When I was 14 years old, I won 500$ through the lottery, but I was unsure what to do with it. Fortunately, my father had taken it and bought shares from one of the companies.
Seven years later, the 500$ had risen to 26,000$. This is the power of the stock market. With knowledge and patience, you can easily make money from it.
Share market is built for everyone from small to big investors. It is everyone’s dream to be a millionaire through the stock market.
However, they have no idea where to begin. Also, some of them are confused.
Are you one of the confused individuals? Do you want to invest in the stock market?
If so, this article will prove very useful to you.
Investing in stocks is one of the most popular ways to generate wealth in the modern world. There are several stories about investors in the stock market, from horrific losses to inspirational success stories.
This investment opportunity is attractive because it treats every investor differently based on how they invest. Stock investing can be a profitable endeavor if you know how to do it correctly.
What is Share Market and how does it work?
Before we discuss the Share Market, we’ll take a closer look at shares.
What does Share Mean?
Suppose a company earns profits and seeks to expand.
The company decides to launch a new product that requires large factory installations and skilled workers – a significant investment.
It doesn’t have the funds to set up this kind of system. So, it borrows money from a bank or financial institution or raises money in another way without paying interest on the raised amount.
To achieve this, you can ask partners to contribute a certain amount to a company’s capital.
The company can do this by issuing shares. In order to raise capital, companies issue shares. Depending on how many shares you own, you determine your percentage stake.
Therefore, if a company is worth Rs.10 crore and you hold shares worth Rs.1 crore, then you are a 10% partner. If the company makes a profit, you’ll receive a share of this.
This is a simple way to understand shares.
Since a share certifies your ownership in a company, you can sell it to a third party for a profit.
Suppose, If you are a partner in XYZ company, you can transfer your rights in the company to a third party by notifying the company about it.
Imagine you want to become a partner at Bank of America. How would you find its shares? A company issues shares only when it wants to raise capital. How do you locate the existing shareholders of the company, and what is the price you pay for the shares?
Regulators around the world developed a marketplace where investors could buy and sell shares of any company listed on a stock exchange.
In this marketplace, you can buy Bank of America’s shares at the current market price, as if you were buying the stock yourself.
With the use of several intermediaries, the market ensures that the company is told about the change in shareholders, the buyer receives their shares, and the seller receives their money. This is the Stock Market or Share market.
A company launches an Initial Public Offering (IPO) when it issues shares for the first time.
An IPO is a primary share market where you can buy shares directly from the company.
Once the company has completed its IPO, the shares are listed on a stock exchange. The secondary market is where you can buy and sell shares with other investors.
The role of intermediaries in a share market
Several things can go wrong if you buy a company’s shares from another shareholder. Therefore, the stock transactions in every country are guided by regulatory bodies that prevent fraud.
In Nepal, the Securities Board of Nepal (SEBON) is responsible for this. As part of its definition of a process for share transactions, this body includes the following intermediaries to ensure maximum protection for all investors:
- Broker: SEBON mandates that all stock exchange transactions must be conducted through a registered stockbroker.
- Depositories and Depository Participant: Traditionally, shares were allotted in physical form. Today, shares are usually electronically distributed or dematerialized. In the same way that a bank account keeps a record of dematerialized money, a Demat account keeps a record of dematerialized shares. The account is provided by a depository participant.
- Bank: In order to receive the profits from sales, you need a bank account. Hence, a bank serves as an important middleman in share transactions.
- Clearing House: They ensure all transactions are successfully cleared.
How to Enter Share Market?
After you have a basic understanding of shares and the idea of the stock market, let’s move on to the next important question: How to enter the share market?
Well, there are some of the basic things you need to have before entering the share market. They are as follows:
An account where shares are held under the buyer’s name is a Demat account. It is possible to open a Demat account through any depository participant. Demat accounts are offered by most banks. Demat accounts can also be opened with ease through new investment platforms.
A Trading Account:
A stockbroker is required to open a trading account in order to invest in stocks. Do not forget, stockbrokers, to register with exchanges. Without a trading account, the shares cannot be sold or bought. So, a trading account is mandatory if you want to enter the share market.
Linking your bank account:
As an investor, you will purchase and sell stock over time. Therefore, you should make sure your trading account is linked to your bank account so that money flows seamlessly into and out of it.
With these accounts, you are set to start your share market journey.
There are two types of markets where you can invest your money. ( i.e) Primary Market and Secondary Market.
Investing in Primary Market (IPO)
It is the first step of entering the share market. Investing in the Primary market ultimately means investing in IPOs.
If you have applied to the IPO, congratulations, you’ve entered the stock market successfully.
You need a Demat account to hold allotted shares and a trading account to apply online.
It is also possible to apply using your bank account. It seems like new IPOs are issued every week or month.
Now, you need to remember that the number of shares you will receive will be determined by the market’s response to the IPO. As soon as the company receives all IPO applications, it allots shares based on demand and availability.
IPO applications can be submitted through your net banking account by using ASBA (Application Supported by Blocked Amount). During this process, if you have applied for an IPO worth Rs.10 thousand, the amount is blocked in your account instead of going to the company.
As soon as the shares are allocated, the exact amount is debited and the balance is released. Every IPO application must follow this process.
After the shares are allotted, they are listed on a stock exchange within a week and you can start trading them.
Investing in Secondary Market
Here is where real investing begins. When we refer to the stock market, we usually mean the secondary market. The Secondary market is where investors and traders trade stocks.
You will need a trading account, a Demat account, and a linked bank account to invest in the secondary market.
By visiting your broker, you can buy or sell your shares. However, nowadays, most people prefer to trade or buy their shares online.
If you want to invest in the stock market online, you can do so by:
- Just log into your trading account.
- Decide what share you want to purchase or sell.
- Before buying or selling, Make sure you have funds in your account for purchasing and shares in your Demat account for holding.
- Set a price for what you want to purchase/sell.
- Depending on the situation, wait for the seller or buyer to arrive.
- You will transfer shares/money and receive money/shares at the end of the transaction.
It is a simple process. Nevertheless, becoming a successful investor requires hard work.
SEEK PROFESSIONAL ASSISTANCE IF CONFUSED
In case you are still confused and not confident about investing in the market or you lack time, energy, and resources, do not worry as several professional licensed Portfolio Management Companies offer a full range of products and services under Portfolio Management Services (PMS).
These portfolio managers invest on your behalf in capital markets based on your investment goals and expectations.
These services provide you with the opportunity to tap into the benefits of the capital markets while charging minimal annual and performance fees. They can also restructure and further manage your existing portfolio.
Due to the constant change and increasing technicality of the stock market, retail investors are strongly advised to seek professional advice before making investments, and to avoid investing on herd mentality — invest wisely!
Frequently Asked Questions
How much money do we need to enter the share market?
We don’t need a huge amount of money to enter the stock market. You can start your share market journey by applying for the IPOs. A minimum amount of money is needed.
Is Demat Account Compulsory before Investing?
Yes, a Demat Account is mandatory before we get started investing. Without it, you can’t hold the shares of a particular company.
Can Poor People Enter Share Market?
Anyone can join the share market. Everyone has the right to invest wherever they wish. It depends on your capital, whether you have enough to invest or not.
Before you enter the share market, you should have basic knowledge about the market. Without the right knowledge, you will lose money in the market.
As Thomas B. Macaulay said, “Half knowledge is dangerous.”
So, I advise you to learn about the market and how its works. Then, you should enter the share market through primary market or IPOs.
You barely lose any money in the primary market, and eventually, you will have enough knowledge and capital to invest in the secondary market.