The world of investing has grown so accessible to everybody that most people can now start off minor investments from a young age. In fact, one’s investments can reap greater dividends and profits when one chooses to start them in the early years. If you are a beginner looking to invest in the share market, certain points should be made clear. Things such as learning the meaning of a Demat account as well as your trading account are a few things that will help you in understanding the investment process, as well as its mode of operation. Here is a simple share market guide so one can make the process of investing as a beginner easier.
What Are Shares?
Covering the share market basics for beginners will be impossible without defining what shares are to start off with. This is essential before you begin investing in them. When a company enters into the share market so it can raise capital, it does so in the form of shares it issues. The shares issued represent the unit measurement of the company’s wealth. For instance, if a company issues 10,000 shares worth ₹100, this means its capital is ₹10,00,000. Hence, the more shares a company buys, the greater is the proportion of profit or loss one sees in the company.
Types of Shares
Shares are generally of two types. They can be either preference shares or equity shares.
- Equity Shares: Known as ordinary shares, equity shares form a major proportion of the company’s total shares. If you have equity shares in a company, you have the right to vote on the company’s issues. However, there is risk involved with equity shares, and you will likely face the brunt of market fluctuations.
- Preference Shares: As the name suggests, preference shares offer investors certain privileges which the equity share investors can miss out on. Dividends are distributed to preference shareholders and only then are they passed on to equity shareholders. Even if the company is liquidating, the preference shareholders will get the advantage of being paid first.
What is a share market?
The share market for beginners is basically a place where shares are sold and bought. There are two main types of share markets: the primary share market and the secondary share market.
- Primary Share Market
This is the share market where companies aim to raise capital for the first time by issuing new shares which are to be purchased by investors. The IPO —abbreviated from initial public offering — is one such method by which companies aim to raise capital. Here the investor can receive shares from the respective company directly. The shares in a primary market are issued on a less or more uniform price.
- The Secondary Share Market
In the secondary share market, the primary shares which are issued are to be traded. In the secondary shares market, you can either buy or sell shares. This type of share market is the place where both buyer and seller come into contact for this transaction to be carried out. Share prices in this market constantly fluctuate as this depends upon the proportion of buyers to sellers. If one has more sellers than buyers, the price of one’s shares will be higher valued whereas if the number of buyers was to be less than the number of sellers, then shares would get devalued.
To understand both the secondary and primary share market, you will have to understand what a Demat account and a trading account is since both of these play essential roles here.
What is a Demat account?
A Demat account is akin to a savings account. However, whereas a savings account acts as a vault for your money, a Demat account does the same for bonds, shares, ETFs, etc. People no longer have to deal with the share market through physical share certificates. Through one’s Demat account, you can choose to keep all of your investments in a single place in a digital form. This reduces the risk of losing or damaging physical share certificates but also ensures that the process of investing is smooth and quick.
Demat accounts use a technology known as dematerialization. Through this technology, physical share certificates can be converted into a digital format. By turning your physical shares into dematerialized securities, you can access them like e-money. To open a Demat account, you are required to pick a DP or depository participant. The DP acts like a broker or an agent who works as an intermediary between you and your depository with whom you are going to open your account.
While a Demat account offers you the facility to store your securities in an electronic form, you only have the faculty of buying and selling shares in the market through a trading account. A trading account is used to connect with other investors whom you will be engaged with when it comes to transacting the process of buying or selling shares.
In fact, your bank account needs to be linked with your trading account for shares to be bought or sold. The process of opening one’s trading account is very similar to that of one’s Demat account. The only difference is that a broker is required instead of a Depository participant. Additionally, or bank account details will also be required.
The Bottom Line
Even with this guide, there is no easy way to make a successful investment. A share market is a volatile place and one can only make predictions about where the market will move. Although stock trading for beginners might feel tricky or intimidating, it is worth knowing that experience plays a huge role here.
Now that the market is taking its original shape again, a safe way to proceed with share market investing is to observe the past year’s performance of companies. You should also remember that shares need a substantial amount of time to increase their overall value. A company is unlikely to become an instant hit within a year or two, so the longer time you wait, the more likely you are to land a gem.