Come, let us talk about the share market
What is the share market? Why is it in place? How does it work? What are its advantages and disadvantages?
share market or equity market- all three mean the same These are markets where you can buy or sell a
company’s shares Buying shares of a company means buying some percentage of ownership of that company That is, you become the holder of a percentage of that company If that company makes a profit, some percentage of that profit would also be given to you If that company incurs a loss, a percentage of that loss would also be borne by you.
Telling you an example of this on the smallest scale, presume you have to establish a start up
You have 10,000 rupees, but that’s not enough So, you go to your friend and tell him to invest another 10,000 rupees and offer him a 50-50 partnership So, whatever your company profits in the future, 50% of it would be yours. 50% of it would be your friend’s In this case, you’ve given 50% of the shares to your friend in this company The same thing happens on a larger scale in the stock market The only difference being, instead of going to your friend, you go the entire world and invite them to buy shares in your company.
The origin of share markets dates to around 400 years ago
Around the 1600s, there was a Dutch East India company, like the British East India companyThere was a similar company in the country of Netherlands today, known as Dutch East India company In those times, people used to indulge in a lot of exploration using ships The entire world map had not yet been discovered So the companies used to send their ships to discover new lands and trade with far away places The journey used to be of over thousands of kilometers aboard a ship There was a huge amount of money required for this Not one person possessed such amounts of money individually in those times So, they publicly invited people to invest money in their ship When these ships would travel long distances to go to other lands and come back with treasures from there They were promised a share of these treasures/money eventually. But this was a very risky affair Because during those times, more than half of the ships failed to come back They got lost, or broke down or got looted. Anything could happen to them So investors realized the risky nature of this enterprise So, instead of investing in a single ship, they preferred to invest in 5-6 of them So that at least one of them had chances of coming back One ship used to approach multiple investors for money So, his created somewhat of a share market There were open biddings of the ships on their docks Docks are the places where the ships come out from Gradually, this system became successful because the money crunch faced by the companies. was supplemented by the common people. And the common people got a chance to earn more money You must have read in the history books about how rich the English East India company and the Dutch East India company became during those times Today, each country has its own stock exchange and every country has become greatly dependent upon the stock market.
What is stock exchange
Stock exchange is that place, that building where people buy and sell shares of the companies
The market can be divided into two types- The primary market and the secondary market
Primary markets is where the companies sell their shares
The companies decide what exactly would be their share prices
Although there are some regulations in this too The companies cannot manoeuvre too much because a lot of it depends upon the demand How much price are the people willing to pay for the company’s share If the value of the company is 1 lakh rupees, it sells 1 lakh of its shares and offers shares at 1 re per share If its demand is high and a lot of people want to buy its shares, the company would obviously be able to sell its shares for a higher price What the companies do nowadays is decide upon a range. There’s a minimum price and a maximum price They decide to sell their shares within that range
How many shares can a company have?
A point to be noted here is that every share of the company has equal valueIt is upon the company to decide how many of its shares it wants to make If the total value of the company is 1 lakh, then it may make 1 lakh shares of 1 re each, Or it may make 2 lakh shares of 50 paise each When companies sell their shares in the share market, it never sells 100% of them The owner always retains majority of the shares to keep possession of his decision making power If you sell all the shares, then all the buyers of the shares would become owners of the company.
Since they all become owners, they all can take decisions regarding that company
The individual who has more than 50% of the shares would be able to make decisions regarding the company
Therefore the founders of the company prefer to retain more than 50% of the shares
For example, 60% of the shares of Facebook are retained by
Mark Zuckerberg The people who have bought shares of the company can sell it to the other people This is called the Secondary Market where people buy and sell shares amongst themselves and trade in shares In the Primary Market, the companies set the prices of their shares The companies cannot control the prices of their shares in the secondary market The share prices fluctuate depending upon the demand and supply of the shares So the prices of the shares fluctuate depending upon the demand and supply.
Indian’s stock exchange.
Almost every big country has its own stock exchange There are two popular stock exchanges in India
One is the Bombay Stock Exchange which has around 5400 registered companies
The other is the National Stock Exchange that has 1700 registered companies
With so many companies registered in the stock exchange, If we want to observe, overall, whether the prices of the shares of the companies are moving up or down,
How do we view this?
To measure this, some measurements have been put in place- Sensex and Nifty
What is SENSEX?
Sensex shows the average trend of the top thirty companies of the Bombay Stock Exchange averaging out, whether the shares of the companies are moving up or down The full form of Sensex, the sensitivity index, displays the same The number of Sensex , that it has reached 40,000 marks The value of this number can be understood only upon comparison with the past numbers Because this number has been randomly decided They decided, at the start that the values of the shares of the thirty companies would be this So we compile all the numbers and then say that it is 500 So, gradually, the sensex has been rising and it has reached the 40,000 mark in the past 50 year So this shows how far up have the share prices of these 30 companies gone in these past 50 years
What is NIFTYFIFTY?
