I. Introduction
A lot of people use the term equity market. But what is it, really? If you are curious to know about what the equity market is all about, keep reading! Here we present a comprehensive guide to the equity market, including its definition, function, types, examples, and more.
A. A brief explanation of what the equity market is
If you want to know what the equity market is and learn about its functions, you must begin with the basics. So, let’s start with a definition. An equity market is a platform that allows companies to raise capital by issuing shares to investors. So, in simple terms, the equity market is a marketplace where companies issue their stocks, and traders or investors purchase them and trade them for profit.
B. The importance and role of the equity market in the financial system
The equity market plays a significant role in the financial system. It serves companies who want to raise capital and investors looking for good investment options to make money. Therefore, the equity market plays a vital role in the financial system. To sum it up, it helps both businesses and investors create a co-dependent economy and reduce the amount of external debt.
II. Definition of equity market
By definition, an equity market is a type of marketplace. Companies use it to issue their equity shares and stocks for investors to purchase and trade. On the other hand, it is the place where investors buy equity shares and help companies raise capital.
A. Explanation of stocks and shares
If you want to know what the equity market is or how it works, you should also learn about basic concepts like shares and stocks. While a stock refers to ownership in a corporation or company, a share represents units of stocks. However, share and stock both terms are often used interchangeably.
Read More: What are Equity Shares? Capital, Market & More
B. Basic concepts like ownership and dividends
Ownership and dividends are also important concepts related to the equity market and finance. Ownership of equity refers to a stake or share of ownership in a company or business entity. On the other hand, dividends are the proportion or percentage of earnings of a company. It is paid to its shareholders as their share in the profit.
III. Functions of the equity market
The equity market has a strong function in the financial system. Here we will learn about it in detail.
A. Facilitating company growth
The equity market plays a pivotal role in facilitating companies. Equity markets offer a place for companies to raise capital for their business. They do this by issuing equity—that is, offering a percentage of ownership in the company to buyers. This way companies can grow their capital without taking on debt from the market.
B. Providing liquidity for investors
Equity markets provide excellent liquidity for investors. Investors who want to avoid payable tax over their annual earnings can invest in company equity shares to liquidate their money. Also, this way they can easily liquidate their cash and find someone willing to buy their share when they no longer want to keep them.
C. Pricing mechanism for stocks
Lastly, the equity market offers a powerful pricing mechanism for stocks. As they immediately reflect the status of supply and demand for buyers and sellers across the globe. High demand leads to higher buying trends that result in increased stock prices. On the other hand, if the demand falls the selling activity and price of the stock.
IV. Types of equity markets
There are two types of equity market exits that you must know when learning about what the equity market is all about. One is primary and the other is secondary.
A. Primary market vs secondary market
The equity market can be divided into two types: the primary equity market and the secondary equity market. The main difference between these two markets is that the primary equity market is a marketplace where securities are created, while the secondary equity market is a marketplace where company individuals, a former company employee, and current employees enter to trade the securities they own in the company.
B. Different stock exchanges around the world
There are many equity markets across the world where both companies and individuals can participate in trading shares and stocks to build capital. So, apart from discussing what the equity market is and how it works, let’s also take a minute to discover the different stock exchanges around the world:
- Bombay Stock Exchange (BSE) and National Stock Exchange (NSE): BSE and NSE are both the two largest and most well-established stock exchanges in India.
- NASDAQ: The biggest stock exchange in the USA, primarily known for listing technology-based companies.
- New York Stock Exchange (NYSE): NYSE is another major stock exchange of the USA based in New York.
- Tokyo Stock Exchange (TSE): TSE is one of the biggest stock exchanges in Asia and the primary stock exchange of Japan.
- Shanghai Stock Exchange (SSE): SSE is the largest stock exchange in the entire APAC, mostly listing Chinese companies.
C. Overview of over-the-counter (OTC) markets
Over-the-counter markets are similar to the stock exchange markets. However, the primary feature of these over-the-counter markets is that they are less strict about rules, especially those related to privacy and transparency. Here both listed companies and traders have lesser privacy in trade. This is also one of the biggest reasons for this alternative stock market to remain unpopular among investors with companies.
V. Examples of the equity market
If you want to understand what the equity market is, you must learn it through practical examples. Examples and case studies are important for knowing how the equity market works.
