Introduction to Stock Market
Most of us have heard about SENSEX or NIFTY at some or other point in our life. The SENSEX and NIFTY are the indices run by BSE and NSE respectively. We will talk about these indices later on in this section. When I heard about BSE or NSE or SENSEX or NIFTY they all seem to be same. But these Stock Exchanges and Stock Market are very much necessary for a nation. Do not be amazed if I tell you a healthy stock market corresponds to growing economy which directly co-relates to a growing nation.
Need of Stock Market
- Starting of business
Now let us discuss why we need any stock market. Suppose tomorrow I wanted start lemonade business. I also have some basic capital for the raw materials which I require for my business. The next day I went ahead and started my business of selling lemonades at Rs 20 per glass. Fast forward 1 month, I was lucky and my hard work paid off. I was able to book decent profits within 1 month of running my business.
- Expansion of business
Now I want to move ahead and expand my business but there is a problem. I don’t have the capital to start another shop. But I do know a bunch of people who are willing to invest in my company. So, I approached an investor for some investment in my company. Now I need to give him something in return so I make him shareholder of the company. I decided to give 25% equity of my company to that investor against his capital invested. In order to finalize the investment, I bring a legal stamp paper and complete the deal.
- Raising money from Equity
As you saw, I transferred some amount of shareholding of my company to another person. This is the real meaning of shares. So, whenever you are buy a share from the market you are buying some ownership in the company. On stock exchanges only, handful of the successful companies are listed.
- Sharing of Ownership
Irrespective of your shareholding in the company, whenever the company makes profits you will be the part of profit/ loss-making. Usually, Investors don’t like loss-making companies. The companies distribute profits to their shareholders by means of dividends. The dividend amount which needed to distribute is decided by the company management. If the company has performed very well then maybe management will distribute good dividends.
Now you must be clear that a person who is buying a share of the particular company is actually investing in the future growth of the company. The company will be using this money in the progress of the company like starting new projects or purchasing real state etc. So, there may be an important question who decides the value of the share?
Regulator of Stock Market: SEBI
In India, we have a government body SEBI (Securities and Exchange Board of India) which regulates the listing of the company on the stock exchanges. SEBI also provides certain compliances and guidelines which all listed company needs to follow.
SEBI is like a watchdog which protects investors rights and monitors any fraud or illegal activities. When any company wants to get listed on market, they need to get permission from SEBI. Owners of the company hire big investment banks which help them to raise capital known as IPO. These investment banks analyse the company’s balance sheet, P & L, the past performance, and goodwill. After doing various research they prepare a document about company’s financial records, owners of the company, previous investors of the company and the price band of shares with a lot size. Now, the company can issue shares to the general public and whoever is interested could subscribe to the IPO of the company. Once the issue is fully subscribed then within 1 week or so the company will be listed on market.
Who Runs These Exchanges: NSE or BSE?
Stock exchanges are private organizations which list other companies. As said earlier these exchanges are monitored and directly work under regulation laid by SEBI. In India, we have BSE and NSE exchanges and across the globe, there are exchanges like NYSE, NASDAQ etc.
What is an Index?
SENSEX 30 or NIFTY 50 is a number which represents top 30 and top 50 companies listed on their respective exchanges. One day Sensex or Nifty falls which indicates that top 30 or top 50 companies aren’t performing well and their share prices are decreasing.
Share Price Increasing or Decreasing, Why?
Now again a very important question should arrive. Why does the share price increase or decrease?
Initially, the share prices are decided by the investment bank during the IPO. Once a company is listed on stock exchange, based on people sentiments the value of the share is decided. Stock prices move based on demand and supply in the market. One should understand that people usually see the company financial records like quarterly or annual earnings, any new progress made by the company, future scopes of the company etc. There may be the times that a company is not showing any profits but showing huge revenue growth. This could signify that may be the company is expanding very fast or implementing new ideas and due to which it was not able to show profits. In such cases, if investors think that the company will give profits in future and then also the stock prices increases.
So when there is a surge in a number of buyers of a share than the share price increases and vice versa. So the next time you go and buy a share do your homework first. You should be assured enough that why you are buying the share of the particular company, why not other company. What is the future of that company?
I hope this small article has helped you in your investor journey.