A Beginner’s Guide to Understand the Basics of Share & Stock Market

You may well have thought about becoming an investor in share market, but have been put off by the apparent complexity of the market, by the risk involved or simply because you are confused about WHAT, WHERE and HOW to Start.

Here at “b4investing” our motto is to “make you understand about investment in simple terms”. We aim to make you fully aware of all the factors you should consider before taking the plunge.

Now, we will talk about the basics of share and stock market and everything around it.

TABLE OF CONTENT

• Shares vs Stocks
• Shares & Types Of Shares
• Equity Shares
• Types Equity Share on the basis of Definition
• Types of Equity Shares on the Basis of Returns
• Preference  Shares
• The Types of Preference Share
• Stock Market
• Major Stock Exchanges in India
• Market Indexes in India
• Market Regulation
• More about Stock Market
• Guidelines to Start Trading in Stock Market
• Basic Terminology of Stock Market

SHARES V/S STOCKS

In layman’s language, shares and stocks are used as interchangeable terms but actually it is not. Out of the two ‘Stocks’ is a wider term for shares.

STOCK is a collection of shares of various companies where as SHARES represent the unit of ownership in a particular company. For eg; If Mr. V says “I own shares” then that refers to the shares of XYZ co. but when Mr. V says “I own stocks” then that refers to a collection of shares of a group of companies.

SHARES & TYPES OF SHARES

A share indicates a unit ownership of the particular company. If you are a shareholder it means that you hold a percentage of ownership of the issuing company as an investor. In other words, a company’s capital is divided into small equal units and each unit is known as Shares and an investor who hold shares of a company is known as Shareholder.

In the Indian circumstances, a company can issue two types of shares:

• Equity Shares
• Preference Shares

EQUITY SHARES

The Equity Shares comprises the bulk of the shares being issued by a particular company. These shares are also known as ordinary shares and are issued in majority. Equity shares are transferable and traded actively by investors in stock markets. Investors in equity shares are the real owners of the company. So, the equity shareholders are entitled to the profits earned by the company as well as bear the disadvantage of the losses incurred by the company.

Returns which the company pays to the equity shareholders are in the form of DIVIDENDS. However, the dividends issued from the profit of the company are not fixed. The shareholder may not compel the company to pay the dividends but they enjoy the rights to maintain the proportionate interest in profit, assets and control of the company. Possibility of getting higher returns is always there in equity shares. Apart from the regular dividends, paid by the company in the form of cash profits can also be distributed by way of BONUS SHARES.

The investors in equity shares are granted the voting rights. By exercising the voting rights, the investor can participate in the affairs regarding the business of the company. The voting rights are proportionate to the investment done by the investor on the overall capital of the company.

The liability of the equity shareholders is restricted only to the extent of the FACE VALUE of the shares purchased by the investors. As such, equity shares are good investment attracting the risk taking investors.

Lets us understand one more thing here there are some disadvantages associated with equity shares as well for the investors. There is a high risk involved while investment shares because it is based on the STOCK MARKET INDEX as well as market volatility and other factors affecting stock market as per the amount of investment. Also, the dividends to be received are not fixed.

The types of Equity Shares can be classified on the basis of:

• Definition
• Returns

Types of Equity Shares on the Basis of Definition

• Bonus Shares: Shares which are issued to existing shareholders free of cost, or as a bonus. The additional shares distributed by the company to its current shareholders instead of increasing the dividend payout are termed as Bonus Shares. The bonus shares are issued at a certain proportion (1:1 or 2:1 so on) according to the shareholders’ stake in the company.
  
  For e.g.; XYZ company may decide to give out one bonus share for every ten shares held by Mr. V.

• Rights Shares: The Right Shares refers to those shares which a company offers to their existing shareholders at a lower price for a specific time period before being offered for trading in stock market. The shareholder has the right to accept or reject the proposals. Such issuance of shares is called Right Issues and the share is known as Right Share.

• Voting and Non-Voting Shares: As the name suggests Voting Shares are those shares that provide voting rights to its holder. The majority of shares issued by a company carry voting rights on matters of related to decision about the company. A voting share shareholder can also vote on who should be on the company’s managing body. However, a company can offer different kinds of shares, some with voting rights, some with no voting rights and some with Differential Voting Rights
  
  Non Voting Shares are shares which carry no voting rights. Non Voting Shares are usually issued by company that sought to raise capital for the working of the business without diluting the control of the founders or existing management.
  
  Differential Voting Rights (DVR) shares are shares that are issued with differential voting and differential dividends rights. DVR shares offer lower voting rights compared to voting rights share therefore very useful for companies that want to raise capital without diluting the effective control of the company. To compensate for the lower voting rights these DVR shares are paid a dividend premium of 10-20%.

• Sweat Equity Share: Sweat Equity Shares are offered to certain employees and management body of a company for their phenomenal contribution and hard work towards the working of the company or for outstanding benefits made to business. These shares are issued either at a lower price or as a compliment. 

Types of Equity Shares on the Basis of Returns

• Dividend Shares: A company can choose to pay dividends by issuing new shares on a pro rata basis(in proportion). This share is a method that assigns a proportionate amount of income to shareholders based on their ownership percentage.

• Growth Shares: These shares are for those companies that have a very high growth rate. They might not provide dividends but value of these shares increase quickly which proves beneficial with high profit to the shareholder.

• Value Share: These shares are traded in the stock market at prices lower than their current market value also termed as intrinsic value. The shareholders of these shares can expect the prices to increase after a time period which will prove profitable to the shareholder ultimately.

