Purposes of stock market
Every investor aims at maximizing profit. Stock market basically provide capital to companies that they can use to fund and increase their businesses. If a company issues one million shares of stock that initially sell for Rs.5 a share, then that provides the company with Rs.5 million of capital that it can use to expand its business.
When a company issues stock shares instead of borrowing the capital needed for expansion, it avoids incurring debt and paying interest charges on the capital it would have borrowed.
Also another purpose of the stock market is to give investors the opportunity or the access to share in the profits of publicly-traded companies. Investors can profit from stock buying in one of two ways.
Some stocks pay regular amount of money per share of stock someone owns. The other way investors can profit from buying stocks is by selling their stock for a profit if the stock price increases from their purchase price.
For instance, if an investor buys shares of a company’s stock at Rs.50 a share and buys 100 shares so his total investment is rupees 5000 when the price of the stock subsequently rises to Rs.60 a share, the investor decides to sell his 100 shares, he gets rupees 6000 which makes him a profit of rupees 1000
How the Stock Market works
In brief, stock markets provide a secure and regulated environment where market participants are engaged in transactions of shares and other eligible financial instruments with high confidence with zero- to low-operational risk. Operating under the defined rules as stated by the regulator, the stock markets act as primary market and as secondary market.
Investors who bought the company shares can expect to hold for their preferred duration, in anticipation of rising in share price and any potential income in the form of dividend payments.
The stock exchange performs the work of a facilitator for this capital raising process and receives a fee for its services from the company and its financial partners.
With respect to the first-time share issuance IPO exercise called the listing process, the stock exchange also acts as the trading platform which helps in regular buying and selling of the listed shares. This composes the secondary market. The stock exchange earns a fee for every transaction that occurs on its platform during the secondary market activity.
The stock exchange bear the obligations of ensuring price transparency, price discovery, liquidity and fair dealings in such trading activities. Currently, almost all major stock markets operate electronically, it maintains trading systems that efficiently manage transactions from various market participants.
Two Basic Approaches to Stock Market Investing
- Value Investing and
- Growth Investing
There are many methods of stock picking that investors and analysts employ, but all of them are one form or another of the two basic stock buying strategies of value investing or growth investing.
Value Investors are considered as investors who invest in well-established companies that have exhibited constant profitability over a large number of years and may offer regular dividend income.
Value investing typically focuses on risk avoidance as compared to growth investing, however value investors seek to buy stocks when they deem the stock price to be an underestimated bargain.
Growth investors find out companies who have acquired exceptionally high growth capabilities, with the aim of realizing maximum appreciation in the share price. They are usually less concerned about the dividend income and would invest in relatively young companies while neglecting all possible risks.
Fuel and energy stocks, because of their high growth potential, are often favored by growth investors.
Self Trading vs hiring a Professional
It is always recommended to research the market on your own before investing, like going through balance sheet of the company, past performance, future scope, impact of government policies, new schemes of the government, Budget, etc which is little time consuming. To avoid that some investors take help from Professional stock market experts.
- Stockbrokers are the licensed professionals who buy and sell securities on behalf of investors. They act as intermediaries between the stock exchanges and the investors by buying and selling stocks on the investors’ behalf. Stock brokers act on the orders of investors and does not buy or sell shares on their own.
- Portfolio managers are professionals who invest portfolios, or collections of securities, for clients. They get recommendations from analysts and make the buy or sell decisions for the portfolio for the investors.