With today’s globalization and competitive economies - investing is one way to earn funds exponentially. Many would suggest starting investing at a young age as it would be the most beneficial in the long-term. You can start diving into the share market for multiple reasons. It allows you to earn money for university, establish your own company, or have an income to use on your shopping expenditures.
What Is A Share Market?
The share market is a way where businesses and companies sell their shares to the public. The investor who buys the shares would own a percentage of the company. Thus, over a period, the investor can earn profits through dividends from the invested company or have a loss. Shares are a type of security that can be liquidated to cash or transferred.
How Does It Work?
Companies list their companies publicly for investors to buy shares. It enables companies to gain more capital to use in developing and expanding their businesses. Shares can change prices depending on the demand on the market. Investors and traders will decide which company they would prefer to invest in based on their goals. An investor can choose to invest in start-ups or currently well-established firms.
How Do I Earn?
There are three primary ways for investors and traders to earn from the share market.
1. Dividends
Dividends are the profits of the company after expenses that shareholders are provided. It depends on how many securities a shareholder has that stipulates how much is paid. Additionally, the type of shareholder policy the investor possess affects the distribution of dividends. Preferred shareholders are paid dividends of the company first before common shareholders. It provides security for preferred shareholders to be prioritized for dividends if the company liquidates due to termination. On the other hand, common shareholders have voting rights over the company, while preferred shareholders do not.
2. Buyback
Buyback occurs when a company has a large sum of funds or wants to attain its shareholders’ ownership. Companies would purchase shares back from investors for a higher value than the provided market value.
3. Capital Growth
Capital growth refers to the appreciation of value in the securities an investor has bought. The essence of investing is that the longer the investment duration, the higher the yield of return. However, the level of risk threshold an investor has influences choices and capital growth performance. Equities are securities to invest for higher risk-takers. In comparison, lower-level risk-takers invest in bonds instead. An investor’s age, needs, and responsibilities influence their risk threshold.
Types of Share Market
The share market is divided into two types, primary and secondary.
Primary Market
The primary market is where a company or government increases its funds by selling shares for the first time. They are registered and can decide if they want to be under a public or private placement. Selling shares in the primary market is known as an Initial Public Offering (IPO). After this process, the firm becomes a public listing. However, companies must fulfill the requirements of the Securities and Exchange Commission (SEC) first.
The firm can sell its shares through different pricing methods. A fixed price enables the company or issuer to decide. On the other hand, a book building issue is dependent on the investors’ demand in the market.
Secondary Market
The secondary market contains all the subsequent transactions after the primary market. It is where investors trade shares that were listed previously. Transactions of buying and selling shares between investors and companies occur based on a prevailing price. Additionally, the secondary market enables investors to leave the financial market. By selling all the shares that the investor owns back into the market, it allows them to exit.
The secondary market happens through over-the-counter (OTC) and the exchange-traded market. The OTC is an informal process where trading shares are not on the formal exchange list due to not meeting specific standard requirements. Thus, the process requires the transactions to be through a broker-deal network. In comparison, an exchange-traded market is centralized and regulated. These enable listed companies’ transactions of securities to be handled by stockbrokers and traders. Specific securities on the market, such as shares, have prices influenced by demand and supply fluctuations.
Why Is The Share Market Important?
Companies
Share markets enable companies to acquire large sums of funds to inject in the capital. It allows firms to expand, develop, and grow. Therefore, subsequently increasing profits for the firm and shareholders’ wealth. IPO’s enable the company to enter the stock exchange. While being publicly listed allows exposure of the company to the public. It increases consumers’ likeliness to look into the company and pique other traders’ and investors’ interest.
Investors And Traders
Investors and traders can use the share market as a tool to attain their long-term life goals. Traders can purchase a stock and sell it based on their needs. It is the same with investors, where they buy a share based on their long-term goals. Both investors and traders can readily liquidate the securities into cash and create wealth.
Is There A Difference With The Stock Market?
For many, stocks and shares are interchangeable. There are slight differences, however, are disregarded. The stock market is a secondary (share) market. To buy stocks is associated with purchasing shares of a company or other types of security.
How Can I Start?
There are multiple ways to dive into the share market. If you plan to buy shares of a company, it would be likely that you need to create a brokerage account. However, you also have the option to look into stockbrokers or financial advisors and planners to handle your money with a fee.
Before embarking on your investing journey, you have to ensure that you have established your goals and your risk threshold. It will enable you to distinguish which shares to invest. Additionally, ensure you diversify your portfolio, control your emotions, and keep educating yourself.
Investing vs. Trading
You should distinguish your goals and what type of involvement you want to play in the market. Investing refers to placing money into securities for an extended period. These tend to be lower- risk shares. In contrast, trading is when an individual holds onto a share for a short period. It is due to volatile market fluctuations; trading tends to be fast-paced. These are likely to be higher- risk securities with higher yields. Traders would buy stocks a low buying price and transact by selling them if the market value rises.
Takeaways
The share market provides ample opportunities to create wealth. Individuals can take different roles and achieve their respective goals. The division of the market into primary and secondary enable companies certain benefits. The market permits traders and investors to transact among one another and companies to stimulate growth. It is an outlet that can allow individuals to achieve their financial goals with consideration to risk.
