The share market, also known as the stock market, is a platform where buyers and sellers come together to trade publicly listed shares and various financial securities. In India, the principal stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Understanding the different types of share markets and the financial instruments traded on them is crucial for investors looking to grow their wealth. In this comprehensive guide, we will delve into the primary and secondary share markets, as well as the various financial instruments traded on the share market.
Types of Share Markets
The share market can be divided into two main parts: primary markets and secondary markets.
Primary Share Markets
When a company registers itself for the first time at the stock exchange to raise funds through shares, it enters the primary market. This process is known as an Initial Public Offering (IPO). Through an IPO, the company becomes publicly registered, and its shares can be traded among market participants.
Secondary Share Markets
Once a company’s new securities have been sold in the primary market, they are then traded on the secondary stock market. The secondary market provides investors with the opportunity to buy and sell shares among themselves at prevailing market prices. These transactions are typically conducted through a broker or other intermediaries who facilitate the process.
Financial Instruments Traded on the Share Market
There are four categories of financial instruments that are traded on the stock exchange: shares, bonds, mutual funds, and derivatives.
Shares
Shares represent units of equity ownership in a company. When you own shares in a company, you become a shareholder and are entitled to any profits in the form of dividends. However, shareholders also bear any losses the company may face. Managing shares can be made easier with the help of a Share trading app.
Bonds
Companies require substantial capital to undertake long-term and profitable projects. One way to raise capital is by issuing bonds to the public. Bonds represent a “loan” taken by the company, and bondholders become creditors of the company. They receive timely interest payments in the form of coupons. From the bondholders’ perspective, bonds act as fixed income instruments, providing regular interest payments and returning the invested amount at the end of the prescribed period.
Mutual Funds
Mutual funds are professionally managed funds that pool the money of numerous investors and invest the collective capital into various financial securities. There are different types of mutual funds available, such as equity funds, debt funds, and hybrid funds. Each mutual fund scheme issues units that represent a share of the fund. As the underlying instruments in the fund generate revenue over time, unit-holders receive that revenue in the form of the net asset value of the fund or dividend payouts.
Derivatives
Derivatives are securities that derive their value from an underlying asset, such as shares, bonds, currency, or commodities. Buyers and sellers of derivatives have opposing expectations of the price of the underlying asset and enter into a “betting contract” regarding its future price.
Conclusion
Investing in the share market can be an excellent way to generate long-term wealth. With a strategic investment plan, any investor can achieve their financial goals. Understanding the different types of share markets and the financial instruments traded on them is crucial for making informed investment decisions. Whether it’s shares, bonds, mutual funds, or derivatives, there are various options available for investors to diversify their portfolios and grow their wealth over time.
Remember to conduct thorough research and consult with a financial advisor before making any investment decisions. Stay updated with the latest market trends and news to make informed investment choices. Happy investing!