Just like any other market, say a vegetable market or fruit market, a financial market is a place where buyer and seller meet to enter into a securities transaction. The place where this exchange of share takes place is called stock exchange.
There are many stock exchanges in the world. They are located in the major financial center in the world. Like New York, London, Tokyo, Shanghai, Mumbai, Hong Kong, etc. Companies have to list themselves on the stock exchange so that their shares can be traded. Also, see an overview of Indian stock market for a better idea.
Shares are bought/sold through firms who are called stock brokers. These stock brokers charge a fee for the services that they give. They are full-service brokers and discount brokers.
- Variety of stocks
One can invest in the stock market by either selling/purchasing by oneself (benefits of intraday trading) or by investing in mutual funds (or fund company). By investing through oneself, one has to pay only brokerage charges. By investing in the mutual fund, charges for managing fund are automatically deducted.
By investing through the mutual fund (MF) the fund manager invests in a number of stocks on your behalf, diversifying in different equities so as to reduce the risk, better return on investment and keeping day to day watch on the market.
- Investment companies
The risk is always involved while investing. Be it banks, equity or whatever. Though the degree varies and so do the returns. Investors should balance risk and rewards before investment. Here your risk-taking capabilities come into play. Some investors are risk lovers and some are risk averse. One should know when to sell shares to make a profit.
Hence it is critical to choose the right company to invest in. To reduce risk, one should select such a company that has good cash flow, good saleable product range (present and future) and has large enough market capitalization (mostly blue chips and mid-caps), good and proven management (board of directors).
If you are investing in equity through mutual fund route, see to it which sectors they are investing in. Broader the sectors better but not too broad. As broader sector tend to be less volatile in terms of returns.
- Mix portfolio
Equity investments have the tax advantage as there is no capital gain tax if equity is held for more than one year and dividends are taxed at a much lower rate as compared to interest income. Dividends are not too regular as interest. Hence one should have an investment which is a mix of equities and fixed income.
Depending on your risk tolerance factor (both emotionally and financially) one should choose accordingly. If you are a risk lover than you can have more of equities and less of interest income component. And if you are risk averse the opposite is true.
- Time period of investment
As far as equity investments are concerned, to get better returns one has to stay invested for a considerable period of time to get better returns and one has to make certain adjustments depending on market conditions as and when needed. No need to time the market when they are high or low, that is how to make money in Indian stock market.
From available data, one can see that for long-term investments, the equity market has given better returns compared to interest paying investments. Bank interests are unable to beat inflation as everybody knows inflation rate is moving more ahead of interest rates year on year basis. There are many myths and facts about Indian stock market which should be cleared before investing.