What is equity market?9 Mind-blowing tips from my experience

A lot of time, you might have heard about the equity market. 

Probably, you might have even invested in some stocks or in equity mutual funds on advice of your friends or colleagues.

Or you might be thinking of investing in the equity market. 

But, have you ever wondered what is equity market ? How do you make money in it ? And why should you invest in the equity market ? 

In this post I am going to discuss all the basic things you should be knowing before putting your money in the equity market.

And you might be wondering why you should be knowing basics of equity market, and why I am discussing it instead of giving you a list of good stocks.

The reason is I want you to pick stocks yourself with your own reasoning, whether that stock is good for you or not.

Definitely, you can take advice from your friends, colleagues or stock market experts.

But, you should be able to make a final call on whether to invest or not. 

I do not want you to get manipulated by them, like I bought this stock because he said so.

You must be knowing clearly why you bought it. 

After all you are investing your hard earned money in it.

And you have your own dreams and expectations from the equity market. 

Your friend’s dreams may be different. His risk appetite may be different.

So, you should be able to decide on your own which stocks to buy. 

I am damn sure, after reading this post, you will have a clear idea of Indian equity market ,why you should invest in it and how you can make money out of Indian equity market.

So let’s just start with the basic question.

 

What is equity market? 

Most famously known as stock market or Share market in India, equity market is a place where buyers and sellers of the shares meet.

You must be knowing about the concept of the market. 

Market is the  place where exchange between buyers and sellers takes place.

Buyers get goods or services in exchange for money and sellers get money in return for providing goods or services.

Same concept applies to the equity market.

Buyers and sellers of equity meet and they do trade shares of different companies.

What you must remember here is that share represents ownership claims on businesses.

When you buy that share, you buy that business.

Albeit you will have nothing to say in the management of a company with low quantity of stocks.

Still, you are one of the owners of that business.

What does it mean? 

It means any profit or loss of that business is directly linked to your investment.

Because you own that business through shares you bought.

Back to our topic equity market,

Here the question may arise , Can you directly go to the equity market and buy stocks from any one who owns it ? 

Answer is No, you can not. Only registered broking members are allowed to trade in the equity market. 

You can participate in the market either through brokers or sub brokers.

Some famous names like Zerodha , Angel broking, Sharekhan are examples of those brokers.

They provide you a demat account through which you can buy or sell stocks.

Look how convenient the equity market is, you don’t have to go out and find buyers or sellers of particular stocks by yourself in the market.

So, now you are clear that how convenient equity market it, next thing will come into your mind

Why should you invest in the equity market?

Obviously to make money, right.

There is no purpose other than making money, when it comes to investment.

But, Why am I recommending the equity market for investment? 

To know this answer, we will have to travel back to the past.

Let’s go back to the start of this century.

Let’s say we are in the first month of 2001.

Now let’s check the price of shares of some famous companies listed in indian stock market.

Nestle opened at 530 INR, MRF opened at 659 INR. 

Now let’s check today’s price of these stocks in 2021

Nestle is at 18,000 and MRF is at a whopping 80,400 rupees for a single share !

Just imagine, 10,000 rupees invested in MRF , today it would be worth 11,53,000 !

It is not accurate return though.

Because I have NOT taken into account all bonus, split and dividends given by the company in this timeline.

I have just compared prices of two different times.

Otherwise picture would be a lot more bigger.

Summary of the overall picture is, sensex opened at 3990 in 2001, today sensex is over 54,000.

Now I have a task for you, compare these returns and timeline with other investment avenues in the finance market like Bank FD, EPFO, Post savings and insurance savings products.

You will get the answer, where you can generate big wealth over the long term.

It would be totally unfair if I just show you only those stocks that performed tremendously well.

There are many stocks that failed in these 20 years and investors lost all of their money.

There comes your own common sense of picking good businesses handy.

And when I say this , believe me investing in good businesses has never betrayed me.

Then you may get this question in your mind.

How you can make money in the equity market

By setting goals and staying invested for long in good businesses.

But it is easier said than done.

Me and one good friend of mine, he is an equity market expert. 

We often discuss this topic.

We found that 5000 rupees invested in Bajaj finance in 2008, would have been 14 lakh rupees today ! 

Earlier in this post too we saw similar kinds of numbers in good businesses.

But whenever we ask, How Many people could make this kind of money by investing in these same stocks ?

Answer is nobody, or very few people.

Do you know the reason why ?

Reason is your own fear and greed.

Fear and greed plays an important part in the equity market.

We will understand this thing with an example.

Earlier we discussed how great some businesses did in the last 20 years.

But these same 20 years witnessed some big economic crisis.

Like 2001 stock market crash, Financial crisis of 2007-2008, Economic crisis due to pandemic in 2020.

Every time, investors got scared, they panicked and pulled out all the money invested in those businesses.

Because of the fear that they will lose all of their money.

Now you may ask, aren’t these crises a fair reason to take out money and save capital?

Because, everybody loves their hard earned money, who does not ! 

My answer is No, It doesn’t form any reason to take out money.

When you invest in good businesses with a bright future and strong fundamentals, you have to trust your business.

Any crisis can create economic havoc, you could even witness a big capital washout in your investment.

But it can not end the world, businesses with strong fundamentals are bound to bounce back just after any crisis.

And this is the reason why we are seeing these amazing returns in good stocks.