There is another similar index- NIFTY- National + Fifty
Nifty shows the price fluctuations of the shares of top 50 companies listed on the National Stock Exchange If a company wants to sell its shares on the stock exchange, then this is termed as “public listing”.
How to sell your company’s shares
If a company is selling its shares for the first time, then it is called IPO- Initial Public Offering that is, offering the shares to the public for the first time During the days of the East India company, it was very easier to get this done Anyone could sell the shares of their company to the public But today, this procedure is very long and complicated, and so it should be Because, think about it, how easy it is to scam the people Anyone could get listed on the stock exchange with a fake company, and exaggerate the value and achievements of its company They could lie to the people and the people would foolishly invest in his company He then could abscond with the money So it has become extremely easy to scam somebody India in its history, has been a witness to a lot of scams like these. Eg. Harshad Mehta scam Satyam scam, they were all the same- fooling the people and getting themselves listed on the stock exchange. collecting the money and then absconding So as and when these scams happened, the stock exchanges realized that they need to make their procedures stronger and scam proof For this the resolutions and rules were made stronger due to which there are very complicated rules today
SEBI- Security And Exchange Board of India
is a regulatory body that looks into issues like which companies should be listed on the stock exchangeand whether it is being done in the proper manner or not If you want to do this (i.e. get listed), then you would have to fulfill the norms of SEBI Their norms are very strict, for example, There need to be a lot of checks and balances on the accounting of your company At least two auditors must have had checked your company’s accounting This entire process maybe take around 3 years. More than 50 shareholders should be pre present in the company if you want a company to be publicly listed When you go to sell their shares but there’s no demand for it amongst people then SEBI can remove your company from the stock market list.
How can you buy shares
Now, how can you invest money in the stock markets?
During the times of the East India Company, one could go to the docks where the ships departed from and indulge in biddings and buy and sell stocks Before the dawn of internet, one had to physically go to the Bombay Stock Exchange building to do this However, with the internet in place you merely need three things-A bank account, a trading account and a DEMAT account A bank account because you would need your money A trading account, to allow you to trade and invest money in a company A DEMAT account to store the stocks that you buy in a digital form Most of the banks today have started offering a 3 in 1 account with all three accounts encompassed within your bank account People like us would be called retail investors, that is, common people who want to invest in the stock market A retail investor always requires a broker A broker is someone who brings together the buyer and seller For us, our brokers could be our banks, a third party app or even a platform When we invest money through brokers in the stock market, a broker retains some money as his commission. This is called “brokerage rate” Banks mostly charge a brokerage rate of around 1% But 1% is a little high. That’s not how much it should be If you look properly, you would discover platforms that charge a brokerage rate of around 0.05% or 0.1% This brokerage rate is a disadvantage for those who want to indulge in a lot of trading of stocks If a lot of stocks are bought and sold in a day, a lot of money would be siphoned off as brokerage fee But if you want to invest for a long term, then a high brokerage rate wouldn’t make a lot of difference because you’d pay it only once.
Trading vs Investing.
So, investing and trading are two different things Investing means putting in some amount of money in the stock market and letting it stay there for some time Trading means quickly putting in money at different places and withdrawing from some place This all happens in quick succession In fact trading of shares is a job in itself There are a lot of people in our country who are traders and do this job all day long taking out money from one share and putting it in another taking out from one place, putting it in another and earning profit in the process An important question that arises is whether you should invest money in the share markets?
A lot of people compare it with gambling because a lot of risk is involved in it In my opinion it is correct to say so because this is indeed some sort of gambling If you are not aware of the type of the company and its performance, the parameters of the company and its financial record if you don’t observe its history and accounting information then, in a way, this is akin to gambling Because you would have no idea of how the company would perform in the future You merely listen to people saying that the company is doing well and we should invest in it in the share market, so that’s why you invest in it
You should never do this because it is extremely risky And obviously, when there are people that do this job day in and day out, for examples the traders, who are experts in this field and have more knowledge about the stock market
They obviously would outperform the others because they have an idea of how this all works So, in my opinion, you should never directly invest in the share market and instead rely on the experts
Mutual funds
A very competent form of it is mutual funds Because in mutual funds you don’t directly decide which companies you would invest in In mutual funds, you place your trust in experts and let the experts decide which companies to invest in In fact a lot of mutual funds invest in many different companies to minimise the chances of loss For instance I’ve given the example of the East India company. Investors had quickly realised that they should not invest their money in one single ship Investing money in 5-6 of them would ensure that atleast one of them came back.
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