A INTRODUCTION TO THE STOCK MARKET

Stock Market

Introduction to Stock Market

Most of us have heard about SENSEX, NIFTY is increasing or decreasing at some or other point in our life. These SENSEX and NIFTY are the indices run by BSE and NSE respectively. We will be coming to these indices later on in this article. When I heard about BSE or NSE or SENSEX or NIFTY they all seem to be same and I was never sure why the hell I should be worried about these things. But these Stock Exchanges or Stock Market is 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

Now let us start from basics. Suppose tomorrow I wanted to go and 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.

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% of my company shareholding to that investor against his capital invested. In order to finalize the investment, I bring a legal stamp paper and complete the deal.

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 buying a share from the market you are taking some ownership in the company. Usually, the some of the successful companies are only listed on market.  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.

Read: All you need to know about IPO

I guess you must be clear that a person who is buying a share of the particular company is actually investing in the company. The company will be investing this money in the progress of the company that could be in the new projects they are planning to start or hiring employees 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 guidelines which one needs to follow.

SEBI is like a watchdog which prevents 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 contact big investment banks which help them to raise capital known as IPO. These investment banks will analyze the company’s balance sheet, P & L, the past performance, and goodwill. After doing various research they will 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.  The company will now issue shares to the general public and whosoever is interested could buy the shares 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 Indices: NSE or BSE

These markets are private organizations which list other companies and are usually called as Stock Exchanges. As said earlier these Exchanges are monitored and directly work under regulation laid by SEBI. In India, we have BSE and NSE which list other companies and across the globe, we have NYSE, NASDAQ etc. An index like SENSEX or NIFTY is a number which represents top 30 and top 50 companies listed on their respective exchanges. For example, one day Sensex or Nifty is falling that clearly indicates the 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.

Read: Which factor pushes an increase or decrease in Stock Prices

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?

Read: Why long-term investing creates wealth? 

Read:  Some bitter truth about Stock Markets

I hope this small article has helped you in your investor journey.

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