At the core of all business is money. In the case of a manufacturing unit, inputs require money to buy raw material which after sale of those goods is again converted back to money. Raw material and finished goods may change, but the common theme is money.
The difference between production cost and sales is called profit. This is the earned income for a company after selling the goods and services. At times, the profitable income earned through sales wouldn’t be enough to meet the company’s daily working capital needs.
In case, if the company plans to expand their businesses across places, depending solely on profits doesn’t take them anywhere. As the company requires additional money other than profits, they invite the public to invest in the company in return for a share of their earnings. After scrutinizing the overall performance of the business and other related aspects, interested people put their money into the company. In lieu of the investment, the company offers them shares.
Now, what is a share? Let’s consider a company as a big round fluffy cake. There are 10 people who are interested in investing in the company. So, the founders of the company divided the cake into 10 pieces. As per this example, each cake piece is termed as a share. This is just for the sake of your understanding.
All those who buy the shares of the company become the owners of that particular company. To put this in simple words, a share is a part of the company’s equity ownership. People who buy the shares of the company become equity shareholders. These people also become the joint owners of the company and are entitled to voting rights.
When a person claims that he or she has invested in the company, it means they have bought the shares of that company. He/she is now the shareholder of that company. On their investment made, the shareholders get returns or interest in the form of dividends. A company generally pays dividends to the shareholders if they are profitable.
A share market is a marketplace where interested parties (buyer and seller) buy and sell shares, securities, bonds, and other financial assets.
To buy and sell shares in the stock market or stock exchange, you need to have a trading and demat account interlinked with your bank account. You can open these accounts at any registered stockbroking firm or a depository participant. For instance, TradeSmart Online, an established stockbroking firm that deals with trading and demat account services, and much more.
There are three types of shareholders, namely, Equity Shareholders, Preference Shareholders, and Debenture Shareholders. Each has different rights in the company.
Equity Shareholders: If a person buys the shares of the company, he/she becomes a part owner corresponding to the share value. They are called equity shareholders for buying the equity in the form of a share in the company. They are entitled to dividends. The dividend rate keeps differing due to multiple factors and happenings in the business. You find equity shares as a liability in the balance sheet of the company.
Preference Shareholders: Companies can boost their capital by issuing preference shares. Also known as preferred stock, people who buy these shares are referred to as or claimed to be preference shareholders. The best part of these shareholders is that they get fixed dividends on a regular basis. Irrespective of the company’s performance and profit-generating capability, preference shareholders are the first ones to get dividends.
In the end, if the earnings are still left, the company then issues the remaining to the equity shareholders. It’s obligatory to pay dividends to the preferred shareholders.
Debenture Shareholders: Sometimes, companies need extra money to upgrade machinery or establish a new business in another country, or for some work reasons. So, they raise funds by taking loans from the public. People who give loans or credit to the companies are called creditors, debenture shareholders being one of them. Unlike the equity shareholders, these people are not entitled to any voting rights or decision-making in matters of the company. In return for the credit or loan, debenture shareholders are paid fixed interest. When the company ceases or liquidates, debenture shareholders are the first people to be paid, followed by preference shareholders and equity shareholders.
Share market is classified into two types, namely, primary market and secondary market. In the former, a company issues, and allocates shares to the public, whereas in the latter, the actual trade happens. Well, let’s know the difference between the two in detail.
Primary Market: It’s a name given to a fictitious marketplace where companies offer securities to the people. In this market, companies invite and sell financial instruments like shares and bonds with the aim to raise capital. When the company issues shares for the first time in the primary market, it means going for an IPO or Initial Public Offer.
All new companies are registered in the primary market before issuing shares. The company’s shares get listed on the stock exchange post selling the shares in the primary market.
Secondary Market: After the shares are issued in the primary market they are eligible for trading in the stock exchanges. All the trading activities take place in the secondary market. All trading transactions happen through a stockbroker and a depository participant. You can avail all types of trading services by opening a trading and demat account with a stockbroking firm. If you are looking for a better trading platform, you can check TradeSmart Online. They offer trading services at the best brokerage rates. You can get customized trading products that fit your shoes.
Now that you have understood the concepts of the share market, it’s very important to know the list of financial instruments that are traded on the stock exchanges. It’s classified into four divisions – shares, bonds, derivatives, and mutual funds. Let’s understand each of them in detail.
Shares: If a company wants to go public or raise funds, they approach the people for investment. Upon putting the money in the company, he or she gets the shares worth the investment made. For instance, if you have bought 5% of the company’s shares, you have ownership rights for the 5% of the entire company. A person holding a share is called a shareholder. In simple words, buying the shares of a company means buying the stake of that particular company.
Bonds: Sometimes, companies have big projects that require enormous funds. One way to raise money is by approaching the bank for a loan. Another way is by issuing bonds. Both bank loans and bonds are almost one and the same. If the company approaches the public to borrow money, they issue bonds as a note stating that he or she will be paid at a certain future date along with a fixed interest. The creditors will get the interest through periodic intervals.
Derivatives: Futures, options, swaps are some of the most commonly used derivatives by traders and investors. Trading volume in derivatives is much higher than those in the cash market.
Mutual Funds: While most traders or investors avoid trading due market volatility, mutual funds give traders the required push to invest in the market again. A mutual fund is an investment vehicle that collects a pool of money from investors who have a common objective to fulfill. Through mutual funds, investors can invest their money in shares, bonds, ETFs, Tax saving schemes, and other diversified holdings in the market. Mutual funds are administered by experienced professionals called fund managers. They are responsible for the growth of the mutual fund as well as your investments made in that fund.
We all know that investing is risky. In order to ensure that trading takes place safely and that everyone is following the rules and regulations, we have a governing board known as the Securities and Exchange Board of India aka SEBI. Its objectives can be summarised in three main points
The SEBI is mandated to oversee the secondary and primary markets. SEBI has the responsibility of both developing and regulating the market. It regularly comes out with new and comprehensive measures to ensure that the end investors benefit from the dealings in securities.
Bottom Line
Every company requires capital to run its daily business operations. A company can meet its capital requirement by raising funds through the public in return for ownership and dividends. Only equity shareholders get the owner title. There are 3 types of shareholders: equity shareholders, preference shareholders, and debenture shareholders. Investors invest via two markets: the primary market and the secondary market.
The former market is where companies issue securities to the public, and the secondary market is where you find the listed shares on the stock exchange to trade. There are various financial instruments in the market that can be bought and sold by investors. The list includes shares, bonds, derivatives, and mutual funds.
Bombay Stock Exchange, National Stock Exchange, Multi-Commodity Exchange, National Commodity and Derivatives Exchange, India International Exchange, Indian Commodity Exchange, NSC IFSC, Calcutta Stock Exchange, and Metropolitan Stock Exchange.
No, it’s not possible for you to trade after the market hours. Though trading doesn’t require you to be physically present, trading post-market-closure is next to impossible. The trading hour starts at 09:15 am and ends at 03:30 pm. Trades placed post-market hours are called After Market Hours.
Frankly, there’s no difference between a stock and a share, and both are the same. They are used synonymously by the people in the stock market. It’s just jargon, wherein India we call it as a share, whereas in the U.S. they are known as stocks.
In stock market, you find shares of multiple listed companies. Other than that you also find financial instruments like stock futures, stock options, exchange-traded funds, commodities, and other derivative products.
There are plenty of things you have to keep in mind before investing in any company’s stock. The list includes profitability, risk, valuations, performance, earnings for the last few years, growth, analytics, etc.
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Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
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Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.