Stocks and Shares Made Easy
By Rakshitha Leo on ALTCOIN MAGAZINE
What is the share market and why does the world obsess over it? What is this money making platform that churns out millionaires overnight? Is the sharemarket really the most ideal investment option? Should you dive deep into this quintessential money producing factory right away or stay far, far away from the chaos? Let’s find out…
What is the share market?
The share market in its epicenter is an ecosystem in which varied companies sell shares/stocks/commodities that can be bought by people at a specific rate and then sold at a profit/loss depending on the price of the share in the share market at that specific moment in time.
Buying a share refers to owning a part of the company. Since you’re now a part-owner of the company, a very small portion of it, you are permitted voting rights. A voting right is the right of shareholders to vote on matters of corporate policy, including decisions on the makeup of the board of directors, issuing securities, initiating corporate actions and making substantial changes in the corporation’s operations.
Owning a share also allows one to be eligible to obtain a dividend annually. A dividend is essentially the total amount of profit earned by a company equally distributed among the shareholders of the shares depending on the number of shares owned by the person. A dividend is only given by companies under 2 constraints:-
They should have been profitable during the particular year and the profit curated shouldn’t be archetypal for a future plan such as expansion, buying equipment, purchasing another company etc. If the particular company ticks these boxes effortlessly, they’d provide its buyers with a dividend at the end of each quarter.
In rare cases, when the company is surpassing all expectations and have a steady growth rate implying a large profit, they can provide an interim dividend anytime during the year too.
What are the plethora of options available for an interested investor in the share market?
One can invest in: stocks, bonds, mutual funds, futures, and options.
There are mainly 2 kinds of stocks: Common stock and Preferred stock. Common stock refers to the stocks put out by varied companies that anyone has the right to buy. The price of the stock is dependent on the value of the company at that particular moment in time and hence they’re highly volatile in nature. It varies according to the need of the stock in the market and according to policies/behavioral policies/performance of the company. On owning the stock, one has the right to vote to make decisions for the well being of the company. Dividends are paid every quarter only if the company has earned a considerable profit in that quarter.
Preferred stock, on the other hand, is a much safer alternative. It ensures that dividends are paid either monthly or quarterly and have a higher priority while issuing dividends than common stock. The dividends paid are either fixed or vary depending on benchmark interested rates like LIBOR and are completely undeterred by the ebb and flow of the general market. Preferred stocks may also be callable (the company can purchase the stock back from the buyer at any point of time in case of bankruptcy). Since they’re a much safer option, they’re less volatile so they don’t provide a large margin for profit. Therefore its recommended for investors who are either new to the market and prefer a low-risk tolerance or investors who are close to the retirement phase.
Bonds refer to debt obligations. In case a company requires funds for varied purposes like expansion, diversification of a company to a new market, buying equipment, etc. they can issue bonds to the investors. The bonds are essentially a form of borrowing money from the investors so the money they receive when an investor buys a bond is a loan. This loan would be repaid back by the company to the investors over a period of time with an additional interest given at a predetermined schedule. The interest rates vary depending on the company.
Mutual funds comprise of a large number of shares, bonds and other assets collected by professional money managers. An investor can buy a mutual fund from an organization at the rate that they provide but they don’t have a say about the shares/bonds sold or bought by the mutual fund. The mutual fund investors are shown the aggregate value of the assets at all times and the investor can sell the mutual funds whenever they’re content with its value. It’s the safest option available for new investors who are either uncertain about the assets that they must trade in or sheerly overwhelmed by the choices in the market.
Futures are financial contracts where the underlying asset is an individual stock. Stock Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The price of futures is much higher than the price of the stock at a particular moment in time since they comprise of the spot price and the cost of carrying which is essentially the cost paid due to the risk the buyer of the stock takes upon himself/herself before selling it to the investor. Futures are extremely risk-averse. Therefore, they provide a very black and white environment with very little room for grey hence investors can either earn a large profit or lose a large sum of money.
Options comprise of buying/selling any underlying asset like security at a specific date and a specific rate. There are 2 types of options: A call option and a put option. A call option refers to buying an option that allows you to buy shares at a later time whereas a put option refers to buying an option that allows you to sell shares at a later time. It’s basically a bet one makes to the market determining if a share will fall or rise. A correct bet leads to a profit whereas an incorrect one leads to a loss. Options are traded separately on an options market.
How can a potential investor invest in the share market?
Find a broker. One cannot buy and sell shares directly from the share market, they require a broker to do so. Brokers comprise of individuals, companies or brokerage firms. The brokers need to be paid a brokerage fee which can either be fixed or variable depending upon the services that they provide.
Create a Demat Account. A Demat account is essential as it allows investors to hold their shares in an electronic form. One could visit banks/Demat Service providers/brokers in order to create a Demat account.
Would share market be the most ideal investment option?
Share market is a tricky yet extremely smart investment option. It’s pretty much like a game of snake and ladders but with multiple snakes and only a couple of ladders, one right move and you keep leaping forward or might even reach a ladder, but a wrong move could take you to ground 0 instantly. Statistics show that annually only about 7% of the people in India make a decent profit in the share market.
It is an extremely risk assertive field that you should indulge in only with a proper understanding of the market, a mastery of the behavior of the market and an abundance of discipline. With the culmination of all the 3 perfected, you should always diversify your investments. This serves umpteen importance as the investments in other stocks would provide you with a safety net to hold on to in case one of the assets you’ve invested in drops significantly/crashes.
Always remain hopeful but take calculated risks. A loss incurred on your investment in the share market must serve as a lesson to learn about where you’ve gone wrong and then implement the knowledge learned to other investments. However, after incurring loss over and over again, you must be able to look at the bigger picture and evaluate if the share market is really your cup of tea. Therefore a constant analysis of the profit/loss incurred to total investment is extremely cardinal in order to be an excellent investor.
Is share market just a rampant trend or is it one to stand the test of time?
The share market has been around for hundred’s of years all around the world and plays a huge role in a country’s economy. It provides individuals with an opportunity to own equity and take part in major decisions made by the company, all with the comfort of one’s own computer screen. It becomes a crucial part of the working of any organization due to a large amount of capital at stake and the multitudinous number of people monitoring and buying the assets. Although there’s currently a massive lack of knowledge about the working of the share market among the youth, I believe in years to come, it’d be an investment opportunity that both millennials and Gen Z’ers would equally consider. Therefore, in my opinion, I believe the share market is here to stay and would continue transforming the economy in years to come.
