In the previous chapters, we have seen many types of investments. From those investments, let’s see exclusively about stock market investment. Generally, we know the Market is where “Buyers – Consumers” and “Sellers – Shop Owners” meet. We as a buyer go to a shop and purchase from the seller. As a buyer, we always try to buy at the lowest possible price and the seller always try to sell at the highest price. The stock market is just the same. It is a place where shares of pubic listed companies are traded. Traders can buy or sell the shares and make money from it. Let me explain it in more detail…
If a company, for example, Wipro needs more money to expand its business. What will it do? It may take a bank loan, sell its assets(Not a good idea though), ask for more money from the promoters, or can go for IPO(Initial public offering). If a company goes for IPO means, it is entering into the stock market.
Stock Market :
Primary Market
Secondary Market
Basically stock market is divided into Primary and Secondary markets. When Wipro decides to raise capital through the Stock market, it must go into the primary market. There are many processes in the primary market to collect money from the public. One of the main processes is IPO – Initial Pubilc offering. They decide their share price and offer it to the public to buy. Say for example if it wants to rise ₹1,00,000 capital(Just for understanding)through IPO, it may fix its share price as ₹100 per share. So the total number of shares available to the public will be 1000. If person A wants to buy 20 shares, he will bid for the share and pay ₹2000. Another person B may want to buy 30 shares, he will pay ₹3000. After the bidding dates are over, shares will be allotted to the concerned person’s account in electronic form.
After collecting funds through the primary market, Wipro now must enter into the secondary market. The secondary market makes the shares tradeable. Wipro shares will now be listed on the exchange trading platform. We can visually see the price changes of the company in the trading platform. If the company meets its expectation, the share price may go up from ₹100 to ₹120. If there are any issues the price may go down to ₹80. Now person A or B may sell his share if the price goes up to ₹120. For person A the profit would be ₹400 ((120-100)*20). Person B will get ₹600 ((120-100)*30).
In the secondary market, new investors who want to buy Wipro can buy the shares at market time. Investors who may want to sell their positions can sell them in the secondary market. The share price of companies will change depending on demand and supply. If demand for the company is high then the share price will increase. Demand and supply are based on various factors like market news, company earnings, Industry related news, etc.
1. Better returns:
One of the main benefits of investing in the stock market is that you can earn returns on your investment. Over a period of time, you will make money when there is an increase in the value of the stocks or investments that you own. Your capital will be appreciated. If you have invested in good dividend-yielding stocks, then your investment would give you both capital appreciation and dividend yield. Indian Equities have generated upwards of 12% CAGR (compound annual growth rate) over the past 10 to 15 years much better than savings account returns.
2. Better Diversification:
One of the key benefits of investing in the stock market is that it can help you to diversify your portfolio. You can easily diversify your investment with different types of securities such as stocks, bonds, real estate, gold, etc. Some of these may be more volatile than others, but all of them will offer different potential rewards. By diversifying your portfolio, you reduce the risk associated with each investment and increase the chance that you will achieve a return on your investment overall.
3. Liquidity:
Liquidity is an important characteristic of stocks that makes them relatively easy to buy and sell. When a stock is liquid, it means that there are a large number of buyers and sellers in the market for the stock, which makes it easy to find a willing buyer or seller when you want to buy or sell the stock. This is in contrast to less liquid assets, such as real estate which may take longer to sell because there are fewer buyers and sellers in the market.
4. Flexibility:
One of the benefits of investing in the stock market is that it allows you to start with small investments and gradually build up your portfolio over time. Investing in small-cap or mid-cap companies can be a good way to start because these companies often have more room for growth and can provide the potential for higher returns.
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