Stock Market-Basic Knowledge

INTRODUCTION

A Stock market is a place where two parties (buyer and seller) involve themselves in a transaction of securities.

Securities are meant by a financial instrument which is allowed to transferable by/after sale. E.g. Stocks (shares), Bonds, Debentures and any other marketable securities.

Share refers to small denominations of a company’s Share Capital. The price at which share is issued is known as Issue price which can be more than or equal to face value of each share.

Securities market is divided into 2 segments namely:-

• Primary Market:- refer to a market where the securities are issued for the first time by
  the organization to the general public in form of Initial Public Offering (IPO).
• Secondary Market: – refer to a market place where securities are traded after being initially offered to the public in primary market.

Securities And Exchange Board of India (SEBI) established under SEBI Act 1992, is the principal regulator of all the stock exchanges in India. The primary function of SEBI includes: –

• Protecting the interest of investors in securities
• Promoting the development of the securities market
• Regulating the securities market. (Eg. prohibiting fraudulent and unfair trade practices)

Depository is like a Bank wherein the deposits are securities (viz. shares, debentures, bonds etc.). At present in India there are two Depositories which handles all the electronic form of shares that are: –

• National Securities Depository Limited(NSDL)
• Central Depository Service(India) Limited(CDSL)

If any investor wants to convert his shares from physical form to electronic form then such investor is required to undergo a process named Dematerialization and if any investor wants to convert its electronic holding to a physical form then such investor is required to undergo a process named Rematerialization.

HISTORY

Bombay Stock Exchange (BSE) was the first Stock Exchange recognized by the Indian government in the year 1957. All the shares certificates were transferred physically to the purchasing party thus resulting in long Trading Cycle. Today’s leading Stock Exchange National Stock Exchange (NSE) was established in year 1992 and was established as the first electronically traded Stock Exchange in India. Thus it reduces the Trading Cycle which at present is T+2days

Why should on invest in equities?

Further it has been proved by researched studies that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment.

The average annual return of stock market over period of last 15 years, if one takes Nifty Index as a benchmark to compute the returns, has been around 16% in form of capital appreciation and besides that average stocks have paid 1.5% of dividend on annual basis.

However such huge percentage does not give any type of guarantee to investors that they will also earn such huge returns from the market. Investment in equity market is purely based on self-research of a particular company’s share or stock and relying on such researched share for a longer period of time to earn such huge returns.

Rules for Investment

• Invest early
• Invest regularly
• Invest for long term and not for short term

Thus the investor should always take care of these rules while making investment not only in stock market but in general investments also.

How to tackle the risk involved in stock market

It has been noticed that a general person is not ready to invest in stock market due to risk involved in it, they think that there Hard Earned Money would be lost in the market due to fluctuations in the market.

But the only way to tackle the situation is that a person should invest its money in a diversified portfolio means investor should not invest its whole money in only one security but should invest it in different types of securities in such a manner that loss from security is compensated by the gains earned from the other securities or investments.

Balanced Fund is the very good instrument available in the market in which some proportionate amount of money is invested in risky instruments (shares, stocks) and the rest of money is invested in safe instruments (debt securities). The proportion of such investment is decided in a manner that investor hardly bear any loss.

Mutual Funds

Mutual fund is a professionally managed type of collective investment scheme that pools money from different investors and invest it in stocks, bonds, short term money market instruments and other securities.

Mutual funds are regulated by Association of Mutual Funds of India (AMFI) and all the company’s issuing Mutual Funds have to fulfill the guidelines of such regulatory authority.

Mutual funds are basically meant for investors having low investment amount with them as it pools money from different investors and moreover it considered as one of the safest mode of instrument available in the market for investment purpose.

Conclusion

At last investor should take care of various things before making any investment which are as follow: –

• Always obtain written documents explaining the investment
• Read and understand such documents
• Assess the risk-return policy
• Know the liquidity and other safety aspects
• Deal only through a recognized intermediary ie SEBI recognized broker
• Compare the details of investment with the other investment opportunities available in the market And other relevant aspects while making investments.