SHARE MARKET!!! What strikes up in your head when you read or hear these two words? Let me guess, A Legal Satta (Betting) Bazaar? Right? Do not worry! You are not alone. Usually, people think all over the world that investing in a share market is equal to gambling or betting. I have observed people creating and believing in some myths about the share market. According to stock depository data, out of 1.36 billion people in India, only about 3.7 % of people invest in equities when compared with about 12.7 % in China. As indicated by a survey, almost 55 per cent of the US population own stocks either individually or through mutual funds.
Despite the fact, only 3.7% of people invest in the Indian stock market; but the Indian stock market stands at 7th position with a market capitalisation of $2.7 trillion in the world. So, what is stopping Indians to invest? First, which I mentioned above, people think investing in the share market equates to gambling. A few other myths are that it is only for the rich people or is an exclusive club for brokers. You can make money only by investing a handsome amount. People fear taking a risk at all. People believe that risk and returns are directly proportional. But in reality, if you invest after ample research, the risk of losses will be less. Also, the most important reason is the lack of knowledge.
HOW DID MY MINDSET CHANGE ABOUT THE SHARE MARKET?
I also had the same mindset as others for the share market, but one of my friends introduced me to the flip side of the share market, and Boom!!! Everything has changed since then. Like all the other investment instruments, like mutual funds, bank fixed deposits, public provident funds and many others, the share market also requires homework and preparation. We are here talking about real money and can not swing by easily without proper knowledge.
Once an investor overcomes these myths and gain proper knowledge about the share market, they can also use the wealth creation potential which the market holds. All it takes is to get started on some research work, develop some simple strategies, and open a Demat account with a registered Stock Broker approved by SEBI. A few online famous brokers which an investor can use are Zerodha, Groww, Upstox, and many more. One can enjoy the advantages of the ease, flexibility and speed of trading just with the click of a button. Now, let us take a ride and learn the basics of the share market through this article.
Before learning about the stock market, one should know what exactly is a share or a stock.
WHAT IS A SHARE?
In simple words, a share indicates a unit of ownership of a specific company. If you are a shareholder of an organisation, it implies that you as an investor hold a percentage of ownership of the issuing company. As a shareholder, you stand to profit within the event of the company’s profits and also bear the disadvantages of the company’s losses. Shares are divided into two categories, i.e. Equity Shares (also referred to as ordinary shares) and Preference Shares, about which we will discuss some other time.
Do not get confused between stock and share. Now, you may think, Are not the same? No, Stocks are not the same as shares. Yes, you read it correctly. The principal difference between these two is, stock refers to a certificate indicating ownership of a company, whereas shares refer to a stock certificate of a particular company. It will be explicit with the help of an example. If an investor says that one owns ten stocks – it is most likely referring to shares from ten different companies. On the other hand, one says that they own ten shares- it is most likely referring to ten shares of a particular company. Now, I hope you have a better understanding of stock and share.
UNDERSTAND WHAT SHARES OR STOCKS ARE
When a company sells its shares, it is essentially selling a fraction of its business. There is no need to say any company owners will not give away a large part of their business. They only offer a small portion of the value of the company in stocks.
Let me elaborate with the help of an example, you want to buy ten shares in Reliance Industries, and its current face value is INR 1,900. You will have to pay INR 19,000 for these ten shares. You now own ten shares of Reliance Industries, and this ownership will represent a minor fraction of the total number of shares issued by the company. By buying the shares, you are investing your money in the company. As the company grows, the value of the shares will also increase, which means they are directly related to one another.
SHARE MARKET
Now that we know what shares are, you must be wondering where you can exchange these shares or stocks. So, in answer to that question, there is the market for the exchange of shares or stocks known as SHARE/ STOCK MARKET.
SHARE MARKET is a market where shares are publicly issued and traded. To answer what is the stock market pretty similar to that of a share market. The radical distinction between the share market and the stock market is that the former only allows you to trade in shares. However, the latter empowers you to invest in all the investment instruments, such as derivatives, bonds, mutual funds and many other implements, also the shares of the listed companies. On a STOCK EXCHANGE, one can buy and sell the stocks that are listed on it. Hence, it is a meeting place for the stock buyers and sellers. The prime stock exchanges of India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
SENSEX AND NIFTY
In the stock market, a market index or a stock market index holds a significant value. It is an index that measures a stock market or a subset of the stock market and helps the investors compare the current value of the share with the past prices to calculate the market performance.
SENSEX also called the BSE 30, is the market index that consists of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). On the other hand, NIFTY, also called the NIFTY 50, is the market index that consists of 50 well-established and financially sound companies listed on the National Stock Exchange (NSE).
There are a few more terms that are commonly used in the share market. One should be aware of things such as; dividend, bull and bear market, portfolio, trading volume, and many more, about which we will talk next time.
SEVERAL THINGS TO KEEP IN MIND BEFORE ENTERING THE SHARE MARKET
Investing in the share market for beginners, like you and me, is one of the best ways to create a sustainable pool for your savings and make a career in this financial world. There are several things that a person should keep in mind before investing their money in the share market.
NEVER JUMP BLINDLY INTO THE SHARE MARKET
It happens many times that while talking to your friends and colleagues, the discussion heads towards investing in the share market. And also how the share market helps investors make a handsome amount of money. You might have never thought of investing or ever invested in the market. Although, after hearing about all those things that might excite you and decide to buy some shares. However, if you entered the market only to remain in the mainstream fashion, you have landed in for the wrong reason. You should invest in the share market after getting ample knowledge and after a lot of research about it and according to your financial goals.
