Stock Market FAQ's
The capital market is the market for long-term loans and equity capital. Companies and the government can raise funds for long-term investments via the capital market. The capital market includes the stock market, bond market and primary market. Thus, organized capital markets are able to guarantee sound investment opportunities.
The capital market can be contrasted with other financial markets such as the money market which deals in short term liquid assets and futures markets which deal in commodities contracts.
The financial markets are markets which facilitate the raising of funds or the investment of assets, depending on viewpoint. They also facilitate handling of various risks. The financial markets can be divided into different subtypes: Capital markets consists of:
A stock market is a market for the trading of publicly held company stock and associated financial instruments (including stock options, convertibles and stock index futures). Many years ago, worldwide, buyers and sellers were individual investors and businessmen. These days markets have generally become "institutionalized"; that is, buyers and sellers are largely institutions whether pension funds, insurance companies, mutual funds or banks. This rise of the institutional investor has brought growing professionalism to all aspects of the markets.
The money market is a subsection of the fixed income market. We generally think of the term "fixed income" as a synonym of bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities. Money market securities are essentially IOUs (an abbreviation of the phrase "I owe you") issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extraordinarily safe. Since they are extremely conservative, money market securities offer significantly lower returns than most of the other securities.
The capital market framework consists of the following participants: a. Stock Exchanges b. Market intermediaries, such as stock-brokers and Mutual Funds c. Investors d. Regulatory institutions (e.g. SEBI)
The following are the different types of financial instruments-
One cannot buy directly from the market or stock exchange. A buyer has to buy stocks or equity through a Stock Broker, who is a registered authority to deal in equities of various companies. In effect a lot many intermediaries might come in between the buyer and seller, as brokers do their business through many sub-brokers and the like.
The general theory goes that the higher the profit, the greater the risk. Since there is scope for high profit in the Stock Market, investing in the Stock Market can be risky. In fact, more than 80% of the people who put money in the market lose it and a majority of the rest are barely able to protect themselves from losses. Only a minuscule minority of investors are able to garner any substantive profits.
Basic human psychology. Men want profits- big and fast. Not many are deterred by the risks involved. The fact is that investment in the stock markets can give, potentially, the fastest ROI (Return On Investment), as the value of a stock can rise pretty fast, ensuring huge profit for investor. People buy shares in a company for either of two reasons:
The precept is very easy. The first thing is to ensure that you do not lose your investment. Since most people end up losing their investment, saving your investment is the first and most important part. This can be done by ensuring that you do not put your money in a company that does not show solid prospects. Fly – by - nights companies or companies whose shares touch the roof suddenly, need to be avoided. Companies that show a steady prospect are good to invest in. Needless to say, this process involves close acquaintance with market movements and a thorough understanding of the concepts involved. You should know when to dump your shares especially when they are becoming just junk papers.
The second thing is that adequate market knowledge is very important especially when you have invested in the stock market. One should be patient and judiciously responsive to market swings. Of course, luck is also a major factor.
Undoubtedly, it is 'Don't put all your eggs in the same basket'. It is very tempting to make all your investment in the same sector when their stocks are going up, but since market trends are very volatile, you are, at the same time, making yourself extremely vulnerable to lose all your money. Dealing with single sector investment requires razor sharp timing with zero margin for error - a tall order in such a speculative and volatile business. Hence, it is always advisable to make investments in different companies and in different sectors, so that you can achieve stable portfolio diversification and compensate losses in one sector against profits in an another sector