How Does Indian Share Market Works: A Beginner's Guide

 

We don’t have to be smarter than the rest. We have to be more disciplined than the rest.

Share market is for disciplined man which I believe.Patience is important in share market. Share market is hard for one for who don't understand it or who don't have patience.So, you should understand before investing in share market or you can invest small amount and learn from it.It is life long learning process.Share market works in same way as you buy and sell the products\home\business. The process is same but methods are different. 

You can understand the structure and process involved in share market as you follow this article. By the end, you can understand the answer for three questions.

1. Why you should invest in share market?
2. How share market works?
3. What is share market?
   

Key reason for why people invest in share market:  

People invest in share market or any other investment because of inflation. The key reason is to earn more money. 

If you have ₹25, then you can buy ½ litre of milk, but after 20 years, one cannot buy same ½ litre of milk with the same amount. Because it will increase, say ₹35. As time increases, the value of money decreases. This is inflation in simple terms. To beat the inflation, one should work hard to earn more or invest in investment. Share market needs little investment. So, you can easily learn and earn from it. 

How share market works?

Before answering 'what is share market', you should understand how the share market works. I will discuss the Indian share market from two perspectives. One is from company perspective and other is investor perspective. 

Basically share market is a place which connects company and investor. This method can clarify your doubt. 

Share market from Company perspective:

Company will need money to run or grow their business. Company can raise money from loans. But they have to pay interest. So Company goes to share market to raise money.

Company or industries always has market value based on income statement, balance sheet, cash flow etc., for example, you decide to buy business from your friend and fix a prize (say 10 Crore rupees) based on income, asset, liabilities, customers etc., your friends also agree to sell it. This value (10 Crore rupees) is market value. 

If both are not agreed it, then market value should change accordingly. This market value will range from 5 Crore to 100000 Crore rupees or even higher for large companies like Tata, Reliance etc. So many investors cannot buy it. Therefore, the company split the business into a small piece which is called share. Company seeks stock exchange or share market because to raise money. 

Let us say Shape Up Company has 10 Crore market value. Shape Up company split the business into 10,00,000 pieces (shares). Initially company owner has 10,00,000 shares. The market value of one share is 10 Crores /10 lakhs, which is equal to 100 rupees. When they go to stock exchange, they will sell some amount of shares (say 2,50,000) to raise money. 

First Sale of share by Shape Up Company is called Initial Public Offering (IPO). Company gives their 25% of the share in company to raise the 2.5 crore. The Shape Up company will reinvest 2.5 crore to grow their company. This company will not pay interest. 

Instead company share the business with investor, which means you are part of owners. Shape Up company will list in particular stock exchange. Investors who buy the share/stock of Shape Up Company can sell/buy their shares in this stock exchange. When buyers buy shares rapidly, the share price will move up. When sellers sell rapidly, the share price will move down. 

Advantages of listed company in share market :

• To raise money. 
• There will be speculators (people buy shares more than it's worth) and traders (people buy and sell within day/week/month). These people will increase the Share value more than it's worth. 

This benefits the company and investor because they can sell the share more than it's worth. 

Disadvantages of listed company in share market:

• Shape Up Company should follow rules and regulation of the particular stock exchange Commission. In India, SEBI will regulate the publicly traded company. 
• Shape Up Company should report their quarterly, annual and other reports. 
• Expenditure related to stock listing process, annual report preparation, auditor fees will add to the company's expense.

Share market from investor perspective:

From company perspective, company raises money through stock exchange. Who will give the money in exchange of share of the company? Here comes the investor. People who want to raise their wealth invest their money in various investments. So they invest their money in various investments. One of best investment is share market.

Investor cannot buy/ sell share directly from stock exchange. There will be mediator between the stock exchange and you while buying and selling of share of the particular company. That mediator is called stock broker or investment service. These brokers give trading account and demat account. Investor can buy/sell shares of the company only through these brokers. They will interact with stock exchange and give you result. Stock exchange cannot manage all process. So, they give these roles to the stock broker and Investment services. 

For example, you buy shares of Shape Up Company during IPO process. Company sells their share first time in the market. This market is called primary market(process 1-2). In this market, you can buy share from company through demat account without intervening of stock exchange(process 2-3). After IPO process, Shape Up Company will listed on stock exchange like NSE, BSE etc (1-4).But, you decided to sell it. 

You can sell these shares to anyone who wants to buy the same shares through stock brokers with the help of stock exchange(3-5)). Likewise, buyers buy the share of Shape Up Company through stock brokers(5-6). Stock exchange will match the buyer and seller of Shape Up Company. This whole process is regulated by board like SEBI in India.

You can buy and sell the shares of many companies as you want. There is no need to hold the particular shares for a long period.Whenever a buyer is ready to buy the shares, you can sell it. If there is no buyer, then you can't sell the shares of the company. You need not to worry about it because a lot of order will take place in a single day.

Advantages of investors to invest in share market:

•  The return on investment is very high in share market.
•  No large money required
•  As long as you know about the company, you can buy/ sell the shares/ securities.

Disadvantages of investors to invest in share market:

•  You want to share the risk of the company as owners.
•  As company went bankrupt, investors may lose their investment.

What is Share\stock market?

As we know how the share market works, it will easy to understand the term 'share market'.Share\stock market is an electronic marketplace where people buy or sell the Share/securities of any publicly listed companies.People buy share/securities when they feel good about the company. People sell share/securities when they feel bad about the company. 

For company, the share market is a place to raise the capital for their future use. For an investor, it is a place for investment to earn more money. Simply, it is a place which connects investor and company. Excellent Company returns their favour by giving dividend, coupon interest, good profit, etc

The conclusion:

        As we understand the working of share market from companies and investors perspective, it will be much clear. Share\stock market works in same way in all other countries including India. This process is same for all the country. Company need money. Investors give that money. In return company give dividend and improve the profit of company. 

How do you feel about stock market? Please leave in comment section.