What is the stock market, how does stock market work, what is the benefit of stock market, what is the disadvantage and how can you invest money like so many questions come to mind while we plan about investment in stock market or mutual funds to achieve a financial goal.
What is stock market
Stock market is that market where you can buy or sell the shares of a company or buying shares. It means that you are buying some percent ownership in a company, with this some percent of ownership of that company, you will get some profit if the company performs good or you will bear loss if that company is in loss.
Suppose you are planning to start a start-up, you have ₹100,000, but that is not enough, then you go to your friend and say that you put ₹50,000 on a 50-50% partnership of your company and in future you will be share profit of 50%, you will get 50% to your friend, in this case you have given 50 percent share to your friend, the same thing happens in the stock market on a large scale.
The only difference is that instead of going to your friend, you go to the whole world and invite people to buy in my company by selling the some percent of share.
History of stock market
Business in the share market started about 400 years ago when the existence of Dutch, East India Company came and the map of the whole world was not discovered.
During that time such companies were searching and exploring such places in the other world due to many reasons like expansion business and other things. but such business was very risky at that time because sometimes ships did not come back, they were lost, they were either broken or looted.
To bear such expenses lots of money needs and a single person did not have that much money, at that time such ideas come to share some percentage of profit to the common people who were interested to invest money in their business and they get some share of that profit.
Today almost every country has a stock exchange where multiple companies are listed with their trade value.
Suppose a company has a value of 100,0000 or one million then they can issue 100,000 shares of face value of 10 rupee each to the market where people can invest accordingly.
Type of Stock Market
There are two types of markets: Primary market and the Secondary market.
Primary market is that market when the founder of such company first time decides to offer the share to investors which is also known as initial public offering (IPO) in this process the owner of the company issues limited share to the public by keeping majority share with the founder.
If you have more than 50% shares it gives more control to the company. It is said that in the primary market where the company had set a fixed initial price of his share and offer to the public.
When the people start trading such shares between each other they can buy and sell to each other this is called secondary market.
The company cannot do anything in the secondary market of its shares as the prices may go up and down as per demand and supply of share and the company performance.
Every big country has its own stock exchange, the most popular stock exchange in India is one. There are about 5004 companies registered on the Bombay Stock Exchange and another one is where more than 1700 companies registered on the National Stock Exchange.
"SENSEX" gives the ideas about the average trend of top 30 companies listed in Bombay Stock Exchange. An average of the top third company shows that the share price of all those 30 companies is going up and down.
The full form Sensex is a sensitivity index. If a company sell its shares on a stock exchange then you will say to make public listing of that company, if the company is doing it for the first time, you will say the IPO initial public offer to the public.
Earlier it was very easy to offer shares to the public, anyone could bring his company and sell the share in front of the public, but in today's time, it is difficult to due to government and regulatory body rules and regulations.
Securities and Exchange Board of India (SEBI)
Now no one can make a company of their own and listing on the stock exchange makes the entire process stronger and transparent.
Securities and Exchange Board of India a regulator made the regulations more strong and quite complex which ensure that no one can make fools of people and protect the interest of investors.
Regulatory body which looks at all these things, which company is to be listed on the stock market and is being done in the right way correctly.
Now the company should have a lot of checks and balances on its accounting, at least two and it should have checked the accounting from your company in this whole process. There should be more than 50 shareholders in your company in this process.
Earlier if you want to buy or sell shares you need to visit Stock Exchange building but after but after the arrival of the internet now investor need only three things:
Bank account, Trading account and a Demat account
If we want to invest in the stock market, then retail investors always need a broker, they will keep some commission for their services.
A broker is a medium where they bring buyer and seller together now the broker can be our bank or any other party or any online platform.
To provide such service they charge some amount as a fee which can be 0.1 to 1% which is called brokerage.
Difference between Trading and investing
People think Trading and investing are the same but both are different things. Let's explain a little bit here before further proceeding.
A trading is a concept if you buy shares at some specific rate for any particular company today and after some profit you again sell within 2-3 days, if you sell on the same day it's called intraday trading.
A trader has a short-term goal and his approach is to buy or sell shares on some percentage of margin.
While investing is altogether a different mindset which has a long-term goal, investors don’t bother for short term volatility in the market they are focused on long term strategy.
They have strong research and long-term vision about a company in which they decided to invest.
Now the question is whether some people should invest money in the stock market. In my opinion you should have some basic knowledge about the stock market, about company accounts and business fundamentals of such companies, their past record and other related financial information.
If you don’t know about such basic things then it's like a gamble where you invest money without knowing anything because there is risk in it if you don't know what type of company their business model and the financial information then there is a way to gamble.
Because if you enter first time in the stock market then definitely you will need to compete with those people who are full time investors and much more experience in this field and they know very closely market their ups and down trend.
Still if you are interested in investing in the share market then there is an alternate option which is known as mutual funds where a retail investor can invest their hard-core money through mutual funds.
It is not the direct investment in the stock market, instead you can invest your money with some fund house which is called AMC (Asset management Company) they have experience and expertise fund manager who will manage your money in stock market and they decide in which company they invest to buy or sell shares.
Mutual funds are a concept where money distributed in different sectors means allocation of assets as per market trend and sector performance where an experienced fund manager can manage these funds.
Mode of investment in mutual funds
Systemics investment plan (SIP) where investors can invest money in small amounts on a monthly basis for long term to achieve their financial goal.
Net Asset Value (NAV) units are allocated to investors in proportion of their investment to the account holder. NAV is market value of the shares held by the scheme.
Lump sum investment is the total investment amount in one go in mutual funds, current NAV units are allocated to investors.
Financial planning is an important part of asset creation and to achieve financial stability getting knowledge is one of the key factors which play an important role to achieve financial goals.
Stock market or mutual funds are sources of getting a good return but proper knowledge and experience required. Hence getting a financial expert opinion is important.
This article is only for knowledge purposes and our objective is to provide the basics of stock market and mutual funds, readers can consult with a finance expert if they plan to invest.