How to Play Share Market For Beginners : A lot of people come to the share market and what happens to them? People invest their money and sometimes destroy their wealth. They tell everyone that share market is like gambling. That it is impossible to make money from it. But friends, if you do thorough research and give your investment some time and keep your investment for long period then you can become a good investor in the share market. I, am RK Singh welcome to our Blog MoneyPip.
In which, if you are interested in the stock market, but you don’t know anything about it. We will help you become a good investor from a beginner.
Let’s start First of all, let me tell you what the market in the share market stands for. In any market there will be two parties who exchange something or the other with each other. Similarly when I talk about financial market, there are two parties. One party that needs money to run its business. Second party who has extra money that needs to be invested somewhere.
Imagine there is a company that needs money to run its business. It uses financial market to get money from investors which it uses for running its business. How does the investor give money to the company? How does this transaction happen? This transaction happens in two ways.
First method is shares. Imagine that a company is worth 100 rupees, It has ten shares. So one share is worth ten rupees. To get money, the company sells its two shares. Two shares were sold, so one investor gave twenty rupees for two shares. In this way, the company gives away its shares and the investor gives money for those shares.
A feature of share market is that for every share, an investor gets a certain percentage of ownership in a company. How much shares they buy they become owner to that much of the company.
The second method is debt. Debt, like when we take loans. Likewise, companies take loans and pay interest from time to time. After a point of time, they have to pay the full principal amount. Now you must be thinking why the investor bought the shares of this company. How does it benefit the investor?
Why the Investor Bought the Shares of this Company. How does it Benefit the Investor?
An investor can benefit from buying shares in two ways. First: price appreciation. To explain it in simple terms The first investor bought the shares of the company for ten rupees. Assume that the price of the shares doubled and became twenty. So the investor got ten rupees profit on each share. This is called share price appreciation.
Which Investors like us Commonly Ignore
Second: Which Investors like us Commonly Ignore. But friends, dividends are very important. What are dividends? Imagine that the company after running its business made a profit of rupees 100 in a year. Out of 100 rupees, the company kept 30 rupees for future expansion. How much has it left? Seventy rupees. This 70 rupees of profit is distributed among the shareholders. Assume that the company had ten shares then each shareholder gets seven rupees. This is called the dividend.
To explain it again, out of its profits, the amount after deducting what the company saves for future expansion what remains is distributed among the shareholders, the portion each investor get is called a dividend. An attribute of the dividend is that it is entirely upon the company to decide whether or not it wants to give out dividend. Because many companies don’t give dividends saying that it invests all of its profits on itself.
To give you an example of price appreciation a good example would be MRF shares. The shares that used to trade at 1500 rupees. For those who bought it then, it became 70,000 at some point in time. Whenever we talk about price appreciation many examples come to our mind. But we don’t pay enough attention to dividends. Come on, let’s talk about a company that has paid dividends to its investors from time to time. Because dividends are also a good means of income. And investors should pay more attention to it.
To talk about dividends, a good example is Coal India. The current share price of Coal India is around 200. And this company has till now paid over hundred rupees of dividends to its investors. So you can imagine how much profit you can make via dividends too if you choose a company that gives good dividends. If you are still confused about dividends, dividends come directly to your bank account whenever the company declares dividend. If I were you, I would be thinking I understood that dividends come from company’s profits.
How does the Share Price of a Company Increase?
But how does the share price of a company increase? If the share price of a company is now hundred rupees, how does it increase and become more? What is that factor that takes the price up? Now let’s talk about that.
How Share Price Rises or Falls
If try to tell in you in three words how share price rises or falls, Those three words are “demand and supply”. You must be thinking that I am confusing you by throwing big words. What does demand and supply really mean? Let me tell you. Imagine that a company started. The share value of that company was one rupee. There were hundred shares. The sales of this company was only ten rupees. After ten years the sales of the company increased to hundred.
So the company grew ten times. Even then what was the number of shares in the company? The shares were still hundred. But since the company grew more people would want the shares of this company because it is growing. When a company grows, more investors come forward to buy its shares. But the number of shares will remain the same. The supply will remain the same. Then what happens? More investors willing to buy means that the existing investors will increase the price.
How does Share demand increase?
So when demand increases of a company’s shares, its share price increases. How does demand increase? Demand increases with business growth. When a company performs well, the demand for its shares increase and its price increases. But friends, if the company does not perform, if the sales were worth ten rupees today and it became 1 rupees tomorrow, what will happen? The investors will think about selling its shares and buying shares from another company.
In that case, there will be more sellers than buyers. Then the share price will start falling. This is what is meant by demand and supply on the basis of which share prices rise and fall. Demand and supply is controlled by many factors.
How To Share Price Incress
Is a company’s growth a reason for increase in its share price? No, friends. There are multiple factors involved. There are a few macroeconomic factors that depends on the economy. Some are company-specific–based on how the company performs. Do not be confused. We will talk about these factors in detail in the upcoming post.
How Can It Be Share Sold?
Now you must be thinking that if an investor has bought a company’s shares and they want to sell it how can it be sold? how will this transaction take place? Will I spread word on the road that I want to sell it? No, friends. For this there are exchanges in India. Exchange is a place where transaction of shares take place.
A share from one person is sold to another person. Now I will tell you how many exchanges there are in India and how they function. To talk about stock exchanges,
There are two stock exchanges in India. First, Bombay Stock Exchange (BSE) which is our oldest stock exchange. Second, NSE, National Stock Exchange.
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
Where currently the most volume trade happens. To explain volume, it is where the most number of shares are bought and sold. So does investors like you and me go to the exchange to buy and sell? No. That’s where Stock Brokers come into the picture, who are situated between the seller and the exchange and facilitate the trade. They take orders from us and give us confirmation.
To Trade without brokers, for investors like us is almost impossible. When we talk about banks, the banks are regulated by RBI. RBI is the entity that regulates all the banks. Similarly, in the share market all the exchanges in the Share Market is regulated by SEBI. SEBI is such an entity that protects regular investors like us. When a problem arises for the investors, SEBI works to resolve it. SEBI also makes sure that there are no wrongful transactions taking place.
Shares are not used in wrong ways and the market is neutral. Friends, in this Post, I explained the basics of share markets, regulators and exchanges.
If you didn’t understand something in this How to Play Share Market For Beginners (Post), and would like a clarification, let us know in the comments. So please follow the Our Google News and do not forget to Follow to our Google News. We will help you become a better investor. Please Share this Post and Follow to our Google News and comment to give us more ideas on what we should include in the series.