Market investments have become quite popular in the country of late. Investors who want to reap the benefits from equity markets can certainly invest in different shares in the stock markets.
However, first, they need to remove their hesitations and any preconceived notions to see the market from an unbiased viewpoint. This is important as most people dive headfirst into investing without any knowledge of what they are getting into and suffer significant losses.
What is a Stock Market?
A stock market is an aggregation of stock buyers and sellers who represent ownership claims in businesses (listed companies). Stock markets are often referred as equity markets or share markets and buying or selling of stocks is called stock trading.
A share is a unit of ownership of a company. Buying shares or stocks of a company means that you are buying a unit of the company. However, the stocks of a company can only be bought when the company launches its shares in the market (makes its shares public). Selling their own shares gives an opportunity to the company to raise funds for future growth. On the other hand, the shares remain involved in trading on exchanges such as the NSE or BSE.
The shares are launched in the form of Initial Public Offering (IPO). The price of IPO largely depends on the company’s net worth, number of shares issued, and industry reputation. The money spent by an investor to buy the shares goes to the company and the investors get the partial ownership of the company based on the number of shares bought.
In a stock market, the company that issued the shares gets only the amount collected through IPO. The money from buying or selling of the stock on an exchange does not go to the company. The money involved in trading is lost or gained by the investors as per the perceived value of the company.
The stock market is impartial and completely neutral. It does not work according to a specific plan or pattern. This makes the market highly unpredictable but also provides equal opportunities to everyone for money-making. Predicting or speculating in the stock market is quite difficult and experts often warn investors not to do that.
India has two major stock exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). And the majority of share trading in the Indian equity market happens through these two exchanges.
The National Stock Exchange was established in 1992 and started trading in 1994. This was the first dematerialised electronic stock exchange in the country. This was the first exchange in the country that provided an automated screen-based trading system that offered fast and efficient trading to investors across the country. It has a total market capitalisation of US$ 1.4 trillion making it the 12th largest stock exchange in the world.
Bombay Stock Exchange is widely known as the first and largest stock exchange in the Asian continent. The exchange was established in 1875 and is one of the world’s fastest stock exchanges with a median trade speed of 6 microseconds. Approximately 5,500 companies are listed on BSE and its total market capitalisation is US$ 1.83 trillion.
After IPO, the prices of shares may go up and down as per the financial condition and growth of the company. However, every single share needs to be tracked and recorded to assess the market performance of the company. And it is quite a difficult job without any specific approach and technology. This is why a small sample is taken that represents the whole market. An index acts as a sample of the market performance of stocks for the listed companies. It helps in the value assessment for a specific section of the stock market. The index is calculated as per the prices of the selected stocks. Nifty 50 (under NSE) and Sensex (under BSE) are good examples of a few leading indices in the world.
Each index has a base year and base value that acts as a benchmark for the computation of the share prices. Both Nifty and Sensex are calculated on free-float market capitalisation weighted method. This is a widely trusted method that considers all the variables and significant corporate actions such as stock splits, rights, etc.
Stock Market Regulation
Being a highly volatile market, the stock market needs to be regulated to facilitate fair trade and protect the investors from frauds and financial crimes. Securities and Exchange Board of India (SEBI) holds the authority of market regulation for stock markets. The organisation was formed in 1994 for the development, supervision, and regulation of the stock markets in the country. In the case of any breach of regulations, SEBI holds the authority to penalise the individual or the company. SEBI can be considered as the benchmark for honest and prompt regulatory actions in the country. And investors trust it as well.
Reasons to Invest in Stock Market
Experts have seen a trend among the investors regarding their investment habits in the stock market. Many investors have been jittery and apprehensive and have been looking for a stable market situation to make an entrance. However, timing the markets has always been a mistake committed by many. Investors should instead try to understand what they can gain or lose.
Stock market investments allow you to buy shares of stable and ever-growing companies or equities and receive dividends and / or see an increase their market value. This is a long-term strategy that requires patience and consistency. Here is a brief explanation of some obvious and important reasons to invest in the stock market.
- Diversify Your Investment: There is more than one way to invest in a stock market. The best way is to have a diversified portfolio.
Investors have to understand that there is a balance between their risk appetite and their risk tolerance. Many younger investors think that they should invest 90% of their funds or 100% in equities as there is enough time for their retirement. Moreover, they do not think about the consequences of pulling their funds before retirement.
You have to ensure that your personal goals are in sync with your risk tolerance before making any long-term investments. Do not invest just in equities. Make your portfolio a mix of various asset classes.
- Market Will Go Up With Time: The stock market is meant to grow over time and there are no two ways about it. Due to various social security schemes and institutional investments, the market prices will go up inevitably. Investors should never feel disheartened with a small fall in the market as it will eventually go up. Having patience and making conscious decisions is the key to becoming successful in the stock market.
- Conquer Inflation: The stock market offers a great way to counter the effects of rising inflation rates. Since the purchasing power of money decreases over time, long-term investment in stock markets offers good returns due to the rise of the market over time. Over a few years, the value of equity will increase and along with it, the value of your money.
Advantages of Long-Term Investment in the Stock Market
Experts always suggest keeping the stock market investments for a long time. Past trends and fluctuation in indices show high volatility in market returns in shorter time-frames. Investors who choose to remain invested for a long time, usually experience much higher returns. Here are a few advantages of long-term investment in the stock markets.
- Better Returns: If you take a look at the several decades of the historical asset class returns, you can see that stocks have outperformed most asset classes. On the other hand, riskier equity classes have also historically delivered better returns than most counterparts. Equity markets always carry the maximum potential profit but they also carry a significantly higher degree of risk.
- High Survival Rate: Stocks usually drop 10% or 20% of their value in a short period of time. Long-term investors tend to survive such highs and lows over a period of many years or decades. Such approach always leads to better returns. If you look at the investors who have stayed invested for long and held their shares for 20 years or more, they have never lost money. Even the ones that kept their emotions in control during the Great Depression, Black Monday, Tech Bubble, and the Financial Crisis, experienced significant gains as soon as the economy was back on the track.
- Avoidable Mistakes: The experienced ones always suggest not to time the market. Such speculations do not work in stock market as no one has ever done it successfully. Many investors claim to be long-term investors unless the market is going down. As soon as the market goes down their fear of loss takes over and they suffer heavy losses by making sudden withdrawals. This ‘buy high-sell low’ behaviour cripples their returns.
- Lower Capital gains Tax Rate: An investor who sells a security within one year of buying it will have to pay regular taxes. On the contrary, securities held for a period of more than one year attract capital gain tax that is levied at a way lower rate. Some investors may also qualify for a 0% capital gain tax rate.