Share market is becoming more popular as each day passes. The reasons behind this phenomenon are many and varied. Increasing financial literacy, risk appetite, and the objective to have financial freedom are few main factors. However, it is not a quick money-making place where one can make lots of money. If you are a layman then you must have good knowledge as to what and why of share market
In case you desire to know more about the stock market but don’t know how to begin. This is the right place to begin. Here you will get an idea about the basic terms of the stock market to start as an investor. Let’s go through some of the important definitions and concepts about stock markets, their participants, and process. It will help you to have clear understanding of the entire working mechanism.
Meaning of shares:
Basically, a share is a unit of capital divided by a company. The capital of a company is divided into smaller units of equal monetary value. Each unit is a share and it represents part of ownership in the company. Actually, the division can be in any suitable denomination like Rs 5, 10, 20, 50, 100, etc. The number of shares held by a person represents the extent of ownership he has in a particular company.
Suppose X Ltd. issued share capital of 10 lakh rupees divided into 1 lakh shares of 10 Rs each. Mr. A received 20 thousand shares or shares worth 2 lakh Rs. It means Mr. A has ownership in the company up to 20% of company capital.
They are the real owners of the company. Dividend on equity shares is of fluctuating nature and depends completely on the earnings and dividend policy of a company. Equity shareholders also have the voting right and they can cast votes in the matters which are important to them. This privilege is not available to preference shareholders.
Preference shares carry preferential rights regarding dividends and payback of capital in case of liquidation. Therefore, they are preference shares. Holder of preference shares will get priority for dividend and capital in winding up. Preference shares carry a fixed rate of dividend.
Companies need a large number of monetary resources. Therefore, these funds can be harvested internally or from sources from the public. A company raising funds from the general public has to make an offering. This is the step where gathering funds from people starts. It is called public offerings and there are two types of public offering which are as follows
Initial public offerings (IPOs):
When a company issues its securities for the first time it is called initial public offerings. A company issues its shares in the primary market. When they are subscribed and traded in the stock exchange they become tradable instruments at the secondary market. Private companies are not allowed to Issue shares. Hence, They should first convert into public ones. The first-time offering in the share market is called initial public offerings.
Follow in public offerings (FPOs):
All the offerings subsequent to initial public offering by a company are called follow-in public offerings. When a company is issuing its securities for subscription 2nd time or onwards it is following in public offering. If the company is performing well on key performance indicators it becomes risk-free and easy to raise funding again. Ipos for branded companies can perform better whereas less reputated companies may not be successful in it. As a result, Many corporated houses seek underwriters.
How do IPOs and FPOs work in Share Market:
We all know that companies require funds for their operations. They go for IPO or FPO they can raise a lot of funds in one go. Private companies are not allowed to go for IPO. Such companies first convert into public companies. When a company offers shares, these are subscribed by various kinds of investors like institutional and retail investors. This way company can easily get the required funds. After the successful subscription shares are listed on stock exchanges or share market where they become tradable among the investors. finally, from here investors can buy or sell shares as per their choices.
In case you are interested in trading securities over the stock exchange, having a Demat account is a must. A Demat account is also known as a dematerialization account. It holds all of your holdings in electronic form and it makes trading just a matter of few seconds. In the past when companies used to issue shares they used to be paper or certification form. It was a cumbersome task to trade shares certificates while buying or selling. One purchase securities are credited whereas on selling securities are debited.
Advantages of Demat Account
- Demat account is necessary for trading in the equity market.
- One cannot directly invest in the share market if he/she does not hold a Demat account.
- It is mandatory from (SEBI) security and exchange board of India.
How to open a Demat Account
Nowadays, it is very easy to open a Demat account. There are various top stock market apps that have transformed the way we trade at stock exchanges. You can go for the KITE app by ZERODHA, Angel booking, or GROW apps. You can also contact your bank for this service.
Growth V/s value approach for the Share Market.
There are two approached towards stock investing and they are radically different from each other. We will discuss these two ways a little. An investor ought to know about these two types of investing. although one can gain profits following any. It is recommended to make the proper judgment as to how which one you should choose.
In the growth investment approach, an investor believes that stock trading at high prices. It should be purchased and sold off when it goes higher. Most of the blue-chip companies, mid-cap, small-cap, and large-cap companies can become good options for growth investing.
Suppose, there is a company X and it is showing a lot of potential in relation to its earnings. Analysts feel like this stock can keep the same earning track and eventually beat the industry or competitors’ benchmarks. And if you invest in such stock. This is an example of growth investment.
Value investing on the other hand uses a different methodology. Here investor is looking for a stock that is undervalued. Undervalued means it is trading at a price less than its book value. The value of a share can go down due to multiple reasons, public perception, or not following ethical principles.
So if an investor is sure that public perception shall change and improves. Tt is a good bet to invest in such a share as finally, the price will go up. Value investing is a good option for large companies which has a good historical record. However, value investing seeks patience on the part of investors as it gives fruitful results in long term.
Investment periods in Share Market:
We can categories all stock market investments into 2 domains. The first one is short-term and the other is long-term. Short term refers to a duration that is one year or less. Any securities held for a period greater than one year shall fall under long-term investment. Understanding and choosing the right term is quite important from wealth creation and taxation point of view.
