There are many investment avenues available for individual investors. Right from fixed income options to equity-related products, there can be many options to choose from, depending on investors’ risk appetite and time horizon. Though the share market is a popular investment choice, many individuals don’t understand how share market works. Given the technicalities involved, it is not surprising. So, let’s breakdown the concept of share market and understand how share market works.
What is the share market?
In the simplest of terms, the share market is the platform that allows investors and traders to buy and sell shares, derivatives or bonds. The share market, therefore, acts as a middleman between the investors and the companies offering their securities for sale.
Participants of the share market
Before understanding what is share market and how it works, it is important to understand the participants which constitute the share market. A share market has four main participants which are as follows –
1. SEBI – The regulatory body
The Securities and Exchange Board of India (SEBI), is the head of the share market which acts as its regulator. It lays down the rules of the share market and the market participants, as well as the traders and investors, have to follow the rules and guidelines prescribed by SEBI. SEBI also governs and monitors the working of the share market and ensures that the market works as per the prescribed guidelines.
2. Stock Exchange – The platform
Stock Exchange is the place where the shares and derivatives are listed and traded. There are two stock exchanges in India – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
3. Brokers – The middlemen
Brokers are individuals or companies who are authorized to conduct buying and selling of stocks and derivatives listed on the stock exchange on behalf of their clients. For rendering their services, brokers get a brokerage on the amount that they transact.
4. Investors and traders – The players
Investors and traders are the final participants who buy and sell securities on the stock exchange. They can be an individual or a company.
How share market works?
Now that you know the important participants of the share market, it is time to understand how share market works. The following process is a step-by-step guide to the workings of a share market:
- There are two stock markets – primary and secondary. To be able to trade its securities on the stock market, a company has to get listed on the primary stock market. This listing is done through an IPO (Initial Public Offering) wherein the company offers its stock to the public to trade for the first time. The company is required to issue an offer document containing the details of the IPO, the company details, the stock being issued, etc. The company would also have to register itself with SEBI and the stock market.
- Once the company is successfully listed, it's stock trades on the secondary market. The secondary market is the platform wherein the traders and investors buy and sell stocks of the listed companies.
- Since there are thousands of investors who want to trade on the listed securities, it becomes impossible for them to assemble at one platform for trading. That is where brokers come into the picture. Brokers represent a set of investors and trade on their behalf. Brokers are also registered with the stock exchange and serve as an intermediary between the participating company and the investors.
- If you, as an investor, want to buy a particular stock at a particular price, you have to communicate your purchase desire to your broker. The broker would then process your order on the stock exchange.
- Your broker lists your purchase order on the exchange which, in turn, searches for a seller willing to sell the stock that you want. When the seller is found, a price is fixed and the exchange informs the broker of the confirmation of the purchase order. The broker then informs you and you need to pay the money to purchase the requested stock.
- The details of the buyer and seller are also confirmed by the exchange to ensure that an authentic transaction is taking place and that there would not be any default by either of the parties in buying or selling the stock. Once the records of the buyer and seller are recorded, the exchange starts the process of transferring the ownership of the stock. This process is called settlement and it takes T+2 days for the actual transfer to complete. This means that, if you request to buy a share today, the share would be bought and deposited in your Demat account the day after tomorrow.
- It is also the responsibility of the exchange to ensure that the purchase goes through without any default. It ensures that the buyer gets the desired number of shares after paying for them.
- The trading of the stock also impacts its price. The share market is volatile wherein the stock prices rise and fall on a continued basis. This rise and fall are due to the theory of demand and supply and the perception of the participating company which investors have. If investors perceive a company to be very profitable, they would be motivated to buy the shares of such a company. This would increase the demand for the company's shares. As the demand rises, the price of the shares also increases. The same holds true for a stock whose prices plummet. If there are too many sellers looking to sell off their stocks, the company would be perceived in a bad light. As the supply of shares increase and the demand is lower than the supply, the price of the stock would fall.
You can also track established indexes like the Nifty 50 to select which companies to invest in. Nifty 50 is a benchmark index that monitors the movement of the share prices of selected bluechip companies. 50 selected companies are tracked by the index covering 13 sectors of the industry. The index, therefore, covers about 65% of the float-adjusted market capitalization of leading companies.
Also, when investing, you should understand the types of stocks trading on the stock exchange. There are, broadly, three types of stocks which include the following –
- Large-cap stocks are stocks belonging to companies that have a large market capitalization. These are those companies which are established from a long time and enjoy a very good reputation.
- Mid-cap stocks are stocks that belong to companies which have a medium market capitalization. These companies lie between the spectrum of large-cap and small-cap companies having a market capitalization ranging between INR 5000 crores to INR 20,000 crores.
- Small-cap stocks are stocks belonging to companies that are relatively new in the market and have a low market capitalization.
The art of investing in the share market
Understanding what is share market and how it works is not enough. You should also understand how to invest. Always understand your risk appetite before investing in a stock market. Though the market promises good returns, there is an equally high chance of a loss when the market falls. You should, therefore, invest only up to the limit which suits your risk profile.
