There are multiple ways to invest in the stock market, in this article we will be covering three of them which are:
(A) investment in stocks,
(b) investment in mutual funds, and
(c) investment in debentures.
Before we dive into different types of investments which can be made in the stock market, let’s first understand what the stock market is.
What exactly is a stock market?
The term “stock market” refers to the public marketplaces that are available for the issuance, purchase, and sale of stocks that trade over-the-counter or on a stock exchange. The stock market is a marketplace where investors can purchase and sell ownership of such investible assets.
Stocks, often referred to as equities represent a portion of ownership in a corporation. Since it enables businesses to swiftly access public capital, a well-functioning stock market is thought to be essential for economic growth.
What is the function of the stock market?
The stock market fulfils two crucial functions. The first is to give companies capital so they can finance and grow their operations. A corporation can spend INR 10 million in capital to expand its operations if it issues one million shares of stock that initially sell for INR 10 per share (minus whatever fees the company pays for an investment bank to manage the stock offering). In place of raising debt, many companies prefer raising capital through equity issuance.
Empowering investors (those who buy stocks) in order to allow them to participate in the profits of publicly traded corporations is the secondary function of the stock market.
Some stocks offer consistent dividends (a given amount of money per share of stock someone owns). Investors can also make money from their stock purchases by selling their shares at a profit if the price of the stock rises from the price at which they bought them.
For instance, if an investor purchases shares of a company’s stock for INR 10 per share and the price of the stock later rises to INR 15 per share, the investor can then sell their shares to recoup a 50% return on their investment.
Trading in Stocks History
Despite the fact that Antwerp stock trading began in the middle of the 1500s, it is generally accepted that the trading of East India Company shares in London marked the beginning of modern stock trading.
The Initial Shares and Initial Exchange
Company shares were initially issued on paper, allowing investors to swap them with other investors, but until the establishment of the London Stock Exchange (LSE) in 1773, there were no authorised exchanges. Although there was a great deal of financial unrest after the LSE was first established, exchange trade, in general, managed to endure and expand during the 1800s.
Exchanges and OTC: How Stocks Are Traded Now
The majority of equities are traded on stock exchanges like the Bombay Stock Exchange or the National Stock Exchange (NSE). Essentially, stock exchanges serve as a market where investors can purchase and sell equities.
Government organisations that oversee the market, such as the Securities and Exchange Board of India (SEBI) in India regulate stock exchanges to safeguard investors from financial fraud and to maintain the exchange market’s efficiency.
Some stocks are traded over-the-counter (OTC), where buyers and sellers often trade through a dealer, or “market maker,” who deals with the stock expressly. The great majority of equities are traded on exchanges. OTC stocks are securities that do not satisfy the minimum listing price or other standards for inclusion on exchanges.
Listing of A Company
When a company decides to become a publicly-traded corporation by offering stock shares, investment banks handle the initial public offering (IPO) of stock.
Here’s an illustration of how an IPO functions. A business that wants to IPO and issue shares approaches an investment bank to serve as the “underwriter” of the business’ initial stock offering. The investment bank manages the initial issuing of shares in the market in exchange for a fee while guaranteeing the company a predetermined minimum share price.
This is done after researching the company’s overall value and taking into account what percentage of ownership the company wishes to relinquish in the form of stock shares. Therefore, it is in the investment bank’s best interests to ensure that all of the shares offered are sold at the best price.
Large institutional investors like pension funds or mutual fund organisations are most frequently the ones who purchase shares offered in IPOs.
The primary, or first, market refers to the IPO market. All further trading in stocks takes place through stock exchanges in the so-called secondary market after it has been issued in the primary market. The phrase “secondary market” is a little deceptive because this market is where the vast majority of daily stock trading takes place.
Stockbrokers buy and sell stocks on behalf of their clients, who may be institutional investors or retail investors who may or may not also be serving as financial advisors.
Investment banks, hedge funds, mutual fund companies, and stock brokerage firms all employ equity research analysts. These people conduct research on publicly traded firms and make predictions regarding the price movement of those companies’ stocks.