It is an advanced investment method where an investor invests in a set of securities to diversify his financial risk. A share analyst can provide you with a suitable option for your portfolio. These are generally constructed on various factors. Investors’ risk appetite, his financial goals, or the time frame for which he wants to invest are some factors. Therefore, they can be customized. Your portfolio may have different securities like debt, shares, bonds and, governmental securities. in fact, the main aim here is to reduce avoidable risks by diversification.
Although, the market price of the stock is determined by the interaction of demand and supply curves. Still, you can gain profit by properly studying the approaches for stock analysis. Two main types of analysis are fundamental analyses and technical analysis which are suitable in different sets of situations.
As the name suggests fundamental analyses try to find out the SWOT positions of a particular share. It involves a proper examination of companies’ financial statements. After analyzing these documents of a particular company investor makes the decision whether he should go for it or not. Proper diagnosis of Profit and loss, cash flow statement, and Balance sheet are necessary for successful fundamental analysis.
It is technical in nature and consists of activities like looking at charts and historical price moments. After this making real-time calculations and predictions. The radical assumption here is history repeats itself. It assumes a undervalue stock price will eventually go up and vice versa. Trend analysis, moving averages and candlestick charts are the main tools that are used here. Technical analysis is primly suited for Intra-day trading. In intraday here participant has to square off his buying or selling position in a single day.
Both the analysis types are not the competitor of each other. On the other hand, they are complementary to each other. So, having a rudimentary knowledge of these two can increase your chances of winning in stock markets.
Primary Market V/s Secondary Market:
Have you ever heard about these two terms? we know a share market is a place where buyers and sellers come together and make transactions. But in the share market, it is a little different because there are two sorts of markets. The primary market and other known is called the secondary market.
The first-time selling or buying transaction is the subject of the primary market. A company going for initial or follow on public offerings has to issue shares in the primary market. However, when these securities are listed in stock exchanges, they become instruments of trading at the secondary market.
The primary market does not have any particular place and it only deals with new securities. A company desiring funds will have to issue shares in the primary market. Within the primary market, shares are issue either at Par, discount, or premium. Meanwhile, the corporate house usually hires the services of merchant bankers and underwriters. It saves companies a lot of time and hard work in making public issues successful and effective.
A secondary share market is a place where already issued shares are traded. Stock exchanges are the most common type of secondary market. In India, there are two important stock exchanges. The first one is the Bombay stock exchange while the other is the National stock exchange. In the secondary market, investors have to make transactions following the rules and regulations.
Demand and supply determine the price of shares rather than any company like in the primary share market. It is worth noticing that in the secondary market you can not buy or sell directly. As a participant, you need to have the services of a broker. These brokers are SEBI registered intermediaries who carry out dealings on behalf of clients and charge brokerage.
Bear and Bull Market
The stock market involves two types of trends namely bullish trends and bearish trends. When the market is dominated by bullish trends it is called a bull market. On the other hand, a bearish trend means the market is bear. So, what are bull and bear in the market?
These are the type of investors who have seen a rise in the stock price and believe that this trend will continue. Consequently, they purchase the securities and wait for selling them at a high price in the future. When the overall trend seems to be going upward. One can consider it as a bull market. in fact, there are multiple factors that contribute to the rising curve of indexes and stocks in the market. These factors can range from individual and company-specific to macroeconomics. Some of the company-specific factors are:
- Management quality.
- sales and profit.
- competitive advantages.
Economic factors can be:
- Favorable economic condition and policies.
- Incentives by the government.
- Strong market demand etc.
- Technological developments.
- Business cycles.
Investors do everything in the stock market based on their knowledge and sentiments. Because their knowledge and sentiments are shaped out of the above-mentioned factors. They can behave as per the performance of micro and macro indicators. Technically a bullish market occurs when the stock or index has risen 20% from its recent peak. The best bet is making a profit by buying securities at the earliest of the bull market and then selling at a higher price.
Opposite to bull market, this trend means market is declining. When stocks and indexes witness surge in their price and trend it diving low for long time. Investor consider it bear market. Their usual expectation is such decline will continue. Finally, they start selling the securities and this creates outlay of money from stock market.
Bear investors start buying fixed-income assets and wait until the bearish trend vanishes. The same factors mentioned above if are no performing well, send a negative signal to investor sentiments of market fall. Pessimism and negativity about the market increase supply of securities, and due to less demand, the price keeps falling.
These are some of the important definitions of share market having the basic understanding of these terms will help you in gaining insight into the advanced working ow stock market. Similarly, if you are interested in knowing about marketing and brand promotion we recommend you to please check our blog Marketing mix or 4 Ps of Marketing.
Square off in share market
Squaring off is a trading style that is mostly used in intraday or day trading. In this, a trader has to buy the securities and sell the securities on the same day. This is gain quick profit. As intraday trading gives the advantage of getting more stock with less money. However, the disadvantage is buying and selling the stock on the same day. Thus, sometimes case stocks have to be sold at a loss, or they are automatically sold at the end of the day.