New Delhi : The scope of investing has become so accessible that almost anyone can start minor investments from a young age. Investments reap greater profits and dividends when started in the early years. But if you are a beginner looking to invest in the share market then certain points should be made clear. Things like Demat Account and trading account are a few things that will help you in understanding the investment process and its mode of operation. These points will also help you understand the concept of the share market better.
What Are Shares?
Although the process of investing in shares is easy, by knowing the basics you can make a more informed decision. When a company enters into the share market to raise the capital it does so in the form of shares issued. The shares represent the unit measurement of the company’s wealth. For instance, if a company has issued 10,000 shares of Rs 100 it would mean its capital is Rs 10,00,000. The more shares you buy the greater will be the proportion of your profit or loss in the company.
Shares are generally of two types: equity shares and preference shares.
Equity shares are also known as ordinary shares. They form the major part of a company’s total shares. If you have equity shares of a company you will be entitled to vote on the company’s issues. However, the risk involved with the equity shares is also very high as you will be directly facing the brunt of the market fluctuations.
As the name suggests, preference shares give the investors certain privilege which the equity shares investors miss out on. The dividends are first distributed to the preference shareholders and only then to the equity shareholders. Even when the company is going to liquidate, the preference shareholders get the advantage of being paid first.
What Is the Share Market?
The place where shares are bought and sold is called the share market. There are two types of share market: the primary share market and the secondary share market.
The Primary Share Market
The primary share market is where the companies raise capital for the first time by issuing new shares which are to be bought by the investors. The initial public offering, also called IPO, is one such method by which the companies raise capital. Here the investor can get shares directly from the company. The shares in the primary share market are issued on a more or less uniform price.
The Secondary Share Market
In this market, the issued primary shares are traded. You can either buy or sell shares in the secondary market. The secondary share market is the place where both the buyer and seller come into contact for the transaction to take place. The price of shares in this market keeps fluctuating as it depends on the proportion of buyers to sellers. If there are more buyers than sellers, the price of your shares will be valued higher whereas if the number of buyers is less than the sellers then the shares get devalued.
For both the primary and secondary share market you will have to know what is Demat Account and trading account as both play key roles here.
A Demat Account is an equivalent to your savings account but in the place of money, it is concerned with shares, bonds, ETFs etc. Gone are the days when people had to deal in the share market through their physical share certificates. With the Demat Account, you can keep all your investments in one place and that too in a digital format. This not only reduces the risk of damaging or losing your physical share certificates but also makes the process of investment smoother and quicker.
The Demat Account uses a technology called dematerialization. This technology is what enables your physical share certificates to be converted into a digital format. By making your physical shares dematerialized you can access them like e-money.
To open a Demat Account, you will be required to choose a Depository Participant or DP. The DP is a kind of agent or broker who works as an intermediary between you and the depository with which you are going to open the Demat Account. Here are the steps to open a Demat Account.
– Select a Depository Participant of your choice.
– An account opening form will be provided to you by your DP.
– Fill the form and submit the relevant documents required. These documents generally include your identity and address proof.
– A verification process of the information provided by you will be initiated.
– Once the verification process is completed, your Demat Account will be opened and you will be given a Beneficiary Owner Identification number (BO-ID).
While the Demat Account gives you the facility to store your securities, it is only with the trading account that you can buy or sell shares in the share market. The trading account is used to connect with other investors with whom you will be engaged in a transaction of buying or selling your shares. A bank account needs to be linked with your trading account for the shares to be purchased or sold.
The process of opening a trading account is quite similar to the Demat Account except a broker is required instead of a Depository Participant and your bank account details will also be required.
Investing In Share Market
There is no golden trick to make a 100% successful investment. Share market is a volatile place and only speculations can be made. Experience plays a major part here. But for the beginners, it can be quite tricky. The COVID-19 pandemic, especially, made investors see even those shares falling radically who were doing exceptionally well till then. Banks like ICICI and HDFC faced major loss in Sensex. Nifty itself went down by 2%.
Now that the market is taking shape again, one safe way to proceed will be to see the past year performance of companies. You should also keep in mind that shares need time to increase their value. A company cannot become an instant hit in a year to two. Once you give proper time to your shares to grow, they will serve you better.