What Is the Share Market?
The share market is a marketplace where buyers and sellers come together to trade shares of publicly listed companies. When a company wants to raise capital, it offers portions of ownership in the form of shares to the public. Investors who purchase these shares become part-owners of the company and stand to benefit from its growth and profitability.
Share markets serve a critical function in the global economy. They provide companies with access to capital for expansion, research, and operations, while giving investors the opportunity to grow their wealth over time. Understanding share market basics is the first step toward making informed investment decisions and building long-term financial security.
"The share market is filled with individuals who know the price of everything, but the value of nothing." — Phillip Fisher
Share Market vs Stock Market: What's the Difference?
The terms share market and stock market are often used interchangeably, and for practical purposes they refer to the same thing. However, there is a subtle distinction in how different regions use these terms.
In countries like the United Kingdom, India, and Australia, the term "share market" is more commonly used. In the United States and Canada, "stock market" is the preferred terminology. Both terms describe the same system: an organized marketplace for buying and selling equity securities in publicly listed companies.
Similarly, the terms "shares" and "stocks" overlap significantly. Shares typically refer to the units of ownership in a specific company, while stocks is a broader term that can refer to ownership across multiple companies. When someone says "I own shares in Company X," they are being specific. When they say "I own stocks," they are speaking generally about their equity holdings.
How Do Share Markets Work?
Share markets operate through a structured system that connects companies seeking capital with investors seeking returns. Here is how the process works from start to finish:
The Initial Public Offering (IPO)
A company enters the share market through an Initial Public Offering (IPO). During an IPO, the company sells shares to the public for the first time. This occurs on the primary market, where new securities are created and sold directly to investors. Investment banks typically underwrite IPOs, helping determine the initial share price and facilitating the sale.
Secondary Market Trading
After the IPO, shares trade on the secondary market. This is what most people think of as the share market. Investors buy and sell shares among themselves through stock exchanges. The company does not receive money from secondary market transactions; instead, shares change hands between investors at prices determined by supply and demand.
Price Discovery
Share prices are determined through a continuous auction process. When more people want to buy a share than sell it, the price rises. When more people want to sell than buy, the price falls. This mechanism reflects the collective judgment of millions of participants about a company's current and future value.
Major Stock Exchanges Around the World
Stock exchanges are the physical or electronic venues where shares are traded. Each major economy has at least one significant exchange. Understanding the world's leading exchanges is an important part of share market investing.
| Exchange | Location | Notable Companies | Key Features |
|---|---|---|---|
| NYSE | New York, USA | Berkshire Hathaway, JPMorgan, Walmart | Largest by market cap; auction-based trading |
| NASDAQ | New York, USA | Apple, Microsoft, Amazon, Google | Tech-heavy; fully electronic exchange |
| LSE | London, UK | Shell, HSBC, AstraZeneca | Europe's largest; FTSE 100 index |
| TSE | Tokyo, Japan | Toyota, Sony, SoftBank | Asia's largest; Nikkei 225 index |
| SSE | Shanghai, China | PetroChina, ICBC, Kweichow Moutai | Restricted foreign access; A-shares and B-shares |
| BSE/NSE | Mumbai, India | Reliance, TCS, Infosys | Among the fastest growing; Sensex and Nifty 50 |
Who Participates in the Share Market?
The share market consists of several types of participants, each playing a distinct role in maintaining market liquidity and efficiency.
Retail Investors
Retail investors are individual people who buy and sell shares for their personal accounts. Thanks to online brokerage platforms, retail investors now have unprecedented access to global share markets. They typically invest smaller amounts compared to institutions but collectively represent a significant portion of trading volume.
Institutional Investors
Institutional investors include pension funds, mutual funds, hedge funds, insurance companies, and endowments. These organizations manage large pools of capital on behalf of their clients or beneficiaries. Their large trade sizes can move share prices, and their research teams conduct deep analysis before making investment decisions.
Market Makers
Market makers are firms that stand ready to buy and sell shares at publicly quoted prices. They provide liquidity to the market by ensuring there is always a buyer for someone who wants to sell, and a seller for someone who wants to buy. Market makers profit from the spread between the bid (buy) and ask (sell) prices.
