Share markets are a common conversation topic at all social gatherings. whether she is 20 or 50, or whether she is an engineer or doctor, everyone has her own opinion as to how and when to invest. This hype about the share market is to a considerable extent justified. Share markets apart from being a rewarding career are an excellent source of passive income.. However, whilst the gains from investing in the share market are very encouraging and enticing, a single wrong decision can cost Millions. Thus, it is imperative to have a thorough and in depth understanding of the share market, before one plans to take the plunge.
This article aims at giving its readers a ‘sneak -peak’ into the functioning of the Indian share market. The tips at the end are certain to enable even laymen become prudent investors.
What is Share Market?
Share markets, in technical jargon referred to as ‘Capital Markets’play a vital role in the development of the economy. They serve as a platform for smooth flow of funds from those who have surplus funds to those who are in need of these funds. Take for instance, Mrs. Banti has a surplus of Rs. 1lakh in her bank account, after meeting her daily needs. If the amount remains in her account, it would not grow. Hence, Mrs. Banti wishes to invest the amount in some avenue so as to earn some returns. Similarly, Bablu Ltd. is a large company engaged in manufacturing shoes. It is in dire need of funds to finance its future projects. Borrowing costs from banks are very high and out of its grasp. Hence, it would benefit from raising the amount from individuals such as Mrs. Banti and pay them a portion of its profit.
Hence, the capital market in layman terms provides the platform for movement of funds from ‘persons having surplus (such as Mrs. Banti) to ‘persons in need of these funds’ (such as Bablu Ltd.)
Over the past couple of decades, India’s capital market has grown exponentially, both in terms of the number of investors and the corporates accessing the market.
Functioning of the Capital Market
As stated earlier, Capital Markets facilitate the flow of funds from persons having surplus funds (investors) to entities in need of funds to finance their growth and development (corporates).
The Capital Market broadly functions as under:
A) Stock Exchange:
A Stock Exchange is at the heart of the capital market. It is comparable to an online market place where investors and corporates interact and buying and selling of securities(shares, etc.) takes place. As of today, there are two stock exchanges in India where majority of the trading takes place namely, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
B) Corporates:
Corporates access the Capital Market to raise funds to meet their growth and developmental needs. A corporate accesses the Capital Market for the first time through a process called Initial Public Offer (IPO). Under an IPO, the corporate offers its shares to the general public. Once, the public has purchased its shares, the shares are listed on the Stock Exchange.
C) Investors:
Investors are persons (individuals, banks, financial institutions etc.) who have surplus funds. They access the Capital Market to channel these funds and earn a return on their investment. Investors can access the Capital Market in two ways:
(i) Purchasing the shares offered by corporates during an IPO (discussed in (B)).
(ii) Purchasing shares post their listing:
Once, the IPO process is complete and the shares are listed on the Stock Exchange, they are available for free trading on the stock exchange. The investors who had purchased shares at the time of IPO can sell the shares. These can be bought by other investors. The trading takes place continuously. However, unlike other markets, the trading on a Stock Exchange is faceless, i.e the buyers and sellers do not directly interact. The buying and selling takes place through the stock exchange window.
D) Demat Account:
All transactions in the Capital Market are in electronic form. To access the Capital Market an investor has to open a ‘Demat Account’ with a Stock broker. Demat Account is similar to a bank account, the only difference being that here one holds shares. When an investor purchases shares, they are credited to her Demat Account. Similarly, when she sells shares, they are debited from her Demat Account. Like a bank account, an investor can obtain an online statement of the shares in her Demat Account. An investor has to trade through a broker only and can’t access the Capital Market on her own.
E) Price of Shares:
The price of the shares listed on the Stock Exchange fluctuates continuously. The major factors influencing the price of a particular share include:
A) Demand and supply for that share
B) Economic, Political, Social or Environmental developments in India and abroad.
C) Policies of the Government and Reserve Bank as also foreign governments and institutions.
D) Developments in that specific sector or industry in which the company operates.
Investors buy or sell a particular share basis its current price, past performance and future projections.
F) SENSEX and NIFTY 50:
There are thousands of shares listed on Stock Exchanges and the price of each share varies basis some unique factor. Hence, it is difficult to get an overall perception of the Capital Market. To meet this challenge, the Indian Capital Market has created SENSEX (for the Bombay Stock Exchange) and NIFTY 50 (for the National Stock Exchange). These are, simply put, baskets of shares representing diverse industries and sectors of the Indian economy. The value of SENSEX and NIFTY 50 varies basis the movement of the shares contained therein. Thus, if the value of SENSEX and NIFTY 50 rises, it signifies boom in the Indian Capital Market and vice versa.