PREFERENCE  SHARES

The Preference Shares are the shares which enjoy preferential treatment compared to the equity shares. The preference shares carry the dividends at fixed rate which are payable even before any dividend is paid on equity share. In case of winding up of the company, preference shareholders are paid back their investment before the investment of equity shareholders are paid off. However, investors in preference shares are not the absolute owner of the company. These share holders do not carry any voting rights and hence, they do not have any say in controlling the affairs of the company.

The types of Preference Share

• Convertible V/S Non-Convertible Preference Shares: Convertible Preference Shares are those shares which can be converted into equity shares at a later date, the terms of conversion (i.e. when the conversion will take place, at what rate etc.) is known to the investors from the beginning.
  Non-Convertible Preference Shares are those which cannot be converted into equity shares.

• Cumulative V/S Non-Cumulative Preference Shares: In case of cumulative preference shares, if a particular company is unable to pay the dividends in a certain year due to unavailability of profits, the arrears of the dividend go on accumulating till the company earns profit and once the company earns profit then it required to pay the arrear dividends first.
  
  If the preference shares are non-cumulative preference shares and the company is unable to pay the dividend in a certain year due to unavailability of profits, the arrears of dividends do no accumulate. The dividend lapses in the year of loss.

• Participating V/S Non-Participating Preference Share: The participating shares allow shareholders to receive surplus profits, after payment of dividends by the company. This is over and above the fixed dividends.
  The non participating shares carry no additional benefits. These shareholders only receive the regular fixed dividends.

• Redeemable V/S Irredeemable Preference Shares: Redeemable preference shares are those shares which are redeemed or repaid after the expiry of a stipulated period. It is one of the methods the companies embrace in order to return cash to the existing shareholders.
  Irredeemable preference shares, on the other hand, have no such options.

Thus, these are the two types of shares with their distinct sub-categories, after knowing all this you will be ready to start your investment journey in stock market. Now, let us look into Stock Market and terminologies associated with it.

STOCK MARKET

Stock market is a place where people buy/sell shares of publicly listed companies. It provides a platform to easily exchange shares. For e.g. Mr. v wants to sell shares of XYZ CO. the stock market will help him meet the buyer willing to buy it. But all this trading is done only through a registered Stock Broker on an electronic medium.

Major Stock Exchanges in India

There are two main stock exchanges in India where majority of trading takes place.

• Bombay Stock Exchange (BSE)
• National Stock Exchange (NSE)

Some other regional stock exchanges are there like Bangalore Stock Exchange, Madras Stock Exchange etc.

Market Indexes in India

Sensex and Nifty are two of the prominent indexes. Sensex, also known as S&P BSE Sensex or BSE 30 is a stock market index of 30 well established and financially sound companies listed on BSE. Sensex is regarded as the pulse of the domestic stock market in India. It represents 45% of the index’s free-float market capitalization.

Nifty, also known as Nifty50 or S&P CNX Nifty is NSE’s benchmark stock market index. Nifty includes 50 shares listed on the NSE, which represents about 62% of its free-float market capitalization.

Market Regulation

The Securities and Exchange Board of India (SEBI) manages the overall responsibility of development, regulations and supervision of the stock market in India. SEBI was formed in 1992 as an independent authority to lay down market rules in line with the best market practices.

More about Stock Market

Primary Market: Primary Market is a market wherein corporate issue new shares in order to raise capital for the company. The company that issues its shares is called ISSUER and the process of issuing shares to public is known as public issue or Initial Public Offer (IPO).

IPO

An IPO refers to the process of offering shares of a private corporation to the public in a new stock issuance. Companies must meet the requirements laid by SEBI. It provides companies a chance to obtain capital by offering shares through primary market. Companies hire investment banks to market, gauge demand, set the IPO price and date, etc.

FPO

Follow-on Public Offer (FPO) is a follow up to the IPO. It is an issuance of shares after the company is listed on a stock exchange. It is done to raise additional capital. There are two types of FPO: Dilutive and Non-Dilutives.

Secondary Market: Secondary Market is where the securities issued in primary market are bought and sold on the stock exchanges. It is platform where shares are freely bought and sold without the invention of the issuing company.

Guidelines to Start Trading in Stock Market

If you are planning to start trading in Indian stock market, here is the simple and complete step-wise guide and requirements before starting.

1. Open a trading account in the share market.
2. Open a DEMAT Account.
3. Link your trading account to your bank account for credits and debits.
4. Select your investment broker. Make sure the broker is registered with SEBI.
5. Set your risk tolerance limit and start investing.
6. Select low risk products initially.
7. Gradually, diversify your portfolio.

Basic Terminology of Stock Market

When experts and amateurs talk about trading in stocks, these are some of the terms used by them in their day-to-day working.

THE BOTTOM LINE

The stock market is made of many traders and investors who are willing to buy and sell. The prices rise and fall depending on the market condition as well as the demand and supply. You may have gained knowledge on how things work around by reading about basics of share market.

Learning about shares, stock market and the terms related to it will definitely help you become a better investor and trader. It takes time to become fully versed with it but this beginners’ guide will come handy to you in your initial investment days and later as well. Investing in shares can not only be risky but if not done with proper knowledge can lead to major financial difficulties. But, if it is done with proper guidance and information it can prove to be a game changer for you and your future.

Be Educated!

Be Careful!

But, Be Bold!

Happy Investing!