. Even today, the BSE Sensex remains
one of the parameters against which the robustness of the Indian economy and
finance is measured.
A share market is where shares are
either issued or traded in.
A stock
market is similar to a share market. The key difference is that a stock market
helps you trade financial instruments like bonds, mutual funds, derivatives as
well as shares of companies. A share market only allows trading of shares.
The key
factor is the stock exchange – the basic platform that provides the facilities
used to trade company stocks and other securities. A stock may be bought or
sold only if it is listed on an exchange. Thus, it is the meeting place of the
stock buyers and sellers. India's premier stock exchanges are the Bombay
Stock Exchange and the National Stock Exchange.
Types
of Share Market
THERE ARE TWO KINDS OF
SHARE MARKETS – PRIMARY AND SECOND MARKETS.
Primary
Market:
This where a company gets registered to issue a
certain amount of shares and raise money. This is also called getting listed in
a stock exchange. A company enters primary markets to raise capital. If the
company is selling shares for the first time, it is called an Initial Public
Offering (IPO). The
company thus becomes public.
Secondary
Market:
Once new securities have been sold in the primary
market, these shares are traded in the secondary market. This is to offer a
chance for investors to exit an investment and sell the shares. Secondary
market transactions are referred to trades where one investor buys shares from
another investor at the prevailing market price or at whatever price the two
parties agree upon.
Normally,
investors conduct such transactions using an intermediary such as a broker, who
facilitates the process. Different brokers offer different plans.
What are the Financial Instruments
Traded in Stock Market?
Bonds:
Companies need money to undertake projects. They then
pay back using the money earned through the project. One way of raising funds
is through bonds. When a company borrows from the bank in exchange for regular
interest payments, it is called a loan. Similarly, when a company borrows from
multiple investors in exchange for timely payments of interest, it is called a
bond.
Mutual
Funds:
These are investment vehicles that allow you to
indirectly invest in stock market or bonds. It pools money from a collection of
investors, and then invests that sum in financial instruments. This is handled
by a professional fund manager.
Every mutual fund scheme issues units, which have a
certain value just like a share. When you invest, you thus become a
unit-holder. When the instruments that the MF scheme invests in make money, as
a unit-holder, you get money.
Derivatives:
The value of financial instruments like shares keeps
fluctuating. So, it is difficult to fix a particular price. Derivatives
instruments come handy here.
These are instruments that help you trade in the
future at a price that you fix today. Simply put, you enter into an agreement
to either buy or sell a share or other instrument at a certain fixed price.
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