A. Success story of a company benefiting from the equity market
Reliance Industries is among the most noteworthy success stories in India. Reliance, which began as a textile company, went public in 1977 and has since grown to become one of India’s biggest conglomerates, operating in the retail, telecom, and oil sectors. The equities market was essential to Reliance’s expansion since it allowed the company to raise money through several IPOs and gave investors significant profits. Reliance’s stock price has increased dramatically throughout the years, generating riches for investors.
B. Case studies of famous stocks and their market performance
There are several ways in which the TCS IPO was innovative. With Tata Sons reducing its stake by offering 14% of TCS’s equity shares, it was the first billion-dollar initial public offering (IPO) in Indian history. It was not an easy road to this initial public offering (IPO). TCS had been a part of Tata Sons, the group’s flagship company and main source of revenue, for thirty-six years. The choice to go public with TCS may have required giving up a steady stream of income.
One business that has prospered in the Indian equities market is Infosys. Infosys was founded in 1981 and listed on the NSE for public trading in 1993. With steady increases in share value, Infosys has emerged as one of the biggest IT firms in India since its first public offering. Over time, Infosys’s early investors have reaped substantial rewards as the business grows its market share and capitalizes on the demand for IT across the globe.
VI. How to invest in the equity market
Accessibility and convenience have made equity stocks more popular among investors. We have already discussed what the equity market is and how it works. Here we will tell you how to invest in these funds.
A. Basics of buying and selling stocks
Here are the steps to buy and sell equity shares:
● Open a trading account and a demat account with your brokerage firm.
● Go through the documentation and verification processes.
● Transfer funds to your trading account through online banking.
● Research shares, place orders and monitor your trading profile on the trading platform provided by your brokerage firm.
● Purchase and sell shares.
● Regularly review the performance of your investment to make informed decisions.
B. Risks and rewards associated with equity investments
Here are some risks and rewards related to equity investments:
Rewards:
● Ability to diversify the portfolio by investing in various sectors and companies
● Higher returns over long-term investments
● Transparency in pricing and other information
● High liquidity
● Opportunity to earn dividends
Risks:
● Short-term losses caused by market fluctuations and volatility
● Requires expertise and extensive market research
● High market risks
● Impact of geopolitical events and regulatory changes
● Adverse market conditions can make one lose the entire investment
C. Tips for beginner investors
Understanding the equity market and considering some factors is essential before making any investment. Here are some tips for beginners interested in equity funds:
● Thoroughly understand the fundamentals of the equity market.
● Conduct extensive research on industries, market trends and companies.
● Create strategies that complement your risk tolerance and financial goals.
● Mitigate risks by diversifying your portfolio.
● Regularly monitor the performance of your investment.
● Keep yourself updated on market changes and other factors impacting the market.
VII. Conclusion
Equity market refers to the marketplace where companies issue equity shares and stocks to raise capital. It is where investors purchase and trade shares and stocks to build capital through their investments. Companies issue equity shares to traders to raise capital, and investors invest money to own shares that will enable them to earn profit from the company’s success.
Equity markets bring both risks and rewards for the investors. However, with the right tips and proper knowledge, one can profit from equity market investment. The equity market is ever-evolving. So, if you are really interested in participating, you must keep yourself updated with the latest news and events and continuously learn about the equity market.
FAQs
1. What is the equity market in simple words?
The equity market refers to a platform that facilitates the issue and exchange of shares between companies and investors. It helps companies raise funds for their businesses. Investors, on the other hand, earn ownership rights in companies by investing in their shares.
2. What is the difference between the stock and equity market?
Most of the time, the terms ‘stock market’ and ‘equity market’ are interchangeably used. However, the stock market facilitates the buying and selling of tradable stocks, while the equity market offers other tangible assets, including stocks.
3. What is the difference between equity and share?
All shares of an organization are part of its equity. On the other hand, equity includes shares and other tangible assets some of which can be non-tradable. Also, investing in equity can have more risks than shares. But it also offers higher returns.
4. Is it good to invest in the equity market?
Investing in equity can bring higher returns, but it also has higher risks. Another benefit of investing in the equity market is that it allows investors to increase the value of the principal investment amount. However, one should have a proper risk management system to get the best equity trading experience.
