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. It has a history that goes way back to the 1800s.
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.
If you’ve heard recently that Indian markets are at record high, you can click here and read about the stocks that propelled the Sensex to new highs.
In 1993, the National Stock Exchange or NSE was formed. Within a few years, trading on both the exchanges shifted from an open outcry system to an automated trading environment.
This shows that stock markets in India have a strong history. Yet, at the face of it, especially when you consider investing in the stock market, it often seems like a maze. But once you start, you will realize that the investment fundamentals are not too complicated. One of the basics of investment fundamentals is financial planning. You can read all about the importance of financial planning here.
So Let’s Start With Share Market Basics.
WHAT IS SHARE MARKET?
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. Click here to start your journey on derivatives market.
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. Click here to understand how either of the stock market works.
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. You can read about the 6 factors to consider before investing in an IPO here.
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. You can visit this pageto understand the different plans that Kotak Securities has to offer. Or, you can click here to read about the features that Kotak Securities has to offer.
HOW TO BUY SHARES ONLINE?
First, you need to open a trading account and a demat account. This trading and demat account will be linked to your savings account to facilitate smooth transfer of money and shares. Note that demat and trading account are different and you can read about the difference between them here.
We offer various trading tools to buy and sell shares that caters to our diversified set of traders and investors :
Online trading: Want to take charge of your stock investing decisions? Our robust online trading system will help buy shares online with sheer ease and convenience. To buy shares online, log in to your trading account using your User ID, Password and Security Key/Access code.
KEAT PRO X: A jet speed online trading software to buy and sell shares online and real time
Kotak Stock Trader: Just tap and buy stocks on the go using our mobile trading app on your smartphone.
Dealer assisted trading: Looking for some guidance to buy a stock? This is an assisted trading service which will help you make an informed investment decision.
Call and Trade: Don’t have access to your laptop or computer. You can call us and buy shares over the phone.
Fastlane: A light and fast Java based trading platform that makes share trading easy even on slow and age old computers
Xtralite: An extra light and a superfast trading website that’s works best even if you have a slow internet connection.
WHAT ARE THE FINANCIAL INSTRUMENTS TRADED IN A STOCK MARKET?
Now that we have understood what a share market basics and investment is, let us understand the four key financial instruments that are traded:
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.Click here to read about the importance of tracking bond yield movements.
For example, imagine you want to start a project that will start earning money in two years. To undertake the project, you will need an initial amount to get started. So, you acquire the requisite funds from a friend and write down a receipt of this loan saying 'I owe you Rs 1 lakh and will repay you the principal loan amount by five years, and will pay a 5% interest every year until then'. When your friend holds this receipt, it means he has just bought a bond by lending money to your company. You promise to make the 5% interest payment at the end of every year, and pay the principal amount of Rs 1 lakh at the end of the fifth year.
Thus, a bond is a means of investing money by lending to others. This is why it is called a debt instrument. When you invest in bonds, it will show the face value – the amount of money being borrowed, the coupon rate or yield – the interest rate that the borrower has to pay, the coupon or interest payments, and the deadline for paying the money back called as the maturity date. If you’re looking for a bond option that helps you save tax, you can read about tax free bonds.
Secondary Market:
The share market is another place for raising money. In exchange for the money, companies issue shares. Owning a share is akin to holding a portion of the company. These shares are then traded in the share market. Consider the previous example; your project is successful and so, you want to expand it.
Now, you sell half of your company to your brother for Rs 50,000. You put this transaction in writing – ‘my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has just bought 50% of the shares of stock of your company. He is now a shareholder. Suppose your brother immediately needs Rs 50,000. He can sell the share in the secondary market and get the money. This may be more or less than Rs 50,000. For this reason, it is considered a riskier instrument.
Shares are thus, a certificate of ownership of a corporation. Thus, as a stockholder, you share a portion of the profit the company may make as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value. There are different types of stocks and you can read about them here.
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.
This is either through a rise in the value of the units or through the distribution of dividends – money to all unit-holders. Start your journey into mutual funds by clicking here.
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. If you want to understand how to buy or sell a futures contract you can read about it here.
Stock markets are risky. Hence, they need to be regulated to protect investors. The Security and Exchange Board of India (SEBI) is mandated to oversee the secondary and primary markets in India since 1988 when the Government of India established it as the regulatory body of stock markets. Within a short period of time, SEBI became an autonomous body through the SEBI Act of 1992.
SEBI has the responsibility of both development and regulation of the market. It regularly comes out with comprehensive regulatory measures aimed at ensuring that end investors benefit from safe and transparent dealings in securities.
Its basic objectives are:
- Protecting the interests of investors in stocks
- Promoting the development of the stock market
- Regulating the stock market
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