Brokers
Brokers act as intermediaries between investors and the exchange. They execute buy and sell orders on behalf of their clients. Modern online brokers have dramatically reduced trading costs, with many offering commission-free trades on shares and ETFs.
Understanding Share Market Indices
A share market index tracks the performance of a specific group of shares, serving as a barometer for the overall market or a particular sector. Indices help investors understand how the broader market is performing without needing to track every individual share.
- S&P 500: Tracks the 500 largest U.S. companies by market capitalization. Widely regarded as the best gauge of the American share market
- Dow Jones Industrial Average (DJIA): Tracks 30 large U.S. companies. One of the oldest and most recognized indices
- FTSE 100: Tracks the 100 largest companies listed on the London Stock Exchange
- Nikkei 225: Tracks 225 major companies on the Tokyo Stock Exchange
- Sensex: Tracks 30 major companies on the Bombay Stock Exchange in India
- DAX: Tracks 40 major companies on the Frankfurt Stock Exchange in Germany
Investors often compare their portfolio returns against a relevant index to determine whether they are outperforming or underperforming the market. Many investment products, such as index funds and ETFs, are designed to replicate the performance of specific indices.
How to Start Investing in the Share Market
Beginning your journey in share market investing does not require a large sum of money or advanced financial knowledge. Here is a step-by-step approach for beginners:
Step 1: Build Your Financial Foundation
Before investing, ensure you have an emergency fund covering three to six months of living expenses. Pay off high-interest debt, and make sure you are not investing money you will need in the short term. Share market investments should generally have a time horizon of at least five years.
Step 2: Educate Yourself
Learn the fundamental concepts of share market investing. Understand how shares are valued, what drives price changes, and the difference between various investment vehicles. Reading financial news and studying company annual reports builds the analytical skills you will need.
Step 3: Choose a Brokerage Account
Select a regulated broker that offers access to the exchanges you want to trade on. Consider factors like trading fees, research tools, customer support, and the availability of fractional shares. Many brokers now allow you to start with as little as one dollar.
Step 4: Start with Diversified Investments
Rather than trying to pick winning individual shares, consider beginning with index funds or exchange-traded funds (ETFs) that provide exposure to a broad basket of shares. This approach reduces the risk of any single company dragging down your portfolio.
Step 5: Invest Regularly and Stay Disciplined
Adopt a strategy of investing a fixed amount at regular intervals, regardless of market conditions. This approach, known as dollar-cost averaging, reduces the impact of short-term market volatility and removes the temptation to time the market.
Key Concepts Every Share Market Beginner Should Know
Market Capitalization
Market capitalization (market cap) is the total value of a company's outstanding shares, calculated by multiplying the share price by the number of shares. Companies are typically classified as large-cap (over $10 billion), mid-cap ($2 billion to $10 billion), or small-cap (under $2 billion). Larger companies tend to be more stable, while smaller companies may offer higher growth potential with greater risk.
Dividends
Dividends are payments that companies distribute to shareholders from their profits. Not all companies pay dividends; many growth-oriented firms reinvest all profits back into the business. Dividend-paying shares are particularly attractive to income-focused investors who want regular cash flow from their investments.
Bull and Bear Markets
A bull market describes a period when share prices are generally rising, typically defined as a gain of 20% or more from recent lows. A bear market is the opposite, with prices falling 20% or more from recent highs. Understanding market cycles helps investors maintain perspective and avoid making emotional decisions during volatile periods.
Volatility
Volatility measures how much share prices fluctuate over a given period. Higher volatility means larger price swings, which represents both greater risk and greater opportunity. Long-term investors can often use periods of high volatility to purchase quality shares at lower prices.
Tips for Share Market Beginners
- Start small and learn as you go. You do not need a large initial investment to begin building experience and confidence in the share market
- Think long term. Shares tend to produce their best returns over periods of ten years or more. Short-term trading is difficult and risky for beginners
- Diversify your holdings. Spread your investments across different sectors, company sizes, and geographic regions to reduce risk
- Do not invest based on emotions. Fear and greed are the enemies of good investment decisions. Develop a plan and stick to it
- Keep learning. The most successful investors are lifelong learners who continuously refine their understanding of markets and companies
- Understand what you own. Invest in companies or funds that you understand. If you cannot explain why you own a particular share, you probably should not own it