Another thing that doesn’t let you create big wealth from the equity market is your own greed.

It is extremely tough not to sell your shares when they are in green, because you are seeing profit in it.

And you would wish to take that amount in your pocket as early as possible for daily expenses.

This is a reason why nobody made those great returns in the last 20 years.

You need to understand the difference between savings in liquid assets for daily expenses and investment in stocks for the long term, if you wish to make money in the stock market.

As you are aware about all these things, now comes the main question.

Where should you go to invest in the equity market

As we discussed earlier, you need to approach brokers in order to invest in the equity market.

Examples are HDFC securities, Kotak securities, Zerodha, Paytm money, Angel broking, Sharekhan.

You will be required to open a demat account with them.

If you are a first time investor then complying with KYC is mandatory.

I have already written an article on how to do KYC for mutual funds, the same applies to the equity market as well.

You can refer to it , if you wish to know more about KYC.

So, that’s about where you should visit for the equity market. 

Now we will discuss a very basic thing about the equity market, that you should be knowing before investing.

What is equity in share market ? 

So far we have used this word equity a lot of time.

We are synonymously using these words equity market, stock market and share market.

And you might be wondering, is there any difference? What the duck is equity?

In easy languages if we say,

Equity is basically ownership in any assets after deducting all liabilities.

So, in any company, you are the owner of the assets of the company after taking out all debts of the company.

You are the owner of the company in proportion to how many shares you are holding against total shares issued by the company.

If you hold equity of any company worth less than 2 lakh rupees at face value of the share, you are retail investors.

 All investor’s with holding above 2 lakhs rupees of shares at face value are considered HNI ( High net worth individuals ) investors.

How to invest in equity market ? 

I have already written a detailed article on this topic, How to invest in the stock market in India.

If you wish to know more about it , you can refer to the above given link. 

I have explained in detail about the complete process of investing in the stock market.

 Also I have suggested some books that you should read before you start investing.

In summary, if you are new to financial markets, you should start with large cap mutual funds or index funds.

Large cap funds are basically composed of top 100 listed companies in the index.

They are very big companies, so you can expect stability in returns. 

In large cap stocks or in large cap mutual funds you can expect comparatively less volatility than small and mid cap companies.

After some time, gradually you can move towards direct equity after some study.

And in the equity market, start with big famous companies and later move on towards mid cap and small cap.

This thing solely depends on your risk appetite and your investment horizon.

Now we will see one more way to invest in the equity market.

 

Types of equity market

There are two types in the equity market.

1. Primary market
2. Secondary market

Primary market is the market where private companies come for the first time and offer their stocks in the form of IPO ( Initial public offer).

After an IPO, the company gets listed on the stock market and the company becomes a public limited company from a private limited company.

So, basically at primary market securities or you can say stocks are created for the first time.

While in the secondary market those stocks are traded between buyers and sellers.

Every company has to bring an IPO in order to debut in the primary market. 

After the IPO the company gets listed and gets traded on the secondary market.

You can also participate in an IPO by investing money in it.

I have written a detailed article on how to apply for an IPO. 

You can check it on the above link, if you wish to learn about how to apply for an IPO.

Secondary market is the market where already listed stocks get traded between buyers and sellers. 

And because of demand and supply and sentiments, the price of stocks witness daily up and down in the market.

Now we will get some interesting information

Overview of Indian equity market

In Indian equity market, the majority of trade in the equity market is carried out in 2 stock market exchanges.

1. BSE ( Bombay stock exchange)
2. NSE ( National stock exchange)

Both are located in Mumbai.

BSE is the oldest stock market exchange in Asia, running since 1875

While NSE is comparatively new, it was founded in 1992 and started trading in 1994.

Both exchanges follow the same trading mechanism, hours and settlement cycle.

As per latest records, there are more than 5500 companies listed in BSE while NSE has 1641 companies listed.

But , out of these big numbers, Top 500 companies at BSE form 90% of total market value, while the rest 5000 companies total worth is just 10% of total valuation of BSE.

So, you can say, we have 500 good options to choose from. Rest options are penny stocks and bear extremely high risk and low liquidity.

Almost all big and renowned companies are listed on both BSE and NSE.

Despite being old , NSE is bigger than BSE in terms of volume.

It means the NSE has more liquidity.

In India trading cycle is T + 2, it means any trade either buy or sell you carry out on Monday will get settled on Wednesday.

Both exchanges have Monday to Friday 5 working days and exchange of stocks takes place between 9:15 to 15:30 on all working days.

Now, delivery of stocks are mandatory in demat form in India.

There are many indices in India equity market as per market capitalization like large cap , mid cap small caps.

There are also indexes representing sectors like banking , IT and FMCG.

Most famous of them is S & P BSE Sensex 30 , it represents the top 30 stocks in terms of market valuation.

Another famous index is Nifty 50, it represents the top 50 large cap stocks.

So, that’s it about Indian equity market.

Conclusion

I hope I have cleared all the doubts about what the Equity market is and why you should invest in it. 

Lastly, I would like to give you some equity market tips. And my tip is do not ask for any stock tips to anyone and believe in your own study. 

Of Course, you should take advice about particular stocks and equity market scenarios from experts. 

But You should not invest blindly, just on the basis of price targets.

What do you think about it? Let me know in the comment section.

Now we will see some Frequently asked questions about the equity market.

Frequently asked questions