G) Securities and Exchange Board of India (SEBI):
SEBI is the chief regulator in the Indian Capital Mmarket. Its main objects are “protecting the interests of investors in shares and to promote the development of, and to regulate the Capital Market”. It has laid down variegated regulations to accomplish the aforementioned objects.
Major Capital Market Instruments
While Equity Shares are the most commonly known instrument in the Indian Capital Market, there are many instruments which can be invested in depending the needs and objects of the investor. Following are the most common instruments.
| Sr. No. | Instrument | Meaning | Suitable for Investors willing | Return on Investment |
| 1. | Equity Shares | Equity shares in ordinary parlance, represent fractional ownership of a business. Equity shareholders are the owners of the corporatein which they invest. They enjoy all the rewards as also bear all the risks arising from the business. | Take high risks to earn high returns. Investment in equity shares warrants in depth knowledge of the Capital Market. | A) Capital Gain on selling the shares (Difference between the Selling Price and the Purchase Price)
B) Dividend (portion of profits distributed by the corporate to its shareholders). Dividend income is quite significant and uncertain as solely depends on the discretion of the corporate. |
| 2. | Debentures, Bonds and Corporate Deposits | Debentures, bonds and corporate deposits are like loans given by investors to the corporates. Investors of these instruments are lenders who would be repaid their principal on the expiry of a fixed tenure. | Take low risks and have a stable income. Such investors are willing to earn low returns | Periodical interest payments.
Unlike dividend, interest payment is mandatory for the corporate and hence, the interest is fixed and regular. |
| 3. | Mutual Funds | Mutual Funds pool money from numerous investors who wish to make investments having similar investment objective. In simple words they are baskets comprising of diverse securities like shares, bonds, debentures etc. depending on the objective of that fund. An individual invests in mutual funds by purchasing units of that fund and earns basis the appreciation in the value of her units.
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There arevarious types of Mutual funds to meet diverse needs of investors: for instance, high risk for high return, low risk for low return, balance between risk and return etc.Mutual funds are managed by highly skilled and experienced ‘fund managers’. Thus, these instruments are ideal for investors with less knowledge of the capital market. | A) Capital Gain on selling the units of Mutual Funds (Difference between the Selling Price and Purchase Price). |
| 4. | Government Securities | Government Securities (G Sec) are issued by the Central or State Government towards raising a loan from the public, to finance important government projects or budget deficits. They are similar to instruments in (2) and are issued for a fixed tenure, after which the principal is repaid to the investor. | Take low risks and have a stable income.Such investors are willing to earn low returns | Periodical Interest payments |
| 5. | Derivatives | Derivatives are instruments whose value is determined basis some underlying asset such as currency, security, commodity etc. | Take very high risks to earn very high returns. Investors need to have a large capital and have vast knowledge and experience in the Capital Market. | Capital gain |
Tips for prudent investing
A) Have a vision: Before diving into the capital market, one must have a vision as to what she desires to accomplish by her investment. For instance, X may aspire to create an additional income stream, while Y may want to create a corpus to meet future expenditures or contingencies.
B) Gain knowledge of finance:
It is imperative to have a basic understanding of finance and cash flows. For instance, if A buys a car, the car would be an asset for her if she uses it as a Taxi )as she would earn from it): while the car would be her liability, if she uses for her personal use [Reccomended read— Rich Dad Poor Dad by Robert Kiyosaki].
a)
C) Gain knowledge of capital market:
One must have an in depth understanding of the capital market, the securities offered and their pros and cons, the various entities involved and the like. [Reccomended read—this bulletin followed by Youtube videos on variegated subjects].
b) Be updated about economic developments:
One must be abreast about the major developments in the Indian and global economic environment. For beginners, it is recommended to read the opinion/ editorial section of Business newspapers/ websites as opposed to directly jumping to the news section. In fact, one may also start from business sections of local dailies such as The Hindu, Indian Express (as they are in simpler language as compared to business newspapers).
c) Be willing to take risks
d) Make an Investment after thorough study
The Indian capital market is flooded with free advice and opinion. There are scores of news outlets, individuals and companies giving suggestions on what to buy or sell. One must not fall in the trap and make her decision only basis her own study or on the opinion of an expert.
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If in r/o of a Reputed Company, large nos of investors want to sell their shares, then how the said Company manages its cash flows.