What is share market?
A stock market may be a place where people buy/sell shares or stocks of publicly listed companies. NSE and BSE are the 2 major stock exchanges in India. An individual has to compulsory open a trading account to trade in the stock market.
What Is an Investment?
An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth. An investment always concerns the outlay of some asset today—time, money, or effort—in hopes of a greater payoff in the future than what was originally put in.
For example, an investor may purchase a financial asset currently with the concept that the asset will provide income within the future or can later be sold at a better price for a profit.
Imagine a company running its regular business earning profits and looking for ways to expand.
It decides to launch a new type of product that requires a huge factory installation and skilled workforce – a huge investment.
The company does not have the required funds to create this set-up. Hence, it looks for a loan from a bank or a financial institution or raising money in some other way that does not require interest payment on the raised sum.
One way to try and do this can be to feature partners by asking them to contribute a certain amount towards the capital of the company.
A company is legally permitted to try and do this by provision shares. Once a company decides to raise capital, it problem shares to people. The amount of shares held by you determines the share of holding you have in the company.
So, if a company is price Rs.10 lakhs and you hold shares price Rs.1 lakh, then you are a 10% partner in the company. You'll be eligible to receive a share of the profits created by the company.
This is a very simple way of understanding shares.
Now that you understand shares and also the concept of a share market, we come to the next important question: How to invest in shares?
Let’s first look at what you need to begin investing.
- PAN Card – It is necessary own a PAN Card to invest in stocks.
- Demat Account – This is the account which will hold the shares in the name of the client. You can open a Demat account with any depository participant. Most banks offer Demat account services. New age investment platforms also offer Demat account opening in a hassle-free manner.
2. Documents Needed
- (i)PAN Card
- (ii)Aadhaar Card
- (iii)A cancelled cheque from your bank account with your name on it
- (iv)Proof of address (from the list of documents accepted by the bank/depository participant/broker)
- (v)Photographs
Investment process
As explained above, there are two markets that you can consider – primary and secondary. We will look at the investment process in both these markets.
Investing in the Primary Market (IPOs)
Investing in the primary market involves investing in an IPO. You will need a Demat account to hold the allotted shares and a trading account to apply online. You can also apply through your bank account. Now it’s important to remember the number of shares allotted to you will depend upon the market’s response to the IPO. Once the company receives all IPO applications, it allots shares based on the demand and availability of shares.
You can easily apply for an IPO through your net banking account through a process called ASBA (Application Supported by Blocked Amount). In this process, if you have applied for shares worth Rs.1 lakh in an IPO, the amount is blocked in your banking account instead of being sent to the company. Once the shares are allotted the exact amount is debited and the balance is released. It is mandatory for all IPO applications to follow this procedure. Once the shares are allotted, they are listed on a stock exchange within a week and you can start trading them.
2. Investing in the Secondary Market
This is where all the action is. The secondary market is usually what we refer to when we say the stock market. It is the place where investors and traders buy and sell stocks. To invest in the secondary market, you will need a trading account, Demat account, and a linked banking account. If you are thinking about how to invest in share market online, then the answer is simple:
- Open a Demat and trading account with a linked banking account
- Log in to the trading account
- Choose the share that you want to buy or sell
- Ensure that you have funds in your account for buying and shares in your Demat account before selling
- Determine the price at which you want to buy/sell
- Wait for the seller/buyer respectively
- Complete the transaction by transferring shares/money and receive money/shares
The process is simple. However, becoming a successful investor is hard work. Let’s look at some concepts that you need to understand and tips that you can use for investing in the secondary market
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