What Are Stocks?
Stocks are an investment that allows you to own a portion of a public corporation. They’re also called shares or equities. Buying stock in a company makes you a part owner of that company, and in most cases it gives you shareholder voting rights Investors buy stocks hoping for good returns, which will help them build wealth.
How Stocks Work
Companies sell stocks to gain additional funds to grow their business, launch new products, or pay off debt. The first time a company issues stocks to the public is called the initial public offering (IPO). After the IPO, stockholders can resell their shares on the stock market. Stock market prices are driven by expectations of corporate earnings or profits. If traders think a company’s earnings are high or will rise further, they bid up the price of the stock
One way that shareholders make a return on their investment is from selling shares at a greater value than they were purchased. If a company doesn’t do well and its shares decrease in value, its shareholders could lose part or even all of their investment when they sell.
A second way shareholders profit is through dividends, which are quarterly payments distributed on a per-share basis out of a company’s earnings. It is a way to reward stockholders—who are the actual owners of the company—for investing. It’s especially important for companies that are profitable but may not be growing quickly.
How to invest in share market?
Demat and Trading Accounts:
So what you have to do to invest in the share market? Firstly, open a demat and trading account online with a broker and link your bank account with that. Opening demat account is a very simple and easy process. Once you have your demat and trading account, you can start investing in the Indian share market. It’s essential for you to be familiar with the stock exchanges and their functions. Stock exchange is where buying and selling of shares take place. The stock exchanges are regulated by SEBI (Securities and Exchange Board of India). The 2 important stock exchanges of India are NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
As per your goals, choose the particular financial asset for investment. Indian is the one stop destination for all your needs. If you are more concerned about regular income and preservation of capital, you can opt for debt instruments likes bonds. If you want capital appreciation and willing to take risk, equity is the one for you. Before you invest in a share, do a complete study of the company, its financials, future prospects of growth, etc. Below is what you have to do to achieve your goals:
- Define your life goals
- Learn about financial assets
- Choose the respective asset as per your need
- Start investing regularly
- Fulfill your goals
Hope you have got a basic idea of share market and so now it’s time to understand the different financial instruments.
Types of Stocks to Invest in Share Market
When you buy a share, you can be a common shareholder or preferred shareholder on the basis of ownership.
As a common shareholder, you are permitted to vote in shareholder meetings and you are eligible to receive dividends. If the company where you have invested goes bankrupt, you will receive the share of proceeds of liquidation only after all creditors and preferred shareholders have been paid.
As a preferred shareholder, you may not have voting rights. But you will get dividends before common shareholder receives it.
On the basis of market capitalization, you can invest in large cap, mid cap and small cap stocks. Market capitalization = share price*number of shares outstanding
Outstanding shares are the shares that can be bought and sold in public markets. I will explain this with an example. Say a company A has 100 outstanding shares and the share price is Rs. 20, then market capitalization of the company will be 20*100=Rs. 2000
Large cap stocks:
These companies are well established and have a strong presence in the market. Companies like TCS, Infosys and Wipro fall under this category. Investing in these companies are less risky.
Mid cap stocks:
These companies have the potential to grow big and are relatively riskier compared to the large cap companies.
Small cap stocks:
Start ups fall under this category and are highly risky compared to the above two. On the upside, they can become a runaway success overnight.
The next essential aspect you should know is IPO (Initial Public Offer). A company raises money from public through IPO. It sells its shares so as to bring in capital for its future development. Your yield is high when you invest in a share due to the power of compounding. In simple terms, the price of share you hold today may be Rs. 100, it can double or triple if you hold the share for a long time.
Key Financial Instruments Traded in Stock Market
Shares/ Equity:
Equities or stocks or shares give you ownership of a company. You can buy or sell shares through a broker.
Mutual funds:
Here, the money is pooled from many investors and then invested in various financial instruments. Investors are referred to as unit holders. Profit generated is distributed to unit holders in proportion to the units held by them.
Bonds:
These are fixed income instruments also known as debt instruments by which government or a company borrows money from investors at an agreed interest rate for a specific tenure. These are less risky when compared to shares.
Derivatives:
A derivative is a financial contract whose value is derived from an underlying asset. It can be used to mitigate a number of risks. Derivatives include forward, futures, options and swaps.
Share market tips
- Its always better to do your own research before investing.
- Its not wise to take decision based on rumors.
- Monitor your investments regularly so that you can eliminate the loss making stocks.
- Patience is very essential for any investor.
- Take the help of research experts also before making an investment move.
- Always be updated with share market news.