SHARE MARKET ISN’T A MONEY-MAKING MACHINE
You must have heard the story of many investors who made their fortune through the market. Many believe that the share market is like a money-making machine, which can turn them into millionaires after some time. Well, a lot of investors have indeed made profits through the share market. But it was only possible because they’ve good market knowledge, have good analytical skills, made some right choices by adopting careful thought of strategies and are also very disciplined in their approach. Wealth in the Share Market comes with time, not in one shot.
Many people forget that people have lost their entire wealth, while some have to sell their assets to offset the loss in the market. Take the instance of Harshad Mehta (an Indian investor) ahead of his career as an investor, and took one wrong decision and lost INR 10 lakhs in a second. But later on, he frequently started investing with well-prepared strategies and became one of the famous investors.
EDUCATE YOURSELF, HANDLE BASICS FIRST
Before making your first investment in the share market, take the time to learn the basics about the market and the individual securities composing the market. There is an adage: It is not a stock market, but a market of stocks. Some significant areas which you should be familiar with before entering the market are:
- One should understand the financial metrics and definitions like P/E ratio, price of a share/earnings per share, earning per share (EPS), and many others. We will discuss it some other time.
- Popular methods of share selections.
- Investors in the share market commonly use trading rules, compliances, and terminology.
- Gain some understanding about the market and its relationship with the economy like market relationship with inflation, GDP, fiscal deficit, crude prices, INR value against USD. People lose money in the markets because they directly jump to the market without understanding the economic and investment market cycles.
INVEST ONLY YOUR SURPLUS FUNDS
The biggest mistake newbie investors make is to invest money that they can’t afford to lose. Investing in the share market is risky, and that means you can potentially lose everything. Like any investment, there are inherent risks associated with the share market. One should decide own risk tolerance considering his age, financial strength, and retirement goal and accordingly should take the risk. If you want to take risks in the share market, then only invest your excess/surplus funds that you can afford to lose. The investment will generate more money but, do not invest all your emergency funds in the share market.
AVOID LEVERAGE
Leverage means the use of borrowed money to execute your share market strategy. In your margin account, also known as a brokerage account, banks and brokerage firms can lend you money to buy shares. It sounds awe-inspiring when the share market is moving up. However, consider the other side when the share market or your shares goes down. In that case, your loss would not only erode your initial investment but, you will also have to pay interest to the broker. Leverage is, thus, a tool, neither good nor bad. However, it is better to use it after you gain experience and confidence in your decision-making abilities. Therefore, limit your risk when you are starting to ensure you can profit over the long term.
AVOID HERD MENTALITY
Unlike many investors, you should avoid the herd mentality. The actions of your acquaintances, neighbours or relatives without evaluating the current information and underlying shares can control you. Thus, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But, this strategy is bound to backfire in the long run if you have not chosen the share by careful analysis. So, if you don’t understand the stock, never step in. Before investing in a company, you should know about its business. It’s important to only invest in interests that are easy for you to understand, especially while you’re just starting. Never invest in a share. Invest in a business instead.
DIVERSIFY, BUT REFRAIN FROM OVER-DIVERSIFICATION
Never put all your money in one share. Create a well-diversified portfolio of stocks that can help you reduce the risk and save you from losing money if a few shares do not perform well. Also, avoid over-diversification, as the increase in the number of stocks up to a particular limit does help diversify the risk proportionately. But, beyond a certain number of shares, your investment can’t get the proper growth moment.
DON’T TRY TO TIME THE SHARE MARKET, FOLLOW A DISCIPLINED APPROACH
A majority of investors try to time the market, something that financial planners have always warned them to avoid. And thus lose their hard-earned money in the process. Time the market or Market Timing refers to the moving investment money in or out of the financial market or switching of funds between assets based on the predictive methods. Not everybody can successfully and consistently time the market by catching the tops and bottoms of the share market cycles. Investors who put in their money in the right shares systematically over the long term generate outstanding returns. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broader picture in mind.
HAVE REALISTIC EXPECTATIONS
Hoping for the best from your investments is not wrong, but you could be heading for trouble if your financial goals are based on some unrealistic assumptions. Let me elaborate with an example, lots of shares have generated more than 100 per cent returns during recent years. However, it doesn’t mean that you should always expect the same kind of return from the share market. If you feel that shares in your portfolio are overvalued, it is better to switch to a relatively low-value good stock.
AUTHOR’S LAST WORDS
Just like every investment, the risk is also inherently connected with the share market. So, investing in the share market is too intrinsically associated with risk. When it comes to newbie share investors, one has to be careful before entering the market. The investor must have a solid understanding of shares and how they trade in the market or risk losing money in a volatile type of instrument.
One should not take the share market investment decisions on a whim. For a beginner, that’s the most important thing to understand. It is not a gambling industry; it works on specific principles that require strategic thinking and deep analysis. Does that mean it’s not fun? OH, IT’S A FUN! You’ll feel the thrill when you’re buying shares and selling them for a higher price. It’s not easy to learn all the rules, but you can do it. The important thing is to start. You can make minimal investments at first, and you’ll grow as you gain more experience.
In layman language, it’s a marketplace, where it helps the two prospective parties do their transactions and charges it from them.
Disclaimer: This article is issued for general informational and educational purposes only and does not intend to investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation of any specific outcome or profit.
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Composed By: Aarushi Jain
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