You must have heard the term once in a lifetime that if you want to be wealthy you must invest in the share market and this term is somewhat true to its facts. But I must warn you that you must know the key concepts of the share market before thinking about investing or trading in it. The principal reason for this statutory warning is nothing else but simply the risks associated with the investment in the share market.
But you can mitigate those risks and make wealth from the share market provided you have sufficient know-how of the share market. So, you must learn the basics of the share market so be with me through this series of blogs where we will discuss every minute detail about the share market. Let’s start:
Table of Contents
What is a share market?
A share market is a place where shares of a company are bought or sold by investors. It gives an opportunity to all the investors to make wealth out of the shares being traded in the share market. By issuing the shares to the investors, the company gets funds and investors become a shareholder of that particular company. So, the share market is like a platform to facilitate trade among the investors like you and me. There are different types and participants in the share market which we must know before investing.
What is a share?
Share in layman’s terms is a portion of something and it has more or less the same meaning in terms of the share market. Share is just a portion of ownership of any company offered to investors if he invests money in purchasing shares of the company. After purchasing the share, the investor becomes a shareholder of the company in the same proportion as the percentage of shares held by him.
Types of share market
The share markets are usually classified into two types depending on the types of investors who are investing with the companies.
The primary share market
The primary share market is the place where securities i.e. bonds and shares are sold by the company to the public for the first time. In the primary market, companies register themselves to issue their shares and raise money for the first time from the public. This process is also known as listing on the stock exchange. The purpose of listing on the stock exchange and entering into the primary market is to raise money.
If the company is selling its shares for the very first time it is referred to as the Initial Public Offering (IPO). And through the IPO process, the company goes public for the very first time, so IPO comes under the purview of the primary share market. Similarly, a govt organization can raise debt capital from the market by issuing long and short-term bonds at a pre-decided coupon rate which depends on existing interest rates. So, the essence of the primary market is that here you can purchase the shares from the issuers of the security i.e. from the companies.
A secondary share market
A secondary share market is a place where the shares are traded at a fluctuating price depending on the demand and supply mechanism. Here, the shares are traded between the traders or investors only and the issuer of the share remains out of this market. Hence, the share market is an example of the secondary market. The price of the security/share also depends on many other factors but primarily on demand-supply.
If you purchase an equity share in the share market, it is supplied by another investor only who wants to sell those shares, and the company to which the share belongs doesn’t have any role in it. Hence the investors can exit the company by selling shares in the secondary markets to the public or retail investors. In the same way, bonds are traded here and you can trade them for profits.
Once a company gets listed in the market, there are always buyers and sellers for the shares of the company. Buyers place their orders at a Bid Price which is the highest price any buyer is willing to pay to buy a share of any company. While sellers demand the Ask price which is the lowest price at which the seller is willing to sell the share of a company.
Process of a company entering into the share market
A company follows a well-designed mechanism being scrutinized at each step by the regulator of the share market. Usually, a company enters into the secondary market or share market with these steps:
- The primary market is the place where there is no participation by retail investors in the business of the company. The company operates in this market prior to listing on the share market.
- The company gets listed in the share market through the process of Initial Public Offering (IPO), where the company allows its shares to the public for the very first time.
- Through the process of IPO, a company raises funds from the public and remains isolated thereafter. After the listing, shares are traded among investors only and the company has nothing to do with it.
- After IPO allocation, shares are distributed to the successful investor or bidders. Share then keep trading in the market at a fluctuating price depending on the demand and supply of the share among the investors.
- After listing on the stock exchange, share prices are tracked and traded among investors. This way company enters into a secondary market where the participation of retail investors is significant.
Participant in Share Market:
The share market is not a standalone entity and it includes many participants with it to make trading smooth for investors. The main participants of the share market are the Stock exchange, SEBI which acts as a regulator, Brokers, and investors.
SEBI is for the security exchange board of India and is a regulatory body mainly looking after the supervision of all the related activities being conducted in the share market like trading, filing of applications, and many more. SEBI was formed as an independent identity under the SEBI Act of 1992 and has the power to conduct inspections of the stock exchanges.
Stock Exchange is the facilitator platform for investors to trade shares and other commodities. Every investor has to be registered with the exchange and SEBI through Brokers in the event to participate in the trading.
Brokers are the firms or individuals registered with the exchange and SEBI and act as mediators between us as an investor and the exchange. Brokers pass our trade order to the exchange which is matched by the exchange and if matching is completed then the share is deposited by the broker in our account.
We act as an investor who put their money into various shares through the brokers in the share market. There are various types of investors in the market and an individual comes under retail investor if he invests less than 2 Lac in a particular share.
How does the share market work?
The share market is an example of a secondary market so if any share is trading here that means it has completed its listing process. Before discussing the process of working for the share market we must know its basic concept of it.
Once a share is listed in the share market after an Initial Public Offering (IPO) process, then it starts trading in the secondary market. Here buyers and sellers try to make out profit through their trading activities. Since the number of investors trading on daily basis is large, share brokers came into the picture. The process of trading or working in the share market gets completed in different steps:
- Investors who are looking to buy any share place a Buy order while at the same time an investor who is looking to book his profit will place a sell order.
- An investor cannot place direct order on the stock exchange and the order has to be routed through their respective brokers.
- Brokers or firms engaged in this profession acts as a link between the investor and the stock exchange in the completion of the trade order for an investor.
- Once you as an investor place a Buy/Sell order for a particular share for desired quantity to your broker, your broker will forward it to the share exchange concerned where you place the order.
- Once the exchange receives the order, it starts searching for the sell order against your buy order or buy order against your sell order. The exchange will also check for the quantities of shares being placed for buy or sell before matching.
- Share exchange also confirms the identity of both buyers and sellers through its process involved at the back end so as to safeguard the interests of investors.
- If the exchange found a suitable matching order which completes your order, it will confirm the order and communicate the same to the broker for further passing this information to you as you are the investor who placed the order and in the need of a share.
- The task of matching the order from numerous orders placed in a short span of time is completed by computers and that is the reason your order gets completed within no time.
- Once the details and quantity of shares are matched and the order is executed, the stock exchange will initiate the process of crediting the share to its new owner and this process is called settlement.
- Nowadays, India follows T+2 days of settlement cycle that means, if you purchased a share today then it will get credited to your Demat account the day after tomorrow. This settlement cycle is very important for you to know as the actual credit date is known by this. It plays an important role in some corporate actions like payouts of Dividends and bonuses.
- Once the share is settled, the ordered quantity will be reflected in your Demat account and the process of trading gets completed.
Why Price of a share fluctuates?
Once a share is listed in the secondary market, it starts trading just like other commodities in a normal market where the price of goods depends on the demand and supply mechanism. Same here in the share market, once the share is open for trade, somebody will place demand, and somebody will sell the share. If more investors place Buy orders that means more demand for that share which will be reflected in the increase in price for that share and the opposite is true for the decrease in the price of a share.
It is important for you to know about the basics of the stock market because it will make you an intelligent investor. Without knowing the basic facts, you may be earning profit but it will be just like tossing the money and luckily you are getting profits. Once you are educated about the market, the behavior of the market will not scare you and you can sail through the sea of investment easily.