Introduction to Stock Market
Most of us have heard about SENSEX/ 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 more about these indices later on in this book. When I heard about SENSEX or NIFTY they did not matter much to me and they were very confusing to understand. Do not be amazed if I tell you a healthy stock market corresponds to the growing economy which directly correlates to a growing nation. Therefore the Stock Market is very much necessary for a nation.
How Stock Market came into the picture?
- Starting of business
Now let me give you an example of why we need a stock market.
One fine day I was having a beer with my 2 besties. We were discussing our career and future prospects. Then I proposed to them a business idea of selling T-shirt merchandise. Both of them got excited about the idea and were willing to be a part of it. But both of them were busy with their jobs. They decided to support me financially. Assume that we started our business next month with the basic capital I had and the rest contributed by my mates. Now, I and my mates are the promoters of the company. And after a month, I was lucky and my hard work paid off. We started earning decent profits within a month of starting my business.
- Expansion of business
Now, if I want to move ahead and expand my business I find there is a problem. I do not have enough capital to start the operation in another city. But I 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. Therefore, I decided to give 5% equity of my company and this made him a shareholder of the company. In order to finalize the investment, I brought 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 an interested investor. This is the real meaning of shares. So, whenever you are buying a share of the market, you are buying some ownership in the company. And only a handful of the successful companies are listed on stock exchanges.
- Sharing of Ownership
Irrespective of your shareholding in the company, whenever the company makes profits or losses you will be the part of its profit or loss-making. Usually, Investors do not like loss-making companies.
The companies distribute profits to their shareholders by means of dividends. The dividend amount which is needed to be distributed is decided by the company management. If the company has performed very well then maybe the company will distribute good dividends. Approval of dividends is subject to the approval of management and shareholders. Now you must be a clear idea that a person who is buying a share of the particular company is actually investing in the future growth of the company. When you are investing in the company you are also taking a risk involved in the future developments of the company.
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 for all listed companies.
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. For the purpose of raising money from the public, promoters of the company hired investment banks (SBI Capital, Morgan Stanley etc) which help them to raise capital known as IPO. These investment banks analyse the company’s financial health which includes the balance sheet, P & L, the past performance, and goodwill. After doing a thorough research, they prepare a document containing the company’s financial records, owners of the company, past investments in 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 a week or so the company will be listed in the 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 the 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 the 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.