Stock Market
Stock Market Basics
In India, share markets are broadly classified into Primary Markets and Secondary Markets. Let us understand the difference between the two.
Primary market is also called the IPO market. Here companies issue shares so as to get listed in the stock market. Primary market raise money through New Offers (fresh issue of shares) or through offer-for-sale (existing shareholders selling their shares).
Secondary market is where listed shares are traded. Once the IPO is completed, shares normally get listed within a period of 10 days. Once the listing is done, then the shares start trading in the secondary markets.
Why do people invest in Stock Market?
There are 3 reasons people invest in the share markets in India. Here we are referring to the secondary markets in particular.
People invest so that these share values can appreciate and give good returns in the long run. For example an amount of Rs.1 lakh invested in Havells in 1996 would be worth Rs.32 crore today. That is potential to create value that share markets have.
People also invest in share markets to participate in the growth of the Indian economy over a period of time. Unlike bonds, these shares do not assure any returns. But over longer periods of 10-12 years they give above index returns.
People also invest in shares markets for the sake of dividends that are paid out by these companies from their profits. This is also called dividend yield investing.
How does the Stock Market works?
The share market plays 3 important roles to help the investors and the brokers. Brokers are your intermediaries for trading in the share markets. Here are the 3 critical functions that share markets actually perform in India.
Share markets bring buyers and sellers together. When both the buyer and the seller place their orders on the stock exchange, the stock market gives best execution to both. For buyers, execution is at lowest available price and for seller it is done at highest available price.
Stock markets clear trades which is one of the most important functions. Stock exchanges have their own clearing corporations to clear trades which connect with brokers to ensure that credits, debits, delivery are all handled properly.
Stock exchanges manage risk. They impose margins on traders to ensure that no undue risk is taken in the markets. More importantly, stock exchanges (through their clearing corporations) guarantee the trades. Effectively, for every trade, the stock exchanges are the counter party. Therefore, when you deal in stock markets, there is no counterparty risk.
Types of trading in Stock Market
Equity Trading
Equities refer to small pieces of a company’s worth, considering all pending liabilities. If you are investing in a company by purchasing equities, you become an owner of the company in the same ratio as the equities bought. If you’re looking to turn a profit, the best way to do so is to sell the equities you’ve purchased when they grow in value. In some cases, depending on the percentage of equity shares owned, the shareholder can also have a right to vote on important decisions that are made by the Board of Directors.
Features of owning Equity
- Redeeming capital: If you have purchased equity shares from a company, then only you can claim the company’s value in case of liquidation. Another way to get a return on investment on equities is dividends, and trade the share when its value moves above your purchase price.
- Voting rights: If you purchase equity shares from a company, you become a partial owner with the right to vote at company meetings. Most people buy equities of publicly listed companies with a highly fragmented shareholder base, so it is usually left to the Board of Directors to handle all this as they are the appointed representatives of the company.
- Limited liability: Ordinary shareholders of a company are not impacted directly by the losses of a company. The only impact they will feel is in the depreciation of the value of the shares they hold, which would impact their net worth and their profit-turning prospects.
Benefits of purchasing Equity
- High risk, high reward: Equity shares can give high returns to the shareholders if the risk pays off. Investors enjoy the profits through dividend earnings as well as the appreciation of the company.
- Easy and efficient: You can invest in equity shares at any company through a stockbroker or financial planner. All you need is a Demat account to trade.
- Diversity: You can invest in equity shares across many thematic areas, from trading based on the capitalization of a company, to equities of companies in a particular sector. Thus, equities lend to greater diversity for better and more stable returns.
Disadvantages of owning Equity
- High risk includes high losses too: The possibility to earn through high returns is present, but the risk of loss is also high.
- Linked to performance: Since there is a link between the equity shares and the market, their performance can fluctuate greatly and often take a turn for the worse.
- Inflation risk: If a country’s economy experiences inflation, the company’s worth can fall which in turn will affect its shares and not provide the returns that were expected and impact the profits that were to be generated.
- Risk of Liquidity: When a company is unable to repay its debts, it may opt for liquidation which requires the shareholders to sell their shares at a price lower than the market price.
- Social and Political fluctuation: The social and political climate of a country and the goals associated with the same can impact the growth of the company. This, in turn, impacts the profits generated and therefore the benefits that a shareholder could have received.
Types Of Equity
- Shares: This is the simplest way of buying shares in a company that you have faith complete in The shares of the company will appreciate within the time frame in which you want a return.
- Equity-Mutual fund investments: This is when several investors collect funds and at least 60% of those are invested in equity shares of various companies. Mutual funds can be further divided into the following categories:
Large-cap equity funds: The fund invests only in large companies with stable returns.
