Have you ever wondered how people buy shares of companies like Reliance Industries, Infosys, or Tata Motors? Why do share prices rise and fall every day? And how can an ordinary person become a shareholder in a company?
To understand these questions, let’s start with the basics of the share market, how it works, and how beginners can get started.
What Is a Share?
A share represents a unit of ownership in a company. When you purchase shares of a company, you become a shareholder and own a portion of that business.
Depending on the type of shares and applicable rules, shareholders may have voting rights and may receive dividends when declared. However, dividends are not guaranteed.
Example of a Share in Everyday Life
Imagine you and seven friends buy a pizza and divide it into eight equal slices. Each person owns one slice, representing one-eighth of the pizza.
Similarly, when a company divides its ownership into shares, purchasing those shares gives you an ownership interest in that company.
What Is a Market?
A market is a place or platform where buyers and sellers exchange goods, services, or financial assets.
For example, people buy vegetables in a vegetable market, clothes in a clothing market, and fruits in a fruit market. Prices are influenced by supply, demand, and competition.
The share market follows a similar principle, but instead of physical products, investors buy and sell shares of companies.
What Is Share Market?
The share market is a financial marketplace where investors buy and sell shares of publicly traded companies. It also helps eligible companies raise capital by issuing shares to investors.
The terms share market and stock market are commonly used interchangeably.
For example, if you want to own a small portion of Reliance Industries or Infosys, you can purchase its shares through a registered stockbroker.
India has two major stock exchanges:
- National Stock Exchange (NSE): One of India’s major stock exchanges.
- BSE (formerly Bombay Stock Exchange): Another major Indian stock exchange.
These exchanges provide an organised electronic platform for trading listed shares and other securities.
How Does the Share Market Work?
Understanding how the share market works becomes easier when we break the process into five steps.
1. Companies Issue Shares
Companies may raise money for expansion, operations, or other business purposes by issuing shares. When a company offers shares to the public for the first time, it generally does so through an Initial Public Offering (IPO).
2. Investors Open Accounts
In India, investors generally need a demat account to hold securities electronically and a trading account to buy and sell them through a stockbroker. A linked bank account is used for transferring funds.
Before opening an account, read our guide on how to choose the right broker for investment and trading.
3. Buyers and Sellers Place Orders
Investors place buy and sell orders through their brokers. The exchange matches compatible orders according to its trading rules.
4. Share Prices Rise and Fall
Share prices change because of supply and demand, company performance, earnings, economic conditions, news, and investor expectations.
When buying demand increases relative to available selling supply, a share’s price may rise. When selling pressure increases, its price may fall.
5. Trades Are Settled
After a trade is executed, funds and securities are transferred through the applicable clearing and settlement system.
In simple words, the share market connects companies seeking capital with investors looking for investment opportunities.
What Is Share Market Trading?
Share market trading means buying and selling shares to benefit from price movements.
For example, suppose you buy 10 shares at ₹100 each.
- Purchase value: 10 × ₹100 = ₹1,000
- Selling value at ₹120 per share: ₹1,200
- Gross profit: ₹200
This calculation excludes brokerage, taxes, and other applicable charges.
However, if you sell those shares at ₹80 each, your gross loss would be ₹200.
Trading styles include intraday trading, swing trading, and positional trading. Investing generally involves holding shares for a longer period to participate in potential business growth. Both involve risk, and profits are never guaranteed.
Primary Market vs Secondary Market
The share market has two important segments.
| Primary Market | Secondary Market |
|---|---|
| Companies issue new securities to raise capital. | Investors buy and sell existing securities. |
| Example: An IPO fresh issue. | Example: Buying listed shares on NSE or BSE. |
| Fresh issue proceeds go to the issuing company. | Sale proceeds generally go to the selling investor. |
An IPO may include a fresh issue, an offer for sale (OFS), or both. In an OFS, the proceeds generally go to the selling shareholders.
Importance of the Share Market
The share market plays several important roles in the economy.
1. Capital Formation: Companies can raise funds for expansion, operations, and new projects.
2. Investment Opportunities: Investors can participate in the potential growth of businesses across different industries.
3. Liquidity: Investors can buy and sell listed shares more easily, subject to market conditions and available buyers and sellers.
4. Price Discovery: Share prices reflect the interaction between buyers and sellers and their expectations about businesses and the economy.
5. Wealth Creation: Investors may benefit from capital appreciation and dividends when declared. However, returns are uncertain, and losses are possible.
What Is an Equity Share Market?
The equity share market is the segment where ownership shares in companies are issued and traded.
When you buy equity shares, you acquire an ownership interest in a company. You may benefit if the business grows and its share price appreciates. Some companies also distribute dividends to eligible shareholders.
However, share prices can fall because of poor financial performance, high valuations, economic changes, or negative market sentiment. Research and risk management are essential before investing.
How Can Beginners Start Investing in the Share Market?
If you are new to the share market, follow these steps:
- Learn the basics: Understand shares, stock exchanges, trading, investing, and risk management.
- Choose a registered stockbroker: Compare brokerage charges, services, and platform features.
- Open the required accounts: Complete the verification process for your demat and trading accounts.
- Research companies: Study their business models, financial performance, valuations, and risks.
- Start according to your financial capacity: Invest based on your financial goals and risk tolerance.
- Diversify your investments: Avoid putting all your money into a single company or sector.
Remember, buying a share simply because its price is rising is not a complete investment strategy. Understand the business and its risks before investing.
Conclusion
The share market connects companies that need capital with investors who want to participate in business growth. Understanding shares, stock exchanges, trading, and investment risks helps beginners make informed decisions.
Start by learning the fundamentals, researching companies carefully, and investing according to your financial goals and risk tolerance. Remember, successful investing begins with understanding what you own and why you own it.
