Why do we invest? We invest to generate returns on our capital, fulfill our financial needs and secure our future. However, what happens when the monster of inflation eats into the returns? We definitely need an avenue wherein the returns beat the inflation and equity market is one such avenue.
One of the biggest reasons as to why investors choose to invest in equities is to beat inflation. The rate of inflation in the country signifies the rate at which the prices of things increase and they impact the daily lives of people. The rising rate of inflation eats into your returns as well because the worth of what you earn after 50 years will be much lesser than what you earn today. Equity investment is an avenue wherein the returns exceed the rate of inflation in the long run. Investing in the shares of a company is a risky proposition but it definitely pays off over a longer period. The key is to follow a disciplined approach and know well which stocks to buy.
What is a stock market?
We all have heard about share market, but do we know how it exactly works? Let us suppose that you want to purchase a book for yourself. You walk into your favorite bookstore, which sells books of all the leading authors. You pick up the published work you love the most; pay a price for it and now the book is yours. Similarly, a stock market refers to a platform wherein buyers and sellers meet to transact the shares of the publicly listed companies. Unlike the bookstore, it does not exist in the physical form. It is an electronic form of market wherein shares of the big listed companies like Reliance, Infosys, and Tata Steel are listed for sale and small (retail) and big (institutional) investors purchase these shares. You must also remember that the transaction of shares can be done only through an intermediary called the stockbroker.
Regulators in the Indian market
In India, there are two main exchanges: The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). There are also regional stock exchanges in other cities like Kolkata, Chennai, and Bengaluru, but the BSE and NSE are the two most important markets for transactions. The Securities and Exchange Board of India (SEBI) is the main regulator of the stock exchanges in India. The SEBI is established with a goal to foster the growth of stock markets in India, protect the rights of the retail investors, as well as, to set the legal framework and regulate the activities of the markets and financial intermediaries.
ight from the time you decide to purchase a share to the time the share makes its way to your demat account, there are various financial intermediaries involved in the act. The most important financial intermediaries are the stockbrokers, banks, and depositories. The stockbroker can be an individual or a company, which helps retail investors to invest in the markets. They help you to open a share trading account, guide you on how to open a demat account, and do the equity trading on your behalf. To do so, you can visit the broker’s office or make a phone call to them. Another way is to get access to the share market software or the trading terminal to punch the orders yourself.
We have had an overview of how share markets function but this brings us to a question, “Why do companies need to go public?” Companies need to go public or launch an Initial Public Offering (IPO) to raise funds for the expansion of their operations. When a company’s requirement for capital is huge and goes beyond what Venture Capitalists (VCs) and private equity can offer, it goes for a public offering. Some of the other reasons are restructuring debt, capital expenditure plans, or introducing a new product line.
The Indian stock market and top indices
The IPO is the launch pad for a company on the listed stock exchanges. After the IPO, its shares start trading in the markets wherein the buyers and sellers transact in a price determined by demand and supply. The prices of shares are impacted by the share market news and other economic events in the country or globally. The shareholders hold the shares for a particular time known as the holding period and get rewarded in the form of bonus, dividends, and rights issue.
There are more than 5,000 companies listed on the BSE and around 2,000 listed on the NSE. If you want to know the overall pulse of the market, it will be nearly impossible to check the price movement of each and every stock. Therefore, for the ease of the investors, the stock exchanges have constructed indices. Indices are a collection of few companies from varied sectors with maximum weightage on the particular exchange, as per their market capitalization. The indices are like a dashboard, which help you view the overall direction of the markets.
The BSE Sensex has a list of top 30 companies, while the NSE has Nifty, which includes a list of 50 companies as their flagship indices. Apart from these, there are also other indices based on sector or other segments of trading such as commodity trading, currency trading, or derivatives trading.
Key events that influence the share markets
Apart from micro factors such as the company’s results or its corporate actions, the other macro events that have an impact on the share markets are inflation, monetary policy, Index of Industrial Production (IIP), budget announcement or General Elections.