A stock market, or equity market, is a private or public market
for the trading of company stock and derivatives  of
company stock at an agreed price The company stock/shares are listed on a stock
exchanges like National Stock Excahnge (NSE) and Bombay Stock Exchange (BSE).
When you buy a share of a company you become a shareholder in that company.
Shares are also known as Equities. The size of the world stock market is estimated
at about $36.6 trillion US at the beginning of October 2008. The world derivatives
market has been estimated at about $480 trillion face or nominal value, 12 times
the size of the entire world economy.
Trading volumes in the equity segment have grown rapidly with
average daily turnover increasing from Rs.17 crores during 1994-95 to Rs.14,148
crores during FY 2007-08. During the year 2007-08, NSE reported a turnover of
Rs.35,51,038 crores in the equities segment.
Investing in equities are considered the most challenging and
the rewarding, when compared to other investment options and have outperformed
most other forms of investments in the long term. Equities have the potential
to increase in value over time. Research studies have proved that investments
in some shares with a longer tenure of investment have yielded far superior
returns than any other investments. However, this does not mean all equity investments
would guarantee similar high returns. Equities are high risk investments. One
needs to study them carefully before investing.
When to start Investing?
The sooner one starts investing the better. By investing early you allow
your investments more time to grow, by accumulating the principal and the interest
or dividend earned on it, year after year. The three golden rules for all investors
are:
• Invest early
• Invest regularly
• Invest for long term and not short term.
For Beginners in Stock Markets
A first time investor needs to understand that every investment
carries certain degree of risk and the potential to earn is directly linked
to the degree of risk taken For a long-term investor, it is essential to ensure
that he earns positive real rate of returns i.e. rate of return minus inflation.
Equities, as an asset class, have the potential to achieve this. No doubt, equity
markets can be volatile over the short-term and that makes equity markets a
risky proposition in the short-term.
What drives Stock Markets?
All macroeconomic and microeconomic events effect the equity
price movement Some of which includes the policies adopted by the Indian government
and decision of the RBI, commodity prices, inflation, employment reading, Foreign
Institutional fund flow, Currency movement, corporate performance, political
events etc.
Over 1500 foreign institutional investors (FIIs) have registered with market
regulator SEBI as at the end of Calender year 2008.
Which are the factors that influence the price of a
stock?
Broadly there are two factors: (1) stock specific and (2) market
specific.
The stock-specific factor is related to people’s expectations
about the company, its future earnings capacity, financial health and management,
level of technology and marketing skills.
The market specific factor is influenced by the investor’s
sentiment towards the stock market as a whole. This factor depends on the environment
rather than the performance of any particular company. Events favourable to
an economy, political or regulatory environment like high economic growth, friendly
budget, stable government etc. can fuel euphoria in the investors, resulting
in a boom in the market. On the other hand, unfavourable events like war, economic
crisis, communal riots, minority government etc. depress the market irrespective
of certain companies performing well. However, the effect of market-specific
factor is generally short-term. Despite ups and downs, price of a stock in the
long run gets stabilized based on the stockspecific factors. Therefore, a prudent
advice to all investors is to analyse and invest and not speculate in shares.
What care should one take while investing?
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have
already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and
then, if satisfied, make the investment.
Who can Participate?
Participants in the stock market range from small individual
to large hedge fund traders. Large institutions like pension funds, insurance
companies, mutual funds, index funds, exchange traded funds, investor groups,
banks and various other financial institutions also participate.
How to get started in the Stock Markets?
No individual or institution can deal directly with the exchange
for buying and selling of shares. For investing in share markets, one need to
have two accounts with a stock broker – (1) Demat
Account, just like a bank account which holds shares in electronic
mode instead cash and (2) Trading Account, for buying and selling shares.
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