Stock market is like an indicator of economic health of a country. We everyday hear about stock market in TV or read in newspaper. Many of us understand the nitty gritty of stock market, but many do not.

History of stock market

The stock market concept developed way back in 13^th century. However, it took shape in 16^th century when Italian companies first issued shares. In 1602, the first stock exchange came up in Amsterdam. It is followed by stock exchange in New York, London and other countries. The Bombay Stock Exchange came up in 1875.

What is shares of a company?

A company can raise funds to run its business in two ways – borrowing from banks or capital from promoters i.e. person who owns the company. When capital is raised from promoters, the company issue a certificate as a proof which is known as share certificate.  It is commonly referred to as shares or equity.

Holding shares of a company means partly owning the company. When someone hold shares of multiple companies it is referred as stock. Most of the time stock is used to mean shares only.

What is stock market?

Companies are permitted to raise funds from public for their different requirement subject to fulfilment of guidelines and norms of SEBI. The process is known as IPO (Initial Public Offer). On successful IPO, the company need to register itself with a stock exchange, wherein shares of different companies are sold or purchased.

Companies are also allowed to borrow money from public through bonds. Difference between shares and bond is that investment in shares continue till the company exist, though owner may change. Investment in bond is for a definite period. The company has to return the money to the investor at the end of the period with interest. During the definite period ownership may change.

There are many intermediaries involved in the IPO process such as registrar of shares, custodian of shares, brokers, trading agents, rating agent etc. The activities of these intermediaries including stock exchange, buy and sale of shares and bonds are all part of stock market.

How stock market works?

Once IPO is approved by SEBI, the company goes out to market with the IPO. They advertise, approach institutions who are potential investors and hold meetings at different places for public awareness. Institutions and public apply for shares of the company either through banks, brokers and trading platforms.

One need to have a dematerialised or demat account with the custodians to apply for shares. During the IPO process, the company has to appoint a registrar of shares. The registrar will finalise the number of shares to be allotted to investors depending upon the number of shares offered and number shares applied for. This process is known as share allotment.

An investor may or may not get as many shares applied for. The allotted shares will be credited to demat account of the investor. The shares are then listed with stock exchange. Till this stage it is known as primary market.

If an investor proposes to sale the shares or purchase new shares, he or she has to approach a broker. Now a days many trading platforms are available wherein the investor can place order for buy and sale online.

The broker or trading platform find the buyer or sellers in stock exchange and carry out the transaction. This is known as secondary market.

What are the products in stock market?

Primarily it is only the shares and bonds of the companies. There different variants like futures, options and certain mutual fund are also traded in stock market.

What are advantage and disadvantage of stock market?

The advantage of stock market are,

1. Through stock market an investor can take ownership right in company and become entitled to dividend, bonus, right shares etc. High amount of shareholding may give voting right also. The shareholder will be able to vote for or against decisions taken by the company.
2. It provides high liquidity to investors. Whenever the investor wants buy or sale shares of a listed company, it can be done through stock market.
3. All the players including intermediaries are highly regulated by SEBI.
4. Only short and long term capital gain tax are applicable. Losses can be off set or carry forward upto 8 years.
5. Everything is online. Transaction cane be done on the go from anywhere.

The disadvantages of stock market are,

1. It is highly volatile. The price of shares changes almost every day.
2. The associated risk factors are varied. There are risk of company not performing well and its share price go down. The shares price may also go up or down due to government policies, economic conditions, political instability, global factors etc.
3. In case of any eventualities with the company, the shareholders are paid last.
4. Investment in share market take the investor through an emotional roller coaster when prices go down or up.
5. Too many information, makes the investor puzzled. Therefore, the onus of decision making is purely rest on the investor.

Should you invest in stock market?

It’s an integral part of modern economies. Despite advantage and disadvantage of stock market, stock market participation is must for wealth creation. Therefore, it is advisable to invest in stock market after knowing its prons and cons.

What are the things you need to know before investing?

The important things that you must know before investing are,

• Study the background of the company whose shares you want to buy. Things like the reputation of the promoters, financial performance, industry performance, future outlook of the company etc.
• Study the performance of the share in stock market – volume of trade, share price fluctuation, comparison with share market parameters etc.
• Your own risk appetite. All human are not equal. Different people have different risk-taking capability. Therefore, you must assess your own risk bearing capacity before making investment in share market. It could be low, moderate or high. Now a days the risk associated with any shares is published in all medias. Align your risk-taking capacity with the risk of the shares.

Conclusion

Investment in share market is important for wealth creation. So make it part of your personal finance. It may not be convenient for everyone. One should keep the following points in mind while deciding to invest in stock market.

1. Set a price at which you want to buy shares of a company. Monitor the market and buy shares when it touches your desired price. Similarly, set a price for sale. Execute the sale when the share price touches that level.
2. Don’t get emotionally attached to your investment. Follow your target price and execute buy or sell at that price irrespective of whether market is going up or down.
3. Make your investment for long term – 3 years or more. Unless your intention is booking short time profit.
4. If you find following stock market difficult, switch to mutual fund.
5. As you grow older reduce investing in equity proportionately.