A share market is a place where share investors buy and sell shares from publicly listed companies. The two types of share markets in India are the primary market and the secondary market. The primary market is where firms issue new shares to raise capital, while the secondary market is where these shares are traded between investors. Both markets are part and parcel of economic development since they assist firms in raising funds and wealth for investors.
India has a flourishing stock market. The country has two major stock exchanges, namely the Bombay Stock Exchange and the National Stock Exchange. The investors trade stocks online with their trading accounts. The price of stocks increases and decreases for different reasons, including the changing demand and supply position, the performance of companies, policies of the government, and the psychology of investors.
What is the Share Market?
The share market is a capital market where issues of shares of firms are issued as well as exchanged. It represents a connecting point between those business firms that demand capital and savers who aim to invest money for good profits. Companies may list their share issues on a stock exchange where investors can then purchase such issues to acquire an interest in the concerned business.
The share purchase process turns the investor into a shareholder, thereby making him eligible to receive dividends whenever the company distributes its profit. The share market is the heart of the economy since it is the source where businesses seek capital and also provides investors with an opportunity to increase their wealth. It is governed by the rules and regulations of the SEBI (Securities and Exchange Board of India), which thus brings transparency and fair trade.
There are two types of share markets- the primary market and the secondary market. The place where a company issues its new shares to the public is termed the primary market, and the place where these shares are traded between investors is termed the secondary market.
How does the Stock Market work?
A stock market is an exchange platform where buyers and sellers purchase shares at market prices. The firms raise more capital when they issue shares that offer an IPO. Immediately following the issuance of shares, these can be bought or sold in the secondary market by investors.
SEBI frames the rules for these stock exchanges. The trade happens on the stock exchanges such as BSE and NSE. Investors provide orders to their respective brokers who buy and sell, and this buying and selling happen on their behalf. Demat accounts make electronic trades with a digital record of shares held by the shareholder.
The demand and supply of stocks and shares determine the price. When there are more buyers, prices increase for stocks and shares, but when people want to sell more, prices decline. Other factors that influence the cost of stocks include the performance of companies, prevailing economic conditions, and general trends in the global market.
Through stock exchanges, two profitable ways investors could benefit are in stock price appreciation and receiving shares of the company’s profits to return to its equity holders, known as dividends. Through stocks, they can be exchanged for quick realization of gain-intraday-trading-and a long-term basis investment.
Types of Share Market
The share market in India is basically divided into two categories:
1. Primary Market
The primary market is where firms first sell new shares to the public to raise capital. This source of capital is also referred to as an IPO: Initial Public Offering. The buyers of shares in the primary market are investing directly in a firm. The money raised in this market is injected into new business, paying outstanding loans, or financing new projects.
Key Features of the Primary Market
The primary market enables a firm to raise capital by issuing new shares into the public market. This has provided businesses with an opportunity to expand and increase operations.
- Investors can buy their shares at a predetermined price or even at a quoted price through the book building, which is basically an auctioning process. The shares are later allotted and thus are listed on the stock exchange.
- The investor cannot trade the shares issued in the primary market with another investor. They have to buy it from the company that issues the share.
- Before the issuing company issues the shares, it has to issue a prospectus regarding its financial position, future proposals, and risk factors. That is what the investor should know before investing in the shares.
- Once issued in the primary market, then these shares become eligible for trading in the secondary market, where the investor can sell and buy with another investor.
Primary Market Issues Types:
a) Initial Public Offering (IPO): When a private company issues its shares to the public for the first time, then it is an IPO. After the IPO, the company is listed on any stock exchange. Stockbrokers take applications for IPO shares.
b) Follow-on Public Offering (FPO): A listed company issues further shares to raise additional funds in the form of an FPO. It does so after the IPO when the company requires more capital for growth.
c) Rights Issue: A rights issue allows existing shareholders to buy more shares at a discounted price. It helps companies raise capital without bringing in new investors.
d) Private Placement: They are issued to institutional investors (banks, mutual funds, etc.) and not to the public. It takes less time than an IPO and lets companies raise money without having to face lengthy regulatory processes.
e) Preferential Allotment: It is issued at a discounted price to selected investors or financial institutions. It is also used to reward early investors or strategic partners.
2. Secondary Market
This is the market where shares sold in the primary market are traded among investors. This market ensures liquidity for the investor, thus allowing them to sell their shares at any given time.
Features of the Secondary Market
Investors in the secondary market trade with each other at the stock exchanges such as BSE and NSE. The company has no hand in it.
- The price of a share in the secondary market increases or decreases according to the demand and supply. More buyers increase the price, whereas more sellers reduce the cost.
- Investors keep the shares in the demat account and place buy and sell orders through a trading account that is linked to the bank account for easy transfer of funds.
- The secondary market is elastic, and investors can sell their shares at any time. This is liquidity, making it easy to enter or leave investments.
- Some of the various types of market participants who trade in the secondary market are retail investors, institutional investors, mutual funds, and foreign investors.
