Saving for retirement seems to be on everyone’s minds especially the millennials who have taken an interest in understanding of financial concepts like savings, investments and returns with better data available to them instantaneously thanks to the internet. This interest in other financial instruments like investing through stocks and funds have increased fueled by the fact that traditional saving methods like Fixed Deposits do not yield enough returns. If you are one of those who are looking to understand this other methods of investing, here’s a guide for you.
What is a share and stock?
A share is type of security, a person who owns a stock of a company have a claim on the earnings and assets of the company proportionate to their number of shares.
Let us take an example for better understanding – A company has invested Rs.5 crores and if a person has invested Rs.10 then he/she owns a proportionate share of 0.00002% in the company.
A stock consists of all types of securities like bonds, mutual funds, derivatives and shares.
Difference between share market and stock market
A share market is where you can sell or buy company shares alone. On the other hand, a stock market is where one can sell stocks which consists of bonds, mutual funds, derivatives and shares. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the leading stock exchanges in India.
Different types of share markets
1. Primary Market: The Primary Market or New Issues market is where a buyer will directly buy from the issuer or the company. Whenever a company sells its stocks through IPO, Rights Issue, Preferential Allotment or Private Placement it is known as the primary market.
2. Secondary Market: Secondary market is where a person can buy from shareholders. This is useful if you have missed the IPO of a company and you can now buy the shares from shareholders who got the shares at the time of IPO.
What are the different types of commodities traded?
There are 4 types of stocks that are traded in the stock exchanges
Shares (Secondary Market)
1. Common shares: Which are equity shares giving the buyer a part or equity ownership in the company. The shareholder will get dividends and can also vote to choose the Board of Directors. These Board of Directors are the ones who decide what to do with the profits earned by the company - That is to reinvest or share the profits as dividends.
2. Preferred shares: These shareholders will receive dividends at predetermined intervals. The preferred shareholders will be paid dividends before the common shareholders. In fact, in case a company files for bankruptcy the preferred shareholders will be reimbursed first with the selling of the company assets and receivables.
When companies want to raise funds for their business they will go to a bank and borrows money with a promise of monthly interest payment. If the same company goes to the public promising interest at regular intervals it is called a Bond.
For example, a company is expecting returns after 3 years of starting a new project and want to raise funds for the project through bonds. Now if an investor is interested in the bond and wants to invest Rs.1,00,000, then the company will provide a bond which says that the company will repay the principle in 5 years with yearly interest of 6% for the duration of 5 years.
A mutual fund is an investment vehicle for those who cannot bear the volatility of the stock market or do not have the time or expertise to follow individual company trends or industries. In essence is a fund which pools in money from many investors and charges a small fee for managing this security.
As the price of shares keep fluctuating on can invest in derivatives to offset that risk. With derivatives you enter an agreement to sell or buy shares or other instruments at a fixed price in the future.
What is an IPO?
When a company has a lot of debt or looking to grow their business, they will need additional funds, for which they might look to go for an Initial Public Offering (IPO) or the first sale of stock which are available for the public to buy. A company post an IPO becomes a publicly listed and are accountable to the public, which would require them to disclose financial, accounting and tax related information; but the biggest benefit for any company to put out their shares in public, would be the number of avenues available to them to raise funds and expand the business.
You now know the basics of stocks and stock markets along with why companies go for IPO. Wait for the next part in the series which would help you take a deep dive into the world of investing.