Money Thoughts

Unlocking the Stock Market: Taming the Market and Building Your Wealth

The terms “share market,” “stock market,” and “equity market” are often thrown around, igniting both excitement and fear. Stories of Warren Buffett and Rakesh Jhunjhunwala’s wealth through stock market investments inspire, while tales of losses deter others. This mixed narrative, coupled with mischaracterizations of the market as pure gambling, keeps many from exploring its potential benefits. However, amidst these diverse perspectives, the stock market’s importance and allure are undeniably growing.

One major barrier for ordinary people is the lack of understanding surrounding the stock market, coupled with the fear of losing their investments. However, contrary to popular belief, the fundamentals of the stock market are not as complex as one might imagine. At its core, it’s simply a platform where shares of companies are bought and sold.

Established companies in India list their shares on the stock market to raise substantial financial backing for growth and expansion. When you buy listed shares, you gain a small ownership stake in the company. As the company performs well, its share price increases, potentially generating profit for you through dividends and capital appreciation. However, if the company struggles, the price may fall, leading to losses.

Significant resources are crucial for the emergence of large-scale enterprises in any country. Stock markets play a vital role in facilitating this by creating the necessary conditions for capital raising. They provide a platform for established companies to access funding from a wider pool of investors, including individuals and other businesses actively participating in the market.

Stock Market Indices

One way is to list companies on share markets. Companies that meet the prescribed criteria can be listed on the Indian stock exchanges BSE and NSE. Such listed companies are called listed companies. Companies enter the stock exchange for the first time through Initial Public Offering (IPO). When a company offers its shares to the public for the first time, it is called an Initial Public Offering (IPO). The first issue of shares is called the primary market. After that, these shares go to the secondary market.

There are mainly two stock markets in India. Bombay Stock Exchange (BSE) and National Stock Exchange (NSI). BSI started its operations in 1875 and is the first stock exchange in Asia. Launched in 1994, NSSE is India’s largest stock exchange in terms of market capitalization. It revolutionized the stock market by introducing electronic or screen-based trading in India. NSI is also the world’s largest derivatives exchange in terms of contracts traded.

The Indian stock market boasts a variety of publicly traded companies, categorized by industry and function. To gauge the overall market performance, specific groups of similar stocks are combined into stock indices. These indices serve as benchmarks against which individual stock or sector performance can be compared.

Indian stock exchanges – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) tracks its performance index:

• BSE Sensex: Comprises 30 of the largest and most actively traded companies listed on the BSE.
• NSE Nifty: Tracks the performance of 50 of the leading blue-chip companies listed on the NSE.

While both indices reflect the broader market sentiment, they differ in composition and weightage. It’s important to note that the Sensex comprises only 30 stocks, while the Nifty includes 50. This difference may lead to variations in their movements, even when the general market trend remains the same.

Regulation by SEBI

All transactions in the stock exchange should be done through a stock broker registered with the exchange. Shares are available in digital formats today. We should have three types of accounts for buying and selling shares. Savings account, Trading account, and Demat account. The stock market investment can be easily started with the help of a stockbroker or through a trading app. Shares are bought and kept in a demat account. First, the money in the savings account is transferred to the trading account. The trading firm uses that money to buy and sell shares.

The stock market investments

There are three main types of investments in the stock market: individual stocks, mutual funds, and exchange-traded funds (ETFs). Each offers different benefits and risks.

• Individual stocks: When you buy a stock, you’re purchasing a small ownership stake in a company. This gives you the potential to profit if the company’s share price increases, but also exposes you to the risk of the company’s performance.
• Mutual funds: These pool money from multiple investors and invest in a diversified basket of securities, such as stocks, bonds, and other assets. This provides investors with broader exposure to the market and reduces the risk associated with individual stocks.
• ETFs: Similar to mutual funds, ETFs hold a basket of underlying assets, but they trade on exchanges like individual stocks. This allows for more flexible buying and selling throughout the day.

In addition to potential capital appreciation, some companies also pay dividends to their shareholders. These are regular payments made from a portion of the company’s profits. Holding shares for the long term can increase your chances of benefiting from both price appreciation and dividends.

Adding to this diversity is a plethora of financial instruments beyond just stocks. Investors can explore avenues like mutual funds, systematic investment plans (SIPs), derivatives, currencies, commodities, and bonds, among others. This diversification does two things: it buffers risks by spreading investments across different asset classes, and it unlocks the doors to participate in India’s burgeoning economic growth.

Beyond the popular domain of stocks, the Indian market boasts a vibrant tapestry of listed companies. From established giants in sectors like energy, infrastructure, and pharmaceuticals, to exciting startups buzzing in IT and e-commerce, the market offers a rich tapestry of investment opportunities.

You don’t need lakhs and crores to invest in the stock market. Investing in the stock market doesn’t have to be about big money. You can start small, with as little as Rs 500 a month through mutual funds. It’s a habit that not only adds discipline to your life but also creates a valuable safety net for your future. Over time, with the power of compounding, your investments can grow significantly, providing you with higher returns and peace of mind.

While only a small percentage – around 2-3% – of the Indian population currently invests in the stock market, it holds the potential for good returns in the long term. However, it’s crucial to understand that it’s not a get-rich-quick scheme. Chasing short-term gains often leads to disappointment and potential losses. Instead, view the stock market as a way to build wealth over time by investing in companies you believe in and have studied.

Remember, the stock market inherently carries risk. To navigate this effectively, seeking professional guidance from qualified financial advisors familiar with the Indian market can be invaluable. Their expertise can help you make informed investment decisions based on your circumstances and risk tolerance.