Share Market Investment

Share Market Investment signifies investment made by the investors (general public, institutional investors, banks, mutual funds, insurance companies, etc.) in the share market. It is not restricted to investing in shares only. The investment might be in derivative products such as futures, options, etc. where the underlying assets are the company shares. Shares are certificates which represents ownership rights of the holder in a company. An investor invests in share with the hope of capital appreciation in the future. This investment is purely a speculative one. But many derivative products (future, call option, put option, etc.) have come into existence for hedging purposes.

Investment in Share Markets are possible either through

•  Stock Exchanges , or

•  Over-the-Counter

Stock Exchanges are organized market places where stocks, bonds are other equivalents are traded between the buyers and sellers . The contracts are standardized and not customized ones.

But in case of Over-the-Counter , the trade takes place through a network of dealers. Generally, the OTC contracts are bilateral customized contracts unlike the standardized ones.

But in case of OTC, there is least surveillance and the dealer network doesn’t act as the counter-party

There are two channels through which investment can be done in the share market, one is Primary Market and the other is Secondary Market . Primary Market deals with securities that are channelized through the Initial Public Offer ( IPO ) route. In the Secondary Market , investors trade the securities among themselves.

Share market Investment can be done though investing :-

•  Directly investing in Shares of companies

•  Investing in Derivative Products

Investors could directly invest in the shares by investing in the following types of share variants :-

•  Common Stock

Common Stocks give an ownership right to the holders of the stock and hence the share holders are entitled to the earnings of the company according to their stake and the time-to-time investments announced by the company. These are ordinary shares which can be bought or sold at any point of the market hour because of their high liquidity.

•  Preferred Stock

These stocks also give ownership right to its holders and they enjoy the privilege of receiving dividends from the company in preference to any other common share holders. But these stocks are less liquid than the common ones.

•  c) Convertible Preferential Stocks

The holders of Convertible Preferential Stocks have the option of converting them into common stocks of the issuing company. The dividends in these stocks are comparatively higher.

Some of the Derivative Products are :-

•  Futures

These are contracts of specified periods where the investor does not actually buys the share of the company but buys specified contracts of buying the share in the future.

•  Options

Here the buyer is buying the right and not the obligation of either buying or selling the share at a predetermined date.

If the investor buys the right and not the obligation of buying the share at a predetermined date then it is known as Call Option .

If the investor buys the right and not the obligation of selling the share at a predetermined date then it is known as Put Option .

Derivative products are used by the investors for hedging the risk associated with any of his naked positions in the cash market. These products help to increase the liquidity of the share market .

Share Investments are of two types :-

•  Traditional Investment

B uy or sell of securities for holding purposes with a view of medium and long term perspective. They basically rely on efficient fundamental analysis of the stock they are taking position on. The investors falling into this type are known as Portfolio Managers .

•  Trading or Speculation

Traders continuously have a watch on the market during the trading hours and the moment they find any opportunity arising they pounce on it for scalping the profit out. These type of trading are highly risky and are not considered as traditional investments because of their higher risk of loss than average. Speculators generally rely on the technical analysis. Now-a-days, it is not a purely risky venture after the invention of many sophisticated investment tools (such as futures, options, short selling, stop loss orders, etc.) which help the speculators to hedge the risk.

Thus, share market investment is full of risks but there are also instruments for hedging the same.