What is Share Market? It is a simple but one of the most precious and subjective question in our financial life. Our success in the stock market also largely depends on how much we know the stock market.
When we hear about the stock market from others, when we come to know that it is a system where huge profits can be made even in a day, our curiosity reaches its peak.
But the truth is that the potential for damage here is equally high. Therefore, before starting in the stock market, we should know in detail what is the share market.
If you are a beginner in the stock market or if your knowledge is not working properly to invest in the stock market then you must read this post. In any field, understanding of the subject is absolutely essential for our success.
People have a personal explanation about “what is share market?”. I have seen many people in our society explaining the stock market as a game of gambling. They have a negative attitude towards the stock market.
They tell you stories of some terrible losses related to the stock market.
This is only due to their ignorance. They either do not know anything about the stock market or they have done a lot of damage in the stock market due to lack of proper knowledge.
Yes ! It is certain that there is a risk in investing in the stock market. But the truth is that the chances of making money here are also maximum. There are many stories of people who built empires with stock market earnings.
Let us refresh our information on a very early but important topic “what is share market?”.
What is Share Market?
In simple words, share market is a system made up of
- investors – those who invest their money to buy shares so that they can earn capital gains by selling shares after a long time,
- traders – who frequently buy and sell securities under market rules,
- shares of listed companies – company shares that are listed on various stock exchanges,
- stock exchanges – institutions where buying and selling of shares essentially takes place,
- brokers – organizations that are involved in opening demat and trading accounts for investors and all related transactions and
- the set of regulatory bodies – which enable the trading processes and ensure all transactions in a fair and transparent manner.
Note- The stock market cannot be identified from any physical location.
In the old days, people used to buy and sell shares of a company in physical form through a broker.
For this, they had to go to the regional stock exchange and follow the queue in the trading ring. Where bids were made for buying and selling of shares orally.
Stock price manipulation was more likely then and there were also many flaws for stock fraud.
Nowadays, the scenario has been completely changed through several stages in the Stock Market –
- Establishment of SEBI-like regulatory system in India. SEBI primarily implements various rules and laws to protect the interests of retail investors.
- Establishment of intermediaries like CDSL and NSDL to oversee the activities related to investors and exchanges.
- Merger of various small regional exchanges and setting up of national exchanges like NSE and BSE in India
- The role of stock brokers has remained the same but all transactions are now done only online.
In other words, the stock market has now been made more and more safe for investors by central governing bodies.
Benefits for Stock Market Investors
The stock market plays an important role for a country’s economy. But what are its benefits to a common investor. Let’s know –
- Quick rise in capital- Money invested in stocks usually grows faster than other financial instruments. An increase in the capital invested in stocks occurs when the price of shares in the market increases.
- Income in the form of dividend- The portion of the company’s annual profits distributed to shareholders is called dividends. You can click High Dividend Paying Stocks with Good Fundamentals to learn more.
- Selling shares is also easy- Generally people prefer the same investment which can be converted into cash almost instantly without any hassle. This is called liquidity. By the way, the stock market provides liquidity. But you should limit your investment to active shares only. Because such stocks are traded regularly on the stock exchanges.
- Easy to handle- Handling shares is much easier than many other investments. Because the shares you bought are deposited in the demat form with the depository. It is safe like money deposited in a bank.
- You can start with less capital-The stock market is particularly important for small investors. Because anyone can invest in shares by investing less capital. If you want, you can also buy only one share at a time.
- Tax benefits– You can get income tax benefits by long-term investment in stocks (at least one year or more).
- Protection of your capital- Is your money safe in stock? Yes ! The answer may be yes, provided you follow investment related strategies. With the help of long-term investment planning and diversification in your investment, you can protect your investment from temporary fluctuations of the market. You can divide your investment into different companies working in different fields.
What is a Stock?
In daily parlance, when we talk about stocks, we mean equity shares of a company. Shares and stocks usually have the same meaning.
When you invest in shares, you buy a stake in the ownership of the company. Equity shares are proof of your ownership in a company.
This proof remains in the form of a document called share certificate.
Nowadays these shares are generally dematerialized or in electronic form with a depository or trustee member institute (bank, broker and financial institution) of National Securities Depository Limited.
How to Invest in Share Market
I have written a dedicated post on how to invest in the stock market. You can read it in detail there.
In short, you can also open your demat account through your mobile phone after submitting some necessary documents and for this you will not have to go anywhere.
It is up to you which broker you would prefer for a demat and trading account. All your securities, I mean the shares you buy are deposited in your demat account.
Trading account is opened by your stock broker for money transactions where you can also do stock trading if you want.
Is Share Market a Business?
Cool! What is share market? Is this your business? There are a small number of investors who use the share market as a business. But in the opinion of experts, the stock market should be for you as a business.
Suppose you want to start a business (no matter how big or small in size). You either already have all the necessary knowledge and skills or you have to do all the research related to business.
You will learn about business skills such as profitability, fund requirement, manpower setup, machine, material requirement, time of running the business, balance sheet etc.
You acquire all knowledge and develop your skills. To know if your business is working in the right direction, you learn a little bit of accounting.
