The share market is a platform where buyers and sellers come together to trade on publicly listed shares during specific hours of the day. People often use the terms ‘share market’ and ‘stock market’ interchangeably. However, the key difference between the two lies in the fact that while the former is used to trade only shares, the latter allows you to trade various financial securities such as bonds, derivatives, forex etc.
The principal stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Types of Share Markets
Stock markets can be further classified into two parts: primary markets and secondary markets.
- Primary Share Markets
When a company registers itself for the first time at the stock exchange to raise funds through shares, it enters the primary market. This is called an Initial Public Offering (IPO), after which the company becomes publicly registered and its shares can be traded within market participants. - Secondary Market
Once a company’s new securities have been sold in the primary market, they are then traded on the secondary stock market. Here, investors get the opportunity to buy and sell the shares among themselves at the prevailing market prices. Typically investors conduct these transactions through a broker or other such intermediary who can facilitate this process.
What Is Traded On The Share Market?
There are four categories of financial instruments that are traded on the stock exchange. These include:
- Shares
A share represents a unit of equity ownership in a company, and shareholders are entitled to any profits in the form of dividends and bear any losses the company may face. Many investors manage their shares through a Share trading app. - Bonds
To undertake long term and profitable projects, a company requires substantial capital. One way to raise capital is to issue bonds to the public. These bonds represent a “loan” taken by the company. The bondholders become the creditors of the company and receive timely interest payments in the form of coupons. From the perspective of the bondholders, these bonds act as fixed income instruments, where they receive interest on their investment as well as their invested amount at the end of the prescribed period.
Mutual Funds
Mutual funds are professionally managed funds that pool the money of numerous investors and invest the collective capital into various financial securities. You can find mutual funds for a variety of financial instruments like equity, debt, or hybrid funds, to name a few. - Each mutual fund scheme issues units that are of a certain value similar to a share. When you invest in such funds, you become a unit-holder in that mutual fund scheme. When instruments that are part of that mutual fund scheme earn revenue over time, the unit-holder receives that revenue reflected as the net asset value of the fund or in the form of dividend payouts.
- Derivatives
A derivative is a security that derives its value from an underlying security. This can have a wide variety such as shares, bonds, currency, commodities and more! The buyers and sellers of derivatives have opposing expectations of the price of an asset, and hence, enter into a “betting contract” with regards to its future price.
Conclusion
Today, investing in stocks can be considered as one of the best ways to generate long term wealth. With a strategic investment plan, any investor can achieve their long term financial goals with the help of the stock market.
- Advantages of Stock Market
Now that you know what is share market, let’s uncover some of its advantages: - Appropriate for Growth: Selling business shares generates steady, predictable, long-term financial growth. These revenues can be used by businesses to grow and flourish.
- Simple Entry and Exit: Buying and selling shares of any company at a price determined by supply and demand for that particular share allows for simple entry and exit on the stock market.
- Regulated Processes: A safe sanctuary for investors since listed businesses must comply with strict disclosure obligations and regulatory restrictions set forth by stock exchanges and market regulators. Stockbrokers who follow the route outlined by SEBI are not left behind.
- Secure Clearing Procedure: Investors purchasing equities that will be sent to their Demat Accounts are guaranteed a dependable and secure clearing procedure by the stock exchanges
How Does The Stock Market Work?
One cannot truly understand the share market definition without knowing how it works. Businesses use the stock market to raise capital by offering investors ownership holdings. Shares of stock are the name given to these equity investments.
Without incurring debt, companies can obtain the necessary funds to run and grow their operations by listing the shares for sale on the stock market. By trading their funds for shares on the stock market, investors gain.
Investors benefit from corporations’ efforts to grow and expand their operations since these investments increase in value over time, resulting in capital gains for the stockholders. Furthermore, as their revenues increase, businesses distribute dividends to their stockholders.
While they fluctuate greatly over time, individual stocks’ performances are considered collectively. The stock market is one of the most dependable methods to increase your money because it has traditionally given investors average yearly returns of about 10%.
What Are the Functions of a Stock Market?
There are several vital roles that stock markets play in an economy’s financial structure. Besides knowing what is share market, explore the major roles that stock markets play for both businesses and investors:
- Capitalization
One of its main purposes is the stock market’s ability to help companies get funds. Businesses raise money for various uses, including R&D, project investment, operations expansion, and stock issuance (equity securities via IPO Investment). Investors give firms the funds to expand and generate economic value by buying these stocks. - Availability of Liquid Assets
The stock market offers investors liquidity by providing an easy-to-use platform for buying and selling stocks. Since it enables investors to quickly turn their assets into cash, liquidity is significant. It also promotes investment by giving investors who wish to sell their shares an exit route. - Discovering Prices
The supply and demand of stocks are the primary factors influencing prices in the stock market. It provides a forum for investors to voice their thoughts regarding a company’s worth. Market prices are established due to continuous stock trading and represent investors’ assessments of a company’s past, present, and future performance. - Wealth Generation
This is an essential role that the stock market plays. Buying stock in companies with a price increase allows investors to profit significantly. As a result of this expansion, individual investors gain from capital appreciation. - Dividend Payout
A company’s shareholders receive dividends, which are payouts generated by earnings. This gives shareholders a reliable source of income. - Risk Transfer
A certain amount of risk is associated with stock market investing. Investors risk seeing their assets lose value due to shifting market dynamics or the success of the businesses they fund. When investors trade stocks, they are basically sharing and transferring these risks. - Financial Measurement
It’s common knowledge that the state of the economy as a whole can be inferred from stock market performance. In contrast, a dropping market may portend future downturns or economic instability. A rising stock market can reflect both economic growth and investor optimism. - Market Efficiency
Stock prices in efficient markets are updated promptly and precisely based on available information. In turn, this promotes market efficiency and openness by incentivizing businesses to give the public timely and accurate data.
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