Equity is the most preferred investment asset class for those seeking high return on their investment with a willingness to take a higher risk. One can invest in equities directly through stock exchanges or through a mutual fund.
Lets first understand what a stock is – A stock is a type of security (financial asset) that signifies ownership in a company. In other words, a shareholder is an owner of a company to the extent of number of shares held. For eg: if a company has 1 lac shares outstanding and you hold 1000 shares in that company then you have 1% shares in the company.
When any company offers issue of equity shares for the first time, it is called an Initial Public Offering (IPO) where the company raises money from investors who submit applications to become shareholders of the company. The IPO market is called the Primary Market.
Once the shares are issued to investors, shares get listed in Secondary Market composed of exchanges like NSE and BSE. Once listed, the investors can sell these shares on the exchanges to other investors who might be interested in buying the company.
Many investors invest in a company through Primary Market IPO with an objective of selling the shares on listing and reaping listing gains in case shares list at a price higher than what they paid for. This way they book profit by selling at a higher price.
Share prices keep on changing on exchanges based on expectations on various market participants about the future prospects of the company, quality of its management, industry outlook, and economic outlook of the country and so on. In this interconnected world where the company does business there can be so many variables affecting the stock prices.
An investor, simply speaking makes money by buying a share when the price is low and selling the same when price becomes higher. Another way an investor earns money is through Dividends paid by the company out of its earnings.
So key aspect of making money in the markets is identifying good companies and buying them at good prices at the right time. Equity as an asset class has outperformed every other asset class in the long term and must be a part of every investor’s portfolio. The basic idea is you should own good companies at the right price and as company keeps on growing you get richer as the shareholder of that company through appreciation in the price of the shares held by you.