Mid-cap: The fund’s investment thesis revolves around investing in companies of smaller size but with higher potential for growth. This is a balance between risk and potential reward.
Small-cap: investments are made in small and volatile companies with a high risk to reward ratio.
Multi-cap funds: These funds invest in companies of all sizes across a variety of sectors. - Alternative Investments Funds: In this, you invest in equity through various methods wherein each of those options have their investment theses. You have to see not only which one suits your needs, but also which one you can afford to invest in.
Currency Trading
Meaning of Trading Currency
Trading currency means exchanging the denominations of currencies of specified nations (e.g. US Dollar, Euro, Yen, Yuan etc.) on international platform. It incorporates all parts of purchasing, selling and trading monetary standards at current or decided costs. As far as trading volume, it is by a long shot the biggest market on the planet.
How do you start trading in Currency
For starting to exchange Forex, simply log on to the internet. There are a lot of choices for Forex over the web. Do a detailed research about a sound and ensured Forex broker. You then need to open an account with the broker. Then you have to download a Forex Trading Platform and begin trading.
What Currencies Trade In Forex ?
An exchange rate is a cost paid for one currency in exchange for another. It is this sort of exchange that drives the Forex market. There are 180 various types of legitimate monetary standards on the planet. Notwithstanding, most global Forex exchanges and installments are made utilizing the U.S. dollar, British pound, Japanese yen, and the Euro. Other well-known currency trading instruments incorporate the Australian dollar, Swiss franc, Canadian dollar, and New Zealand dollar.
What is the best Forex Trading Startegy?
Forex trading requires assembling different components to plan a trading strategy that works for you. The major ones are Price Action and Range Trading strategies. Price action strategy includes the investigation of verifiable prices to define specialized trading strategies. Price action can be utilized as an independent method or related to a marker. Details are only sporadically utilized. Alternately Range trading strategy incorporates recognizing backing focuses whereby traders will put trades around these key levels.
How Much money need to start trading Forex ?
These days, owing to the varied platforms in India and elsewhere, there are certain portals who offer demo trading sessions free of cost. However, for tangible Forex trade, it is advisable that risk calculation should be done before investing. This is because unlike stock trading, Forex trading doesn’t generally fix any particular mandatory amount However, before investing, it is important to consult a certified brokerage firm.
Commodities
What is Commodity Market ?
A commodity derivative market is the platform for trading of commodities that fall under the four segments of agricultural commodities, bullion and gems, metallic commodities and energy commodities. Derivatives are financial vehicles whose valuation is based on the asset value of equities, currencies, or commodities. Any commodities derivative contract, therefore, has commodities as its prime asset. Based on the exchange of derivative contract based on commodities, a commodity derivative market is a prime source of market variations.
Why Invest In commodities?
Investing in commodities helps diversify your overall investment portfolio, which means that the allotment of funds is broadened. This helps create a balanced portfolio and also helps mitigate the chances of any unwanted risk, generally associated with equity investment. Moreover, investment in commodities acts a cushion against future inflation as the commodity trade generally increases in volume during times of high inflation. Also, commodities constitute an economically cheap category of investment vehicles when compared to other future based alternatives.
How to Start Commodity trading?
For trading in commodities, you need a Trading account. A Trading account can be opened with a certified brokerage firm. This trading account serves as the exchange place for trading in the commodity market. It must be noted, however, that the broker that you choose must be registered with commodity exchanges. The notable commodity trading exchanges in India are MCX and NCDEX. The first step, however, is to understand and list your goals and the type of market that you wish to deal with. There are a variety of options for trading in commodities and you should choose as per your financial consultation and your risk appetite.
What is difference between goods and Commodity?
A commodity can be thought of as an ingredient for a finished good. Goods are the final result that we get after value addition is done to commodities. For example: yarn is a commodity and once processed, the final textile that we get is a good.
How much can earn in commodity trading in India ?
Commodity dealers get up to multiple times influence for intraday trading. Contrasted with stocks, trading in products is a lot less expensive, on the grounds that edges are a lot of lower than in stock prospects. Again, the net amount that can be earned depends on which stocks you invest in and the risk to reward ratio that is generated by the varied parameters that influence the commodity market
Which is better equity or Commodity ?
It all depends on what your specific goals are. Equity markets in India and elsewhere are known for the higher rate of returns over a period of time. However, equity stocks come with a higher volume of risk as well, when compared with commodity trading. On the other hand, the earnest profits in commodity market are lesser, but so is the risk involved. If you prefer high risk trading, then equity is the right channel for you. On the other hand, if you prefer low-risk but steady ventures, then you should allot more funds towards commodities.
