In the present time when everyone wants to secure their financial future, the stock market plays an important role. It is not only a platform for investment but also an effective means of increasing wealth. But before investing in the stock market, it is important to know how this system works, what is the process behind it, and how you can make a profit from it.
What is the Share Market?
The share market, also known as the stock market, is a marketplace where shares of companies are bought and sold. When a company wants to raise funds for its business, it sells some of its shares to the public in the form of shares. We call this equity shares. These shares are bought or sold through stock exchanges, such as BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) in India.
By investing in the stock market, you become a partial owner of the company. For example, if you bought 100 shares of ABC company, you became the owner of a small part of that company.
Stock Market vs Share Market
Many people consider ‘share market’ and ‘stock market’ to be the same, but there is a slight difference between the two. The share market mainly deals with the shares of companies, while the stock market is a broader term that includes the trading of shares as well as bonds, mutual funds, derivatives and other financial instruments.
Two Main Types of Share Market
The share market is mainly divided into two parts:
1. Primary Market
The primary market is where a company issues its shares to the general public for the first time. This is called IPO (Initial Public Offering). Through this process, the company raises funds directly from investors.
2. Secondary Market
Once the company issues its shares, those shares are then transacted in the secondary market. Here investors buy and sell shares from each other. Stock exchanges like NSE and BSE are part of this secondary market.
Why Invest in the Share Market?
Investing in the stock market can be a smart financial move, if done with the right strategy. Following are some of its main benefits:
- Long-term wealth creation: Investing in the stock market can give you big returns over the years.
- Fight against inflation: Investing in the stock market protects your capital from the effects of inflation.
- High liquidity: You can sell your shares at any time.
- Ownership rights: You get a stake in the company, which can give voting rights etc.
- Digital trading platform: Now stock trading can be done from home through online medium.
What is a Stock Exchange?
A stock exchange is a platform where shares, bonds, derivatives etc. are traded. There are two major stock exchanges in India:
- NSE (National Stock Exchange)
- BSE (Bombay Stock Exchange)
SEBI (Securities and Exchange Board of India) regulates these exchanges, which ensures that trading is done with transparency and according to the rules.
How Does the Stock Market Work?
The process of trading in the stock market is completed in a few steps:
- Order placement: The investor places an order to buy or sell shares through his broker.
- Order transmission: The broker transmits the order to the exchange.
- Order matching: The exchange matches that order with the seller’s order.
- Trade confirmation: As soon as the deal between the buyer and the seller is finalized, both parties receive confirmation.
- Settlement and clearing: The shares are transferred to the buyer’s demat account and the money is sent to the seller.
This entire process is now automated and is completed within minutes.
How are share prices determined?
The share price mainly depends on demand and supply. When the demand for a stock is high, its price rises, and when the demand is low, the price falls.
- Apart from this, the following factors also affect the share price:
- Financial performance of the company
- Industry trends
- Economic policies
- International events
- Investor sentiment
How to Invest in the Stock Market?
1. Open a Demat and Trading Account
- To invest in the stock market, you need two accounts:
- Demat account: It stores your shares in electronic form.
- Trading account: With this account, you can buy and sell shares.
- These accounts can be opened through a stock broker (such as Zerodha, Upstox, Groww etc.).
2. Do Research
Before investing in any stock, it is important to check its balance sheet, earnings, dividend history, industry performance, and management image.
3. Select shares and place orders
Select shares based on your research and place orders on your trading platform to buy or sell them.
4. Monitor the investment
After investing, keep an eye on it from time to time and rebalance your portfolio according to market movements.
Functions of the stock market
- Means of raising capital: Companies raise capital by issuing shares.
- Investment opportunities: The general public gets a means to increase income.
- Providing liquidity: Investors can buy and sell shares anytime.
- Pricing: Fair prices are determined based on demand and supply.
- Regulation and transparency: Transparent trading process is ensured through SEBI.
What is traded in the stock market?
1. Shares (Equity)
It is a symbol of ownership of the company. It gives dividends and shares in the profit and loss of the company.
2. Bonds
It is a “debt” issued by the company, on which a fixed interest is received.
3. Mutual funds
It collects investors’ money and invests it in different asset classes. It is suitable for low-risk investors.
4. Derivatives
These are financial instruments whose value is derived from another asset, such as commodity, currency or stocks.
5. ETF (Exchange Traded Fund)
This is a type of mutual fund that is traded on the stock exchange. It tracks indices such as Nifty, Sensex etc.
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Benefits of Stock Market
- Wealth creation: With the right investment strategy, good wealth can be created in the long term.
- Transparency and security: All trading activities take place under the supervision of SEBI.
- Easy entry and exit: Shares can be bought and sold at any time.
- Portfolio diversification: Risk can be reduced by investing in different sectors.
- Dividend income: Many companies give regular dividends.
Risks and precautions
- High returns are possible in the stock market, but there are risks too:
- Market volatility can cause losses.
- Investing in the wrong stocks can put you in losses.
- Emotional decisions can cause losses in the short term.
- Some safety measures:
- Adopt a long-term approach.
- Invest in good companies.
- Balance the portfolio from time to time.
- Do not blindly trust any tip.
Conclusion:
The stock market is a powerful investment platform, which can lead you to financial freedom with prudence and proper planning. There is definitely a risk in it, but investment done with knowledge and discipline is rewarding. In today’s digital age when every information is available on your mobile, investing in the stock market is not only easy but also a wise move.
