What is Share Market? A Comprehensive Handbook

When it comes to investing your savings, the first thing that pops into mind is the share market, where financial securities are traded. That is undoubtedly true.

For the first time, the cumulative demat accounts in India clocked 10 crores in August 2022. Fast forward a few months, and that number crossed 11 crores in January 2023. Rising financial literacy, technology intervention, and disposable income are primarily driving retail participation in the Indian share market – Dalal Street.

But what is share market, and how does it work?

What is share market?

A share market is a financial avenue where the general public (or retail investors) buys and sells shares of publicly traded companies, derivatives, bonds, and exchange-traded funds (ETF). In India, these trades happen in the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

The Indian share market contains four critical components:

• Securities Exchange Board of India (SEBI): Regulates share markets in India. It facilitates the efficient and transparent working of securities markets. Also, it devises regulatory frameworks that companies, exchanges, and brokerages must follow to protect investors’ interests.
  
• Stock exchanges (NSE and BSE): Facilitate trade of financial assets and securities behind the scenes.
  
• Brokerages/Stockbrokers: An intermediary individual/firm that executes sell and buy orders for investors against a commission or fee.

• Traders and investors: Investors are individuals who purchase a company’s stocks to become its part owner. Traders buy and sell these equity shares.

How Do Share Markets Work?

Organizations raise money on share markets by selling a pre-decided portion of their ownership to investors – also equity shares of stock.

By listing their shares for sale on the share markets, organizations generate the capital essential to run and expand their businesses without taking on debt (s). In exchange for selling shares to the public, companies must reveal information and empower shareholders to contribute to corporate decisions (voting rights).

Retail investors use their money to purchase equities on the share market. As organizations use that money to improve their businesses, investors enjoy the benefits as their shares gain value over time, resulting in capital gains. What is more, they can receive dividends from companies as their profits increase.

How To Invest in Share Markets?

Demat account holders can invest in share markets in two primary ways – initial public offerings (IPO) and follow-on public offers (FPO).

What is IPO in the Share Market?

An IPO is a procedure where a private company makes shares of its ownership available to the public for the first time. The company then uses the fresh capital collected via the IPO to reduce debts, fund research & development (R&D), and expand operations.

To launch IPOs, organizations hire investment banks for the underwriting process to determine the price at which they will put their shares on sale. This involves auditing the company, including its value, financials, and future prospects, to create an underwriting document.

Then, organizations must file a Draft Red Herring Prospectus (DRHP), a document containing all the necessary information under SEBI instructions. They need to submit this document to the SEBI, Registrar of Companies, and stock exchanges.

Once organizations get approval from these authorities, they can market their IPOs on multiple channels, including news platforms, social media, and newspapers. Moreover, they rope in large institutional investors to promote their public issues and attract potential investors.

Finally, organizations announce a fixed date for the IPOs alongside the issue price ranges at which people can buy shares.

IPOs in India typically remain open for 3-5 business days for subscriptions. After people put in bids, companies finalize cut-off prices based on which shares are allotted to retail investors.

What is FPO in the Share Market?

FPOs are a way through which companies already listed on the bourses can raise fresh funds from the public and promoters. Companies announce their FPOs for the same reasons they launch their IPOs – debt reduction, expansion plans, new projects, and funding M&As.

The issue prices for FPOs are lower than the current market share price. Hence, this attracts new retail investors to purchase shares in the companies at a discount.

Since that company has already been listed on the share market, people have ample information about its financials and track record. As such, they can make more informed decisions about buying the companies’ shares.

If people invest in a company, they can claim a fraction of its profit depending on how many shares they have bought –  called a dividend.

What is Dividend in the Share Market?

Dividends are the profits some companies distribute to their shareholders. These payouts happen quarterly or annually. Companies’ boards of directors decide when and how often they should announce dividend distribution.

Investing in dividend stocks is an excellent source of passive income, especially if you have bought a significant volume of shares in a particular company.

Not all companies pay out dividends. Usually, a fast-growing firm may refrain from sharing its profits with its shareholders and using them for future projects. Likewise, a stable-growth firm may credit dividends to its shareholders’ bank accounts to retain them for reinvesting.

Companies that decide to distribute dividends pick either of these routes:

• Stable: Companies consistently pay dividends every year, no matter their financial results.
  
• Residual: Companies use the leftover capital to pay dividends only after they meet their business objectives.
  
• Hybrid: Companies determine a fixed dividend that is relatively small but is easily maintainable even when during financial fluctuations.

For instance, Vedanta distributed an equity dividend of 10150.00%, amounting to ₹101.5/share from April 2022-March 2023.

Charting Your Investment Course

While understanding share market basics might initially seem overwhelming, it will arm you with the compass to navigate the complexities.

Whether you want to safeguard your financial future, hit particular life goals, or build wealth, share markets offer inflation-beating returns, making them a more attractive investment option than gold or real estate.

Remember that share markets are ever-changing owing to multiple factors, from economic indicators to global affairs. Hence, keep educating yourself, stay updated, and adjust your strategies as circumstances evolve.

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