What is the stock market?

Why invest in the stock market?

We invest in stocks to build and grow our wealth in the long run. Numerous studies have shown that keeping your money in the right stocks for a long period of time (five to 10 years) can yield a return on inflation - and is a better investment option than real estate and gold.

The National Stock Exchange or NSE was established in 1993. Within a few years, trading on both exchanges shifted from an open cry system to an automated trading environment.

What is the stock market?

The stock market is where shares are issued or traded.

The stock market represents a unit owned by the company from which you purchased. For example, if you buy 10 shares of ABC Company for Rs.200 each, then you will become a shareholder of ABC. Here ABC sells shares whenever you want. By investing in stocks, you can fulfill your dreams of higher education, buying a car, building a house, etc. If you start investing at a young age and invest for a long time, the rate of return will be higher. You can tailor your investment strategy to the time you need the money

The key difference between the stock market and the stock market is that the former only allowed shares to be traded. The latter allows you to trade in financial instruments such as derivatives, bonds, mutual funds, as well as shares of listed companies.

The key factor is that the basic platform offers trading facilities that companies can use to trade stocks in the stock market. On a stock exchange, a person can only buy and sell the stock that is listed on it. So buyers and sellers meet in the stock market. The National Stock Exchange and the Bombay Stock Exchange are the major stock exchanges in India.

Types of stock market

Now that we understand the meaning of the stock market, an important aspect of the fundamentals of the stock market is that one can trade on one of the two market segments. In other words, there are two types of stock markets in India. These are primary markets and secondary markets.

1. Primary stock market

The primary stock market is the place where a company first registers for the purpose of raising money and issues a certain number of shares. The purpose of being publicly listed on a primary stock exchange is to raise money. Here the company is registered to issue a certain number of shares and raise money. If the company decides to sell its shares for the first time, this is known as an initial public offering.

Why does the company sell its shares to the public? The company needs capital or money for its expansion, development etc. and for this purpose it collects money from people. The process by which a company issues shares is called an initial public offering (IPO).

2. Secondary market

Once the company's new securities are sold in the primary market, they are then traded in the secondary stock market. In the secondary market, investors have the opportunity to exit their investments and sell their shares. Secondary market transactions mainly involve trades where an investor chooses to buy shares from a different investor at the prevailing market price.

Whichever price both parties agree to set or based on the prevailing market price, one investor will buy shares from the secondary market to another. Investors usually conduct these transactions through brokers or other intermediaries who can facilitate the process. Brokers offer these trading opportunities on different schemes.

How to invest in the stock market

First, you need to open a trading account and a demat account to invest in the stock market. This trading and demat account will be linked to your savings account so that money and shares can be easily transferred. Note that demat and trading accounts are different.

What is traded in the stock market?

Four types of financial instruments are traded on the stock exchange. They are shares, bonds, derivatives and mutual funds. They are as follows.

1. Shares

A share is a unit representing equity ownership in a corporation that exists as a financial asset providing equal distribution for any profits earned. So, when you buy shares, you buy the equity of the company whose shares you have bought. This means that if the company becomes profitable over time, dividends are paid to the shareholders. Traders often choose to sell shares at a higher price than what they bought.

2. Bonds

The company needs money so that they can undertake projects. They pay dividends to their investors from the proceeds of their projects. One way to raise capital for operations and other processes of the company is through bonds. When a company chooses to borrow money from a bank, they take out a loan which they repay with a regular interest payment. On a similar note, when a company chooses to borrow funds from various investors, it is known as a bond, which is also issued by timely interest payments. Take the following example as an explanation of how bonds work.

3. Mutual funds

Mutual fund investing is an important part of the fundamentals of the stock market. A mutual fund is an investment that allows you to invest indirectly in the stock market. You can find mutual funds for various financial instruments like equity, debt or hybrid funds. Mutual funds work by raising money from all the investors who fund them. This total amount is then invested in financial instruments. Mutual funds are handled professionally by fund managers.

Each mutual fund scheme issues units of specific value just like shares. When you invest in such funds, you become a unit holder in that mutual fund scheme. When the instruments that are part of that mutual fund scheme receive revenue over time, the unit-holder reflects that revenue in the form of net asset value of the fund or in the form of dividend payout.

4. Derivatives

The market value of shares listed on the stock exchange fluctuates constantly. It is difficult to determine the value of a stock at a certain price. This is where derivatives enter the picture. Derivatives are tools that allow you to trade at the price you set today. Simply put, you will enter into an agreement where you choose to sell or buy either the stock or any other instrument at a fixed price.