Hedge fund managers, mutual fund managers, an exchange-traded fund (ETF) managers are examples of fund managers, or portfolio managers, who buy and sell enormous volumes of equities, making them significant stock market participants. The demand for a stock alone is frequently large enough to raise its price noticeably if a well-known mutual fund decides to invest extensively in it.
Stock Market Indices
The performance of several stock market indices reflects the overall performance of the stock market. Stock indices are collections of equities chosen to represent how the market as a whole is doing. Options and futures contracts, which are likewise traded on regulated exchanges, are used to trade stock market indexes themselves. Nifty 50 and Sensex are some of the important stock market indices.
Now that we are clear with what the stock market is, let’s understand what stocks are.
What Are Stocks?
The word “stock” is used to refer to a share of corporate ownership. Based on the company’s overall value, each share has a certain value. Shares of a certain firm that you purchase effectively represent your ownership of a small stake in a publicly-traded company. Let’s provide a clear illustration to clarify:
The goal of Sandeep is to open a restaurant. But he needs to put in INR10 lakh for that. He only has INR 25,000 on him, though. He asks four of his pals to invest the last of the money. He grants them each a 20% ownership stake in the business as payment.
After five years, Sandeep’s business is doing incredibly well. His eatery is now worth Rs. 50 lakh. That indicates that the investment made by Sandeep and his pals has increased in value five-fold. Similar to this, you can purchase shares in a public company to take a stake in the business. Your investment increases in value together with the company’s value. Shares are sold by publicly traded corporations to raise the money required for expansion.
Initial Public Offerings are used to accomplish this first (IPO). Following the IPO, investors can buy and sell shares on a website called a stock exchange.
How do you acquire and sell shares?
The stock market is fundamentally similar to every other market in the world. To make money, people come here (though not physically). This is accomplished by purchasing and selling shares of various corporations. Consider Sarah purchasing 200 shares of business X at INR. 10 each. Thus, she has contributed INR 2,000 to firm X. The cost of each share rises to Rs 20 after six months. At this point, her investment is worth Rs 4,000.
Sarah would now make a tidy profit of Rs 2,000 if she sold her shares at this time. Buy cheap, sell expensive. That’s considered to be one of the fundamental principles of making money in the stock market.
What Kinds Of Shares Are There?
Broadly there are two types of shares – equity and preferred. Equity shares, also known as ordinary shares, represent an ownership stake in a company. Thus, as an equity shareholder, you hold fractional ownership in a company.
As an equity shareholder, you benefit from the company’s profit and with a significant holding, you can have a say in the company’s management. However, there are certain downsides to equity shares as well. The cost of issue of such shares is high, and their returns keep fluctuating.
Preferred shares, like equity shares, also represent ownership in a company. If you are a preferred shareholder and the company decides to distribute dividends, you will get preference over equity shareholders. In other words, dividends will be first paid to you and then to other shareholders. This is one of its major advantages. However, as a preferred shareholder, you don’t get voting rights as equity shareholders do.
How Do Shares Work?
Companies sell shares to raise capital for their business. They issue shares through an initial public offering in the primary market, which is then traded in the secondary market. If you decide to buy a share, you do so from another investor. Similarly, if you wish to sell a share, you need to sell it to a potential buyer. The entire trade of buying and selling shares is handled through stock exchanges, with a broker representing each investor.
Why Invest in Shares?
Investing in shares gives you the chance for long-term capital appreciation. Also, you can earn profits through dividends paid out by the company. At the same time, shares can be quickly liquidated, should you want to sell them. If you are a large shareholder of a company, the same gives you voting rights and which results in you having a say in the strategic decisions of businesses.
What Are Mutual Funds?
A mutual fund is a collection of funds from a number of individuals used for buying stocks, bonds, or other securities. A number of investors own mutual fund units, and the corpus of the mutual fund is managed by experts. To put it another way, a mutual fund is a group of securities that are owned by a number of investors and overseen by a fund manager.
