How To Start Investing in Stocks: Basics of Share Market
Updated: May 4, 2022
Do you wish to become the owner of Tesla, Google, Microsoft, Apple, or Infosys? What makes you an owner of a particular company? Know very little about the market, and wonder how to get started with investing in stocks? Well, you came to the right place. This blog is the continuation of the 'best investment options for you' series. Where we will be discussing the share market in detail and how you can use it to create wealth in long term.
What is Share Market?
The share market is a way for people to invest their money in shares of a particular company. Shares are often interchangeably referred to as stock which denotes your ownership in a company. Shares are units of stocks. Share market is not just a place to make money, it can also be a learning experience for the traders and investors to understand what factors affect the economy and how a company can make a profitable business. Now the question arises why would anyone want to invest their money in a company?
Let's try to understand this with this example, You got $1000 in your bank account and you are not happy with the returns it is generating. Now you decide to start a tie-die business with this $1000. For this, you will either hire people to do the labor, marketing and finally sell the t-shirts online or offline. Take out all the cost you incurred from the revenue you generate and that will be your profit or return. But what if you don't want to do all this work. In this case, you can choose to take this $1000 give it to Google in return for buying a google share. Now if this company makes growth and does good business these google shares you own will give you proportionate returns. This is nothing but investing in stocks.
Types of Share Market:
The share market can be categorized into the primary market and secondary market based on the nature of the share.
1. Primary Share Market:
There's a buzz for LICs IPO which will be India's biggest IPO. Now if you are interested then you can participate in it via the primary market. The primary market is where a company first registers itself at the stock exchange to raise funds through shares.
Funds can be raised for multiple reasons. It is usually for expansion, and development but can also be for settlement of the debt. This venture is comparatively more profitable for the promoters of the company than to the investors as with the help of experts they have already priced their IPO at a premium.
2. Secondary Market:
In the secondary market, new securities of a company are traded after being sold in the primary market. At this point, investors are allowed to buy shares (invest in stock) from one another at the prevailing market price or at whatever price the two parties agree upon. An investor usually conducts such transactions through an intermediary or a broker, who facilitates the process.
Investors and traders carry out their trades in this market. It offers all sorts of options like intraday, delivery and also allows you to enter into futures and options contracts.
Basics of Share Market and How It Works?
The stock market is perceived by many as a scary, complex entity that is hard to understand. Here's some basic knowledge that may change your perception. A company lists itself on the primary market or the secondary market to raise funds or capital. The company has to provide details regarding its, financial status, and the stock being issued(IPO)
After a stock is listed, it can be traded on the secondary market. Here is where most of the trading takes place. Buyers and sellers meet here to conduct transactions to make money or reduce losses(no one is to reduce losses but to make investments or make a trade to generate profits). They have stockbrokers who act as intermediaries to increase their reach. Stockbroker passes the order to the exchange. Exchanges find sellers, and after receiving confirmation from the seller, the broker debits/credits your account. Since shares are based on perceived value, they fluctuate when trades are conducted. It follows the basic demand and supply theory.
Below are the steps for you to understand quickly how its work: -
1. An order is placed.
2. Brokers send details of orders to exchanges.
3. Exchanges require sellers to confirm.
4. A confirmation is sent to the broker by the exchange.
5. Money is exchanged when trading takes place.
Investing in the stock market might seem like a confusing avenue at first, but we must learn what it is and how it works. Understanding how to carry out trades when to buy and most importantly make an exit when it is necessary to book profits. Studying and analyzing the fundamentals of the company and with experience and patience one can end up making good investments and also good decisions.
To sum up, making a decision to start a SIP (systematic investment plan), or mutual funds or directly investing in stocks can be the key to the creation of wealth. It's a way to make your money work for you and hence should be a part of your financial planning. To break the bust the myth stock market is not the place to make quick and easy rather it is a place that will help you generate returns if you have the discipline and patience.