Everyone now days are talking about the stock market. Wherever you go one or the other person is investing in it. Many of your friends and colleagues must be investing in it too. But as you have stumbled on this site, I am guessing you might be having some doubts and confusions about the stock market and might be looking for ways to enter in the world of stocks. Don’t worry, we got you covered, you have come to the right place. All your doubts and queries will be resolved here.
Let’s start by asking and answering some questions to increase our understanding of the stock market.
What are shares?
Before answering the question about the share market, it is important to understand the term “shares”
The capital of a company is divided into small equal units of a finite number and each unit is called a share. Equity is a share in the ownership of a company. It represents a claim on the company’s assets and earnings. The terms share, equity and stock mean the same thing and can be used interchangeably. Example:
The capital of the company shows 1,00,000 equity shares of ₹10 each of which is equal to ₹10,00,000. Here 1,00,000 is the total number of shares and ₹10 the value is of one share and ₹10,00,000 represents the capital raised through issue of equity shares to the public.
There are generally two types of shares
- Preference Shares
- Equity (ordinary) Shares
What is stock (share) market?
Now as you know the meaning of term share, we are now ready to understand the meaning of stock market.
A share market is a place where shares of a company are traded i.e. buying or selling. It is also referred to as the stock market, however, besides shares of companies, other instruments like bonds, derivative contracts and debentures too are traded in the stock market.
There are two kinds of share markets:
A company steps into the stock market to raise funds. It gets registered itself in the primary market to issue shares to the public and raising money. If a company is selling (issuing) shares to the public for the first time, then it is called an Initial Public Offer or IPO. A company issues a Prospectus, for the people who are interested in subscribing to the issue, which contains information relating to itself, its financials, its businesses, number and types of shares being issued, its promoters and so on. After completion of this process, a company gets listed on the stock exchange.
In this market, investors trade securities that are already listed. Investors buy shares from one another at the prevailing prices or at whatever prices both buyer and seller agree upon. These transactions are generally conducted through a broker. Investors who received shares in an IPO, further buy more shares or sell the already held shares in this market.
In India, the secondary and primary markets are governed by the Security and Exchange Board of India (SEBI).
A stock exchange facilitates stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India’s premier stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
A stock market is a place for companies to raise money and for the investors to buy part-ownership in the company. On becoming a shareholder, an investor earns a part of profits earned by the company by way of dividend.
Now let us understand it with a small example:
For instance, there is a Company by the name of XYZ Pvt. Ltd. The company is operating for past 5 years and now its business has scaled to a level that it is not possible for the owners themselves to put in money for future projects. So the board of the company decides to go public i.e. issue or sell shares to the public for the first time to raise money. For this purpose, they will bring an Initial Public Offer or IPO by issuing a prospectus. People who are interested in the IPO will subscribe to the offer and give their money to the company and in return company will issue shares. And now the shares of the company will be listed on the stock exchange for further trading. These all transactions happen in the primary market.
Once the shares of the company are listed on the stock exchange, they can be traded further in the market. Now anyone can buy and sell the shares of this company. People who received shares through IPO may sell their shares here or they may even buy more. These are the transactions of the secondary market and are generally done through a broker.