However, your business is much less likely to fail. But still there remains a risk. And then you also learn to minimize the impact of such risks.
Like your business, you should think about the stock market. Know each and every essential point about the stock market.
Try to find out the answers to some questions in advance such as how to start in the stock market, how to invest, which stock to invest, how long to invest, what are the risks associated with investing, how to minimize risk, etc.
What is a Stock Exchange?
Stock exchanges are secondary markets, where existing owners of shares can transact with potential buyers. So when you buy a share of stock on the stock market, you are not buying it from the company, you are buying it from some other existing shareholder. Likewise, when you sell your shares, you do not sell them back to the company—rather you sell them to some other investor.
Source: Investopedia (see- how stock market works)
In India, two major stock exchanges are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
Options for you in the Stock Market
Stock market is like an open book, where you have many options. It depends on you which option you prefer.
Investment
It is a different matter that various financial instruments like indices and stock derivatives are now traded in the stock market. But in reality the stock market was designed for stock investment only.
Your investment increases with the growth of the company, part of which you bought. All you need is to recognize the potential of a company’s growth and then invest.
It is the simplest, safest and most effective way to make money in the stock market.
Pro Tips: Fundamental analysis of stocks is the best way to make your investment safe and fruitful. Try to learn it. Also, learn to analyze the balance sheet.
Trading
Apart from investing, trading in the stock market is also an option for you. Which becomes the main cause of loss for our novice.
Your time horizon defines whether you are investing or trading in the stock market. In my opinion investing is for everyone but trading … not for everyone.
Everyone should avoid trading, especially at the beginning of the stock market journey.
If you do not have much knowledge of the subject or do not have enough money or do not control your emotions or you are in bad trading habits then it is better to quit stock trading.
Pro Tips: Technical analysis of stocks and some other trading strategies such as the best combination of technical indicators, strategies for intraday trading and stock calculator can prove successful in securing your trade to a great extent.
Other choices
In addition to direct investment in shares, you have options to invest in bonds, debentures and mutual funds. Trading in currencies (Forex trading), gold, silver or other commodities is also available. MCX and NCDEX are the main exchanges for commodity trading in India.
What is Share Market Investment Option
There are two types of share market. I mean you can have shares of a company in two ways. One is the primary market and the other is the secondary market.
Primary Market
The primary market is also known as the Initial Public Offering (IPO) market. An IPO is a process through which a company is listed on exchanges for the first time and offers its share to retail as well as institutional investors.
This is a great way to invest in stocks. Because if the company is good, then you get your shares through IPO at a very low price and expect good listing.
After being listed on the exchanges, the company’s shares are further available for the secondary market.
Secondary Market
Actually for common investors, the secondary market is the real stock market. Where they freely buy and sell the shares of any company smoothly.
Now they can buy as many shares as they want and can sell whenever they want after T+2 days as per SEBI guidelines.
According to the current rule (September 01, 2020), when buying and selling shares, investors must have at least 20% cash available for the total share price.
What is Share Market Cycle
The stock market of a country is a true reflection of the country’s economy. There is a cycle of recession and boom for the economy.
The stock market cycle is generally considered to be 7 to 8 years. This means that the economy booms after each recession period.
These periods of recession and boom are identified as bear market and bull market respectively.
Bull Market
There is a situation in the market when smart money accumulates, leading to a spurt in stocks. When the market grows it is called bull market. The market has a long uptrend.
In such a situation investors are convinced that there is strong demand and weak supply of stocks.
The bull market also represents the psychology of investors that they feel about the market and the upcoming trend. This psychology is called Bullish.
Bear Market
Another, but quite the opposite, comes when investors’ psychology lags behind. This feeling is called Bearish.
When retail investors become overconfident, smart money plays an important role. This is the end of the bull run. The market moves to the overbought zone. And there is no option for the market to go up.
As soon as the news of a bad economy comes, the market collapses under its weight as soon as the trigger factor comes into existence. Panic sales begin and the market declines rapidly.
What is Share Market Trading Option
Intraday Trading or Day Trading
This is the most risky way to invest in the market where you invest your money for a single trading day. At the end of the trading day you have to square-off your open position.
Swing Trading
As the name suggests, in swing trading, traders wait for major moves in the price. Swing traders buy fewer stocks and aim for larger profits. It is relatively less risky than intraday trading.
Positional Trading
Positional trading is the best combination of the two, the slow pace of investment and the potential benefit of day trading. It is relatively less risky than both intraday trading and swing trading.
It can build its equity by rolling money rapidly through short-term gains.
Trading in Futures and Options
Trading in futures and options is commonly referred to as derivatives trading. Both of these are the most risky forms of trading.
These are contracts of termination nature. We will discuss this in separate posts. But beginners or novice can never be advised to go for these trading.
My Words
Through this post it has been my endeavor that you not only know about ‘what is share market’, but also be aware and refresh your knowledge. Many basic subjects are still untouched.
The method of forecasting the stock market gives you a new perspective to know ‘what is share market’. Hopefully these posts will be able to give you some new value.
I will do my best for you in the next post. If you have any doubts and questions about the stock market, please write in the comment box. I will answer with my best.