Types of Secondary Markets:
a) Stock Exchange: A stock exchange is an organized platform where securities are authorized and traded. Examples: NSE (National Stock Exchange), BSE (Bombay Stock Exchange), NYSE (New York Stock Exchange), and LSE (London Stock Exchange). The trading is through electronic means that make use of online interfaces.
b) Over-the-Counter (OTC) Market
These are markets that allow two parties to sell to each other without necessarily using the central exchange. This market caters to more of the stocks of small-scale firms that don’t qualify to be on an exchange market. It has a higher risk because the regulation is lower in OTC markets.
3. Derivatives Market
The financial contract, whose value is derived from an underlying asset such as stocks, commodities, indices, etc. Investors use derivatives to hedge risks or speculate on future price movements.
Types of Derivative Contracts:
a) Futures Contracts: An obligation and commitment are legally binding, and one must commit to either buy or sell an asset at a particular price in the future. Futures are applied to hedge price variations among investors.
b) Options Contracts: It allows investors a right but no obligation to purchase or sell an asset at a given price prior to a set date. Used in risk management and speculation
c) Forward Contracts: Commodity and currency
d) Swaps: A financial instrument between two individuals that uses cash flows or liabilities. Of interest rate and an interchange of the currency markets.
4. Commodity Market
A commodity market that uses physical commodities like gold, silver, oil, agriculture, and metals, among others. Two types of commodity markets;
a) Spot Market (Cash Market): It sells the commodity for immediate delivery. It has a vulnerability due to supply and demand conditions on prices.
b)Futures Commodity Market The sale of contracts is about a commodity for which delivery is scheduled for a predetermined price in the near future. This facilitates hedging over risks in price.
Some Exchange of Commodities:
- MCX: Multi Commodity Exchange of India
- NCDEX: National Commodity and Derivatives Exchange
- LME: London Metal Exchange
5. Forex Market or Foreign Exchange Market
The Forex market is the biggest financial market across the globe, and currency trades take place there. It runs 24 by 7. This facilitates global investment and trade. Types of Forex Trading Markets:
a) Spot Forex Market: The currencies are sold immediately upon delivery at current market rates. It is the most liquid and fastest segment of forex trading.
b) Forward Forex Market: A currency exchange contract is established for a date in the future at a previously agreed-upon price. A hedging instrument for corporations that are exposed to currency fluctuations.
c) Futures Forex Market: Standardized forex contracts are traded on a controlled exchange, such as the Chicago Mercantile Exchange (CME).
6. Bond Market (Debt Market)
In the bond market, governments, companies and banks can raise funds by issuing debt products. In the bond market, the benefit of fixed-interest income is passed on to investors with time. Types of Bonds in the Bond Market are:-
- Government Bonds: Issued by the governments; it has low risk
- Corporate Bonds: Issued by private companies for raising funds.
- Municipal Bonds: Raised by local government for public purposes.
- Convertible Bonds: Convertible bonds are convertible into shares of the company.
Functions of Share Market
It helps the economy at large by enabling companies to raise funds and investors to earn returns. The share market acts as a bridge between companies looking to raise money and individuals or institutions willing to invest in a venture to gain returns. Efficiency and transparency help the economy grow and stabilize.
- Capital Raising Platform
Companies raise funds from the primary market because they float their shares to investors. The company floats its Initial Public Offerings when it requires capital to expand, produce new products, or invest in infrastructures. This is one of the means the companies use to raise their capital without borrowing money. The investors bought the issued shares and hence became partial owners of that business. This develops the capital of the firm financially and, thereby, makes it worthwhile in terms of competitive markets.
- Liquidity Provider
Liquidity is thus available in a share market that enables investors to sell and purchase shares without much hassle. Shareholders have the provision of liquidating their investment anytime by selling the stocks they hold to some other buyers; unlike real estate, fixed deposits normally take quite a long period. The stock market does facilitate instant exchange, and that is why such high liquidity results in the liquidity of funds once in need so that the shareholders have the flexibility of withdrawing the funds according to their demand.
- Wealth Building
Investing enables one to acquire wealth generation, either in the form of capital appreciation or dividend income. Compound interest becomes applicable for long-term investors because they earn more and more earnings based on the profits that have been reinvested. Stocks are the best tools for retirement planning, financial independence, and attainment of any financial milestone. This investment in a fundamentally solid company fetches fantastic returns over the long term.
- Price Determination
The prices of stocks differ based on demand and supply and the performance of the company. Market analysts and institutional investors fix the prices by giving orders to buy and sell. Economic events, reports on company earnings, and worldwide trends decide the value of stocks. If regulated well, the stock market becomes transparent and is free from price-fixing.
- Economic Indicator
The stock market shows the economic health of a country through the performance of big companies and industries. When the stock market rises, this usually means there is reasonable business confidence, a growing economy, and investor optimism. Conversely, a falling market may be due to an economic slowdown, reduced corporate earnings, or geopolitical instability. Governments and policymakers are also keeping tabs on stock trends so as to appraise general economic conditions.
How to Invest in the Share Market?
Share market investment requires planning, research and self-control. For amateurs, it is necessary to observe the following steps step by step.
1. Demat and Trading Account Opening
A Demat account holds the shares in electronic form, and a trading account is used to purchase or sell stocks. SEBI-registered brokers or banks can open such accounts. The choice of the brokers should be made based on a comparison of their brokerage fees and other features. Good trading platforms must provide real-time information, analytics, and ideas about investment.
2. Fulfill all the KYC formalities
Investor identification is completed when a PAN card or Aadhaar card, with bank details, is provided. KYC is followed compulsorily by all brokers for following finance norms. Few of the brokers ask for the investor’s proof of income for trading derivatives. The opening account procedure has also become very free of hassle through the online verification of KYC.
3. Fund the Account
An investor has to deposit the amount from their bank account into the trading account before they start trading. Most of the brokers have multiple payments like net banking, UPI, and NEFT. It is easy and smooth through most of the platforms. Some of the platforms even allow margin trading, meaning putting in your money with borrowed money. However, beginners should be cautious when they use excess leverage because the risk is always there.
4. Study Stocks
An investor needs to study the stock before investing in it. Investors are supposed to view the financial statements of any company, revenue growth, and market trends.
The position of competition, wherein technical analysis is used, means that the company looks at price charts and trading volumes to predict stock movements. Investment in different industries reduces the risk and increases the stability of the portfolio.
5. Trade
People can place a buy or sell order through research on the trading platform. The order can be a market order that gets executed in the market, or it may be a limit order that gets executed at the given price. There is a need to track and update stock performance with regard to news related to the market. Initially, the stakes should be smaller, and gradually, the amount of experience should be increased.
Share Market Instruments
Share markets offer investment instruments for all different appetites and specific financial goals. Among the most crucial trade instruments in the stock exchange are:
1. Equity Shares
These are ownership in the company, and the shareholder has voting rights. The returns come in the form of capital appreciation and dividends. However, the share prices vary with the market conditions; thereby, it is a hazardous and high-return investment. Long-term investment in a good company may create colossal wealth.
2. Preference Shares
Preference shares are very famous for providing fixed dividends. The payout priority is much higher than equity shares. They do not have voting rights. They are much safer compared with common stocks. People seeking stability in income are always more likely to invest in preference shares compared to ordinary equity shares. The preference shares might be redeemable or convertible according to the company policy.
3. Bonds
Bonds are fixed-income securities that one uses to produce the sum required to be mobilized for mobilizing funds meant for financing either governments or corporations. A bond generates a periodical coupon and returns the capital sum at its due date of maturity. Conservative investors take it up because it happens to be much less volatile in comparison with a stock. Three types of which are generally involved are government, corporate, and municipal.
4. Mutual Funds
They save individual research because professional fund managers take care of it. The pooled amount of many investors invests in diversified stocks and bonds. They have a wide range of equity mutual funds, debt funds, and hybrid funds. Liquidity and flexibility are provided along with investment through SIP or Systematic Investment Plan.
5. Derivatives (Futures and Options)
Derivatives are financial contracts whose value is derived from underlying assets like stocks or indices. A futures contract is the buying or selling of an asset at a predetermined price on a future date. An options contract gives a right but no obligation to purchase or sell an asset at a predetermined price. Derivatives are used to hedge risks and for speculative trades.
6. Exchange-traded funds (ETFs)
ETFs can be traded like common stocks by virtue of trading on the stock exchange. ETF offers exposure to an index, a commodity, or a bond at a lower cost than mutual funds. ETFs are apt for passive investors due to diversification, liquidity, and transparency. Popular ETFs track indices like NIFTY 50, S&P 500, and NASDAQ.
7. Initial Public Offering (IPO)
An IPO is when a private company issues shares first to the general public. Companies can then quickly raise funds through the investors for listing on the stock exchange. There are ways in which the shareholders can apply in the IPO for their respective stockbrokers’ share prices to undergo trends after the companies get listed. A good piece of research could give a great return on investment.
Types of Share Market in India FAQs
1. In India, how much is the number of share markets?
There are two kinds of share markets in India; the first kind is where companies float new shares to the market. The second, however, is investors trading on existing shares.
2. How many kinds of trading are on the share market in India?
Two significant types of trading include intraday trading and delivery trading, with shares bought /sold within one day and respectively held for quite an extended period.
3. Which of the major Indian stock exchanges?
There are basically two essential exchanges: the India-Bombay Stock Exchange and the National Stock Exchange.
4. What does the SEBI function in a share market?
SEBI: Securities and Exchange Board of India, which controls a fair stock exchange, safeguarding and providing complete investor protection by strictly maintaining transparent exchange rules and orders.
5. Is Share market investing secure?
This means price movement always happens in the market, which is full of risks; however, proper research and a proper technique help to reduce those risks and give good returns as well.
