Category – business
Reading time – 8 minutes
Sorry, for the heading of the blog. This was to get your kind attention.
This blog is about stocks, also known as shares, with particular focus on Indian general masses, who want to enter and explore share market.
It is simplified basic knowledge about share markets.
Babies will not need it. But their dads will need it, to secure their future. Hence in a way this blog is for those babies too; who are going to discover in future, that their daddy knew next to nothing about economics and investing.
As uncertainty, looms in the economy with unpredictable future, you need to have knowledge about all the spheres of the investing.
If you have money, it should grow with time and this can be done by wise investing.
So let’s clear our basic doubts about shares.
First let’s clear biggest confusion according to my analysis. It is terminology which blogs use to explain shares. It is confusing.
We must know that ;
equity = share = stock = security
First you should know this fact that they call shares with so many names. As different sources write different names, it can be daunting. They all are interchangeable.
We will use term share in this blog, to avoid confusion.
“Share is a physical or digital certificate that gives buyer partial ownership of a business.”
Let’s imagine a business is worth 100 rupees. Its owner divides this into 100 shares each worth 1 rupee.
Now, he puts them in stock market ( stock exchange) from where people can buy or sell these shares.
So, if someone buys 40 shares of this company, he becomes 40% owner of the company. Any one who invests 1 rupee, he becomes 1% owner.
So shares help businesses in raising money for their operations.
His investments are now dependent on the performance of the business. If it grows, he earns money and if business falters, he looses money.
He can buy or sell shares anytime on the stock exchanges.
There are two main stock exchanges in India –
1. The Bombay stock exchange ( BSE)
2. The National Stock exchange ( NSE).
Companies are listed on stock exchange. And only listed companies can sell their stock in stock market.
These are regulated by SEBI ( Securities and exchange board of India); which is a statutory body responsible for fair working of the exchanges.
It penalises for wrong practices and frauds and formulates rules and regulations for working of stock exchanges.
Hence, one can invest money in stock market without worrying about frauds or cheating, as far as stock companies are concerned. Whole system runs on trust.
These days stocks are available in digital format and can be easily purchased or sold using apps like zerodha, Angelbroking etc. Whole process is very simple.
You need to make a demat account with regulator and after kyc verification (know your customer) verification; you can purchase and sell from comfort of your home.
How does initial price of a stock is decided?
It is random value in decimels decided by the company promoters. After that performance of the business and demand and supply and perceptions about future decide the price of that stock.
Total number of stocks issued is called total shares outstanding.
If we multiply number of shares issued with the price of one share, we get market capitalisation ( market cap) of the company.
All companies listed on stock exchange are divided into groups based on market cap.
1. Large cap –
Top 100 companies in terms of their market capitalisation. These are safer and successful companies. Examples in India are TCS, HDFC, L and T, wipro etc.
2. Mid cap –
101-250 in list of companies based on market capitalisation. Examples are pfizer, emami, bayer etc.
3. Small cap –
Above 250. These are generally lesser known volatile companies.
Now based on performance of the company, its management, brand value, public sentiments and many external factors like war, disaster, competition, fads;there are fluctuations in the price of stock in the market on day to day basis.
But generally in long term ( 10-15 years ); if business of the company is sound, it results in rise in stock price over time in spite of the short term wide fluctuations. Hence stock market investment is for long term.
If you don’t have 10-20 years of time to let your money grow, it can be less fruitful mode of investment.
What happens when stock prizes rises?
Company can give you part of the profit, that is called dividend.
Or it may hold extra cash for liquidity and expansion.
It may invest gains for further expansion of the business.
Why the people worried about Sensex rising or falling. What is this sensex?
Sensex is a metric using which we can guess overall performance of the economy.
We can’t check each and every stock daily. So we have devised a simple measurement number. It simplifies monitoring.
Sensex and nifty are such numbers. They are stock market indices. They tell the direction of the market, whether towards positive or negative.
Sensex belongs to Bombay stock exchange. It is made up of 31 hand picked companies, which are picked by private firms.
For example, sensex companies are picked by Sand P global. Companies are not fixed. Based on performance new companies enter and go.
Nifty belongs to the national stock exchange. It is made up of 50 stock. Hence, it is called Nifty 50.
Hence, next time you see a news anchor worried about fall in sensex, you will know that, she is talking about the performance of choosen list of companies on that day. Their performance is averaged based on their size and sector.
Few more terms that you hear everyday.
Bull market – when the market is on the rise like horns of a bull.
Bear market – when market is on fall like a crouching bear.
Blue chip companies- companies which are reliable performers.
What is initial public offering?
IPO – Initial public offering –
Each company starts as a small privately owned company. With Time it grows and it needs more money to expand. It then lists itself on Stock exchange, so that anyone in public can buy its shares as IPO. It raises a lot of money for the company.
A board of governors is appointed to oversee working of the company. Its data and performance are public. It is responsible to its shareholders for maintaining good performance.
Hence, IPO is the initial offering stock by a private company, which enlists itself on the stock exchange so that its stock can be bought and sold by general public.
This blog is aimed to provide introduction to the share market to Indian readers.
Inspiration – many financial books.