Understanding the Operation of Mutual Funds
When you invest in a mutual fund, you combine your funds with those of other investors. A fund manager who makes investments in financial assets like stocks, bonds, etc. manages the money that you and other investors have pooled together.
Benefits of Mutual Fund Investing
The following are some major advantages of investing in a mutual fund:
Professional Management
A professional actively manages mutual funds, continuously keeping an eye on the portfolio. Additionally, the manager has more time than a retail investor to spend in choosing investments.
Diversification of Investments
Diversification of investments is possible with mutual funds. A mutual fund doesn’t only buy one stock or bond; it invests in various asset classes.
Continuity
High liquidity is possessed by mutual funds. Generally speaking, if necessary, you can sell your mutual funds quickly.
Now that we understand what stock and mutual funds are, let’s understand what debentures are.
What Are Debentures?
Debentures are a sort of financial instrument that typically have terms longer than 10 years and are not secured by any kind of collateral.
Only the issuer’s creditworthiness and reputation are used to support debentures.
Debentures are commonly issued by both businesses and governments to raise cash or money.
While some debentures have the option to convert to equity shares, others do not.
Understanding Debentures
Debentures, like the majority of bonds, may issue periodic interest payments known as coupon payments A binding legal agreement between bond issuers and bondholders is known as an indenture or the debenture trust deed.
The agreement details the terms of a debt issue, including the maturity date, the frequency of interest or coupon payments, the formula for calculating interest, and other details. Debentures may be issued by both governments and corporations.
Long-term bonds—those with maturities longer than 10 years—are often issued by governments. These government bonds, which have the backing of the issuing government, are regarded as low-risk investments.
Debentures are also used by corporations as long-term loans. The corporate debentures, however, are typically unsecured. They are supported only by the underlying company’s financial stability and creditworthiness. These debt instruments have a defined redemption or repayment date and charge interest.
These planned debt interest payments are often made by a firm prior to stock dividends to shareholders. Compared to other forms of loans and financial instruments, debentures have lower interest rates and longer repayment periods, which is favourable for businesses.
Minimum Investment In Stock Market
Now that we understand the different kinds of investments one can make in the stock market, let’s now understand what is the minimum amount of investment we can make in each of these categories.
Stocks:
Minimum investment in listed stock depends on the value of the stock of the company you are interested in. Price of a single share of many companies is lower than INR 10 for example a single share of Vodafone Idea Cellular Limited can be purchased for INR 8.40 as on 8 July 2022. In conclusion, minimum investment in shares can be as low as INR 10 or even lower.
Mutual Funds:
Minimum investment in mutual funds is typically INR 100 some mutual funds have a higher threshold, however, most mutual funds allow you to start investing with an amount as low as INR 100
Debentures:
Like shares, the minimum investment amount in the case of debentures depends on the price of the debenture you wish to purchase. However, typically in India most companies issues debentures having a face value of INR 1000.
Did you know? You can invest in mutual funds on Kuvera:
Step 1: Download the Kuvera app or visit our website.
Step 2: Create your account on Kuvera by completing the mandatory KYC procedure. This will hardly take a few minutes. Once that’s completed, select the ‘Invest’ option on our homepage after which you can select ‘Mutual Funds’ and ‘Arbitrage’.
Step 3: Kindly go through the list of all zero-commission direct plans of flexicap schemes to start investing.
Frequently Asked Questions:
How one can invest in stocks as a beginner with little money?
In case you are a beginner you can potentially gain from the stock market by investing in mutual funds especially equity mutual funds since they invest in stocks. The minimum investment in the case of mutual funds is INR 100 and moreover, they are professionally managed by experts.
How should a beginner invest in stocks?
Beginners should invest in stocks after doing deep research and understanding their risk appetite and the financials of the company they intend to invest in. Historically, large-cap/bluechip companies have been less volatile than their small-cap counterparts.
What is the lowest amount to start investing?
As mentioned above the lowest amount to start investing in the stock market can be as low as INR 10 or even lower depending on the price of the stock in which you intend to invest.
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