Always study the market and the participating stocks before selecting a particular stock for yourself. Do a trend analysis of the price movement of the selected stock and go through market predictions. Don't get too emotional in case of falling markets because, given time, the market can correct itself.
Be patient with your investments and invest only what you can afford. Don’t get greedy about the returns. Start small and then build up your investment as you learn the ropes of share market investing. Take the help of a good broker who has the required expertise in the field to guide you to invest wisely. IndiaNivesh is an online platform wherein you can get expert guidance on how share market works in India. You can trust IndiaNivesh’s experts to give you investment advice suitable to your risk profile. Your money is hard-earned and at IndiaNivesh you can make your money work harder to give you a good corpus.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
What is NAV? – Net Asset Value & its importance in Mutual Funds
Whether you are a beginner mutual fund investor or an experienced one, you inevitably come across the abbreviated term ‘NAV’. You may try hard to keep the investment jargon at bay, but this one term seems to crop up a lot. For example, when you buy and sell mutual funds, you need to know what is NAV and NAV importance in a mutual fund. In this article, we discuss everything there is to know about NAV including what is NAV and how is it calculated. What is NAV?NAV stands for Net Asset Value of a fund. Based on this net asset value, the asset management company and investors both can keep a count on the number of units the investors hold in a fund. Net asset value denotes the price of each unit of a mutual fund.Now that we know what is NAV, let us see what is NAV Value in Mutual Funds. What is NAV Value in Mutual Funds?The NAV per unit is the market value of securities divided by the total number of units of the scheme. To put simply, the performance of a particular mutual fund scheme is denoted by its NAV. Mutual funds collect money from several investors and invest it in the securities market. Since the market value of securities fluctuates every day, NAV of a mutual fund scheme also changes on a day to day basis.Generally, mutual funds begin with a unit cost of Rs. 10 and as the fund’s assets under the management grow, the price keeps rising. What is NAV and How Is It Calculated?NAV computation is undertaken once at the end of each trading day on the basis of the closing market prices of the portfolio’s securities. Let us understand what is NAV and how is it calculated in this section.• General Net Asset Value CalculationSuppose, a mutual fund scheme has a NAV of Rs. 500. So, if you want to buy one unit of that mutual fund you will need to pay Rs. 500 for it. Conversely, assume you invest Rs. 5,000 in a mutual fund scheme which has an NAV of Rs. 500. It will allow you to buy 10 units of that fund. • Daily NAV CalculationOnce the market closes at 3:30 p.m., all mutual fund companies estimate the worth of their portfolios every day. The market opens the next day with the previous day’s closing share prices. The fund house or asset management company subtract every payable to calculate the NAV of the day. The asset value of the fund is arrived at after deducting the daily expenses to manage a fund. The day’s cost per unit is calculated by dividing the total asset value by the number of units issued so far. Since most of the funds are open-ended, fresh withdrawals and new investments can impact the units. If the fund manager deems fit, they can sell some shares or put in an additional sum. Is There Any Myth About NAV?Many investors think that if they invest in a fund with lower NAV, they have a better scope for a price increase and those that already have a higher NAV may not have the scope for a price increase. This compels them to invest in a scheme with lesser NAV.For example, you get units allotted at NAV 10 if you invest in NFO. But, if you invest in a fund which was launched 3 years ago and has an NAV of 50, you will earn lesser profits comparatively. This is not true. The performance of any mutual fund is dependent upon the performance of the securities involved in the portfolio. Plus, NAV is a combination of costs such as management fees, distribution fees and the expense ratio of the fund manager. The chances of growing your money depend completely on the market situation, the quality of securities in the portfolio and the fund manager's performance.When we buy a mutual fund at its NAV, we buy it at its book value. But what we really should be buying in a mutual fund scheme is its performance and not its NAV. This is why it is essential to keep a track of past records of a mutual fund’s performance and compare its returns over similar periods. What is NAV In SIP (Systematic Investment Plans)?NAV in SIP is the same as the NAV of a mutual fund. SIP and lump sum are two methods through which you can invest in a mutual fund scheme. SIP involves investing a fixed amount of money every month in a mutual fund of your choice. The amount gets automatically deducted from your bank account every month. Thus, it is regarded as a disciplined approach to investing in mutual funds. This is usually preferred by salaried investors looking to force save every month. On the other hand, lumpsum investment involves investing a large amount of money in a mutual fund scheme at one go. This is usually preferred by investors who have a surplus of cash ready to invest.So, no matter which method of investing in the mutual fund do you opt for, the characteristics remain the same. NAV in SIP and NAV of mutual funds via lumpsum investments remains the same. It is advisable to look at the fund’s total return instead of only tracking the changes in its NAV to judge the overall performance of a mutual fund. Also, you may look at the historical performance and current cost among other parameters before investing in a fund. If you need any assistance to invest in the mutual fund market, you may contact IndiaNivesh Ltd. We can help you select the right mutual funds for your portfolio based on your investment horizon and financial goals.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Trading in Equity - 5 Equity Trading Tips for Volatile Markets
Market volatility is quite like Voldemort. No one wants to talk about it though it is inevitable. It will creep into your equity trading life at some point or another. So, what should you do? Leave everything to fate or prepare for the fight like Harry Potter. If the answer is latter, continue reading. You will get to know some great equity trading tips that will ensure that you weather the volatility without a crease on your brow.What causes volatility in the markets?Volatility refers to big swings or fluctuations in the price of stocks in the market. The movement can be in either direction – up or down. When the stock prices come down significantly, it is referred to as a bear market. On the other hand, if the prices keep on rising, it is called a bull market. Some factors which result in market volatility Global and national political scenario (including election results) Fluctuations in crude oil prices Economic or policy reforms Unexpected developments (positive or negative) in the market, earnings or news about a reputed company Equity Trading Tips for Volatile MarketsEquity trading in India has been on a rise in the last couple of years. But so has been market volatility. Hence, it is important to understand factors that can make trading in equity a fruitful exercise.These equity trading tips will come handy while chalking out an investment strategy for effectively handling the volatility in the markets: Stick around for the long-term Sometimes, not taking action is the best action. Investors who take up trading in equity with a long-term view (at least a five-year time frame), do not keep on tracking the markets daily. Hence, they do not panic or get worried in the face of market fluctuations. It is best to review one’s investments on a bi-annual or annual basis. Step into the market A bearish or volatile market presents good opportunities for investors who have been waiting along with sidelines to make their entry. One can get stocks of good companies that have fallen just because of the market conditions. Not only would you be able to get more units (because of the low price) but also the net yield in the long term would be higher when compared with the cost of investment. Average out the cost of purchase As mentioned in the earlier point, the per-unit cost of stocks can come down in a bearish phase. The rupee cost averaging philosophy can help in reducing the average purchase cost of trading in equity over a period of time. For instance, let us assume that the average cost of one stock was Rs. 250 before the slump. If the market continues to fall (Rs. 200, Rs. 175 and Rs. 150) and the investor buys the same quantity as earlier, then the average cost of purchase comes down to Rs. 193. Book profits It is a wise choice to take out profits at regular intervals, especially when the market is going through turbulent times. In such scenarios, there is a high degree of overnight risk. So, all your profits can be wiped out at the blink of an eye. The FIFO approach works best. One should track their earlier investments and if they have generated sufficient profits, one can opt to sell them. The proceeds generated can fund a financial goal or can be used to invest elsewhere. Gracefully exit from non-performers In spite of the best equity trading tips, one is bound to make mistakes. That is, in fact, the name of the game. One should periodically review the stocks and identify the non-performing ones. If they have run their course, one should consider exiting from them during volatile times. The funds generated can be used to invest in other stocks with better prospects. Go Long and Short In times of volatility when one is unsure about the market performance, it is a wise decision to have a portion of the capital invested in short trades. One should not have a complete long-only portfolio. For example, in the case of moderately bullish investors, the ratio of long to short is recommended at 65:35. Covered Call Covered Call is one of the most highly recommended options strategies. It is effective in optimizing returns in a moderately volatile scenario wherein the price of the underlying asset lies within a small/tight range and the premiums are high. Other widely used options equity trading strategies that can be used to make money during market volatility include short straddles, iron condor, etc. But it is best to seek help from experts to effectively execute these strategies.Things to avoid when the markets become volatileThe list for equity trading tips will not be complete with only the DOs. One also needs to be aware of the DONTs or the mistakes to avoid in equity share trading. Panic or contingency sell Knee-jerk reactions and decisions based on speculation are the death of a smart equity trading strategy. Whenever the market is volatile, a sense of fear grips most investors. However, the important thing is to not act on that feeling without any research. Before taking any decision, one should carefully evaluate the reasons for the stock value going down. Go for the cheapest option Trading in equity is not only about the numbers. One should not just pick up stocks merely because they are available at really low price levels. Rather than making money for you, it could end up being a value trap. One should carefully analyze factors such as the stock’s track record, revenues, stability, PE Ratios, debt and equity ratios, etc. before taking a call. Leveraged bets Borrowed capital (or leverage) to fund equity trading may not be a good idea when the markets are volatile. Practices such as leverage and margin investing work both ways. When the times are good, they can generate high returns, but in case of a slump, the losses are also magnified. Hence, it is better to avoid in times of instability.Final Words Volatility in the market is not always an adversary. It also provides opportunities to invest at better (read more cost-effective) valuations and leads to market corrections. The idea is to remain cautious and alert and not fall prey to grapevine rumors or take knee-jerk reactions. And now that you know the DOs and DON’Ts, you can safely do equity trading in India (and also anywhere else in the world). One can also take the services of professional experts for equity trading in India who can help you navigate market volatility with ease. IndiaNivesh is one such partner who offers a wide range of financial services (equities, derivatives, commodities, mutual funds, insurance, IPO and online trading). Their “client-first approach” ensures that each customer gets customized inputs based on their financial goals, risk appetite, and investment horizon. So, whether you are new to trading in equity or just looking for some expert advice, IndiaNivesh can help you out. So, make sure you take help from the best and then even the worst of the market fluctuations will not trouble your trading aspirations.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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