WHY INVEST IN SHARE MARKET?

We invest in shares to build our wealth in the long run. While some people view shares to be a risky investment, many studies have proved that putting your money in the right shares for a long period of time (five to 10 years) can provide inflation-beating returns — and be a better investment option than real estate and gold.

People also have short-term strategies while investing in share markets. While shares can be volatile over a short period of time, investing in the right shares can help traders make quick profits.

WHAT IS SHARE MARKET?

A share market is where shares are either issued or traded in.

A stock market is similar to a share market. The key difference is that a stock market helps you trade financial instruments like bonds, mutual funds, derivatives as well as shares of companies. A share market only allows trading of shares. 

The key factor is the stock exchange – the basic platform that provides the facilities used to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India’s premier stock exchanges are the Bombay Stock Exchange and the National Stock Exchange

TYPES OF SHARE MARKET

THERE ARE TWO KINDS OF SHARE MARKETS – PRIMARY AND SECOND MARKETS.

Primary Market:

This where a company gets registered to issue a certain amount of shares and raise money. This is also called getting listed in a stock exchange. A company enters primary markets to raise capital.

Secondary Market:

Once new securities have been sold in the primary market, these shares are traded in the secondary market. This is to offer a chance for investors to exit an investment and sell the shares. Secondary market transactions are referred to trades where one investor buys shares from another investor at the prevailing market price or at whatever price the two parties agree upon.

Normally, investors conduct such transactions using an intermediary such as a broker, who facilitates the process. Different brokers offer different plans.

HOW TO INVEST IN SHARE MARKET

First, you need to open a trading account and a demat account to invest in share market. This trading and demat account will be linked to your savings account to facilitate smooth transfer of money and shares.

Difference Between Demat Account and Trading Account

WHAT IS A TRADING ACCOUNT?

A trading account is an investment account that holds securities, cash and other holdings like any brokerage account. With a trading account, an investor can buy and sell assets as frequently as they want, that too within the same trading session. Some of the key elements that differentiates a trading account from other investment accounts are – the level of trading activity, the purpose of the activity and the risk involved in the activity. Typically, holders of a trading account are involved in day trading and are often seen exercising long-term buy and hold strategies.

For this reason, you need a special account through which you can conduct transactions.

A trading account is used to place buy or sell orders in the stock market. The demat account is used as a bank where shares bought are deposited in, and where shares sold are taken from.

THE REGULATOR

In India, the stock market regulator is called The Securities and Exchange Board of India, often referred to as SEBI. The objective of SEBI is to promote the development of stock exchanges, protect the interest of retail investors, and regulate market participants and financial intermediaries’ activities. In general, SEBI ensures:

  • The stock exchanges (BSE and NSE) conducts its business fairly
  • Stockbrokers and sub-brokers conduct their business fairly
  • Participants don’t get involved in unfair practices
  • Corporate’s don’t use the markets to unduly benefit themselves
  • Small retail investors interests are protected
  • Large investors with huge cash pile should not manipulate the markets
  • Overall development of markets

Given the above objectives, it becomes imperative for SEBI to regulate the following entities. All the entities mentioned below are directly involved in the stock markets. Malpractice by anyone of the following entities can disrupt what is otherwise a harmonious market in India.

SEBI has prescribed a set of rules and regulations to each one of these entities. The entity should operate within the legal framework as prescribed by SEBI. The specific rules applicable to a specific entity are made available by SEBI on their website. They are published under the ‘Legal Framework’ section of their site.

IPO SEQUENCE OF EVENTS

Needless to say, each and every step involved in the IPO sequence has to happen under the SEBI guidelines. In general, the following are the sequence of steps involved.

  • Appoint a merchant banker. In case of a large public issue, the company can appoint more than 1 merchant banker
  • Apply to SEBI with a registration statement – The registration statement contains details on what the company does, why the company plans to go public and the financial health of the company
  • Getting a nod from SEBI – Once SEBI receives the registration statement, SEBI takes a call on whether to issue a go-ahead or a ‘no go’ to the IPO
  • DRHP – If the company gets the initial SEBI nod, then the company needs to prepare the DRHP. A DRHP is a document that gets circulated to the public. Along with a lot of information, DRHP should contain the following details:
    1. The estimated size of the IPO
    2. The estimated number of shares being offered to the public
    3. Why the company wants to go public and how does the company plan to utilize the funds along with the timeline projection of fund utilization
    4. Business description including the revenue model, expenditure details
    5. Complete financial statements
    6. Management Discussion and Analysis – how the company perceives future business operations to emerge
    7. Risks involved in the business
    8. Management details and their background
  • Market the IPO – This would involve TV and print advertisements in order to build awareness about the company and its IPO offering. This process is also called the IPO roadshow
  • Fix the price band – Decide the price band between which the company would like to go public. Of course, this can’t be way off the general perception. If it is, then the public will not subscribe for the IPO
  • Book Building – Once the roadshow is done and the price band fixed the company now has to officially open the window during which the public can subscribe for shares. For example, if the price band is between Rs.100 and Rs.120, then the public can actually choose a price they think is fair enough for the IPO issue. The process of collecting all these price points along with the respective quantities is called Book Building. Book building is perceived as an effective price discovery method
  • Closure – After the book building window is closed (generally open for few days) then the price point at which the issue gets listed is decided. This price point is usually the price at which maximum bids have been received.
  • Listing Day – This is the day when the company actually gets listed on the stock exchange. The listing price is the price decided based on market demand and supply on that day and the stock is listed at a premium, par or discount of the cut-off price

WHAT HAPPENS AFTER THE IPO ?

During the bidding process investors can bid for shares at a particular price within the specified price band.  This whole system around the date of the issue where one bids for shares, is referred to as the Primary Market. The moment the stock gets listed and debuts on the stock exchange, the stock starts to trade publicly. This is called the secondary market.

Once the stock transitions from primary markets to secondary markets, the stock gets traded daily on the stock exchange. People start buying and selling